Risk Parity Radio
Risk Parity Radio is a podcast about investing located at www.riskparityradio.com. RPR explores risk-parity style portfolios comprised of uncorrelated or negatively correlated asset classes -- stocks, selected bonds, gold, managed futures, and other easily accessible fund options for the DIY investor. The goal is to construct portfolios that are robust and can be drawn down on in perpetuity, and to maximize projected Safe Withdrawal Rates regardless of projected overall returns.
Risk Parity Radio
Episode 411: Portfolios For Accumulators, Assorted Fund Considerations, And That Infernal Cederburg Thing That Won't Go Away
In this episode we answer emails from Michael, Brian and Ed. We discuss Michael's situation and options as a 34-year old with growing portfolios and a growing family, Brian's questions about the infernal Cederburg paper that won't go away and Ed's questions about accumulation portfolios.
Links:
Father McKenna Center Donation Page: Donate - Father McKenna Center
Testfolio Comparison between Total Market and Large Cap Growth: testfol.io/analysis?s=0GbmPE8D9GK
Merriman Best In Class ETFs: Best-in-Class ETF Recommendations | Merriman Financial Education Foundation
Shannon's Demon Article: Unexpected Returns: Shannon's Demon & the Rebalancing Bonus – Portfolio Charts
Rational Reminder Podcast #350: Episode 350 - Scott Cederburg: A Critical Assessment of Lifecycle Investment Advice — Rational Reminder
An Actually Useful Analysis of Global Portfolios: What Global Withdrawal Rates Teach Us About Ideal Retirement Portfolios – Portfolio Charts
Brian's Golden Butterfly Monte Carlo: Monte Carlo Simulation
Brian's All Equity 50/50 Monte Carlo: Monte Carlo Simulation
Brian's All Equity 34/66 Monte Carlo: Monte Carlo Simulation
Amusing Unedited AI-Bot Summary:
Frank Vasquez tackles the complex world of portfolio construction across different life stages, offering practical wisdom mixed with his trademark humor for investors at all levels. This episode dives deep into a $1 million portfolio review, addressing how to balance real estate investments with securities, manage excess cash, and prepare for eventual retirement.
A key highlight is Frank's thorough debunking of a frequently misunderstood academic study suggesting all-equity portfolios are optimal for retirement. With mathematical clarity, he explains why the study's unusual methodology comparing non-reserve currency bonds to U.S. equities across disconnected historical periods doesn't translate to practical investment advice. His Monte Carlo simulation comparisons confirm that diversified portfolios consistently outperform all-equity approaches during drawdown scenarios.
The episode offers particularly valuable insights on pairing large-cap growth with small-cap value investments – not because either category is predicted to outperform, but because they create effective rebalancing pairs operating on different cycles while delivering similar long-term returns. This mathematical principle, known as Shannon's demon, shows how two assets with comparable returns but different timing can outperform either investment held alone.
For younger investors still accumulating wealth, Frank recommends focusing on equity exposure while avoiding unnecessary complexity. His practical advice extends to managing investments across different account types, structuring 401(k) investments with limited options, and maintaining psychological fortitude through market cycles. Whether you're managing a complex portfolio or just starting you
A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer. And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor, Broadcasting to you now from the comfort of his easy chair. Here is your host, Frank Vasquez.
Mostly Uncle Frank:Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program.
Voices:Yeah, baby, yeah.
Mostly Uncle Frank:And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational, and those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. Whoa, and you probably should check those out too, because we have the finest podcast audience available.
Mary and Voices:Top drawer, really top drawer.
Mostly Uncle Frank:Along with a host named after a hot dog.
Voices:Lighten up Francis.
Mostly Uncle Frank:But now onward to episode 411. Today, on Risk Parody Radio, we're just going to do what we do best here. Looks like you've been missing a lot of work lately I wouldn't say I've been missing it, bob which is attend to your emails, and so, without further ado, here I go once again with the email. And First off. First off, we have an email from Michael Hee. Hee and Michael writes.
Mary and Voices:Dear Uncle Frank, first thank you for the opportunity to pay a noble bribe via the Father McKenna Center. My donation receipt is below yes. Just a pleasure to listen to a podcast by someone doing something they enjoy their way, with no ads nor pretension. I come to learn and I stay for the drops.
Voices:Bow to your sensei. Bow to your sensei.
Mary and Voices:I finally caught up on all your podcasts and while I have been following Markets since I was a teenager, I didn't realize until discovering your podcast via the Bogleheads forum that I only knew just enough to be dangerous. You have given me a holistic narrative framework through which to think about some personal investing that I am now trying to put into practice at the age of 34. Wish I knew sooner, but better late than never. I have a few questions. Apologies for the worriness, Aunt Mary.
Voices:Mary, Mary, why you bugging?
Mary and Voices:And would welcome your consulting service as well, if still on offer. I am in the accumulation phase with a wife and small children.
Voices:I don't care about the children, I just care about their parents' money.
Mary and Voices:I have an approximately $1 million portfolio which I hope to grow via a relatively high earning career over the next 15 to 20 years, with the hopes of transitioning to part-time work and living off a modified golden ratio portfolio until social security kicks in. Modified golden ratio portfolio until social security kicks in. Portfolio breakdown Approximately 31% real estate, equity and rental properties, excluding primary residence. I count this here because I hope to sell these one day and convert into securities, but if not, we'll remove and count the income against my fire income goal. Approximately 16% cash security and for opportunistic investments Approximately 7% private securities. Approximately 4.5% T401K-like private company ESOP, which should grow nicely over time, and approximately 2.5% VC fund playing around.
Voices:Cool approximately 2.5%.
Mary and Voices:VC fund playing around 0.5% physical gold and silver plus some crypto, approximately 45.5% in public securities where I focus accumulation Approximately 2% in play money my wife likes picking stocks and thematic funds in her play account wife likes picking stocks and thematic funds in her play.
Mary and Voices:Taxable brokerage 25% each to SCHG, avuv, brkb, vxus. Should I swap SCHG for VOO or VTI? Considering swapping VXS for DFIV and DISV, with five securities at 20% each, increasing XUS weighting Approximately 15%. 401k approximately 8% T401k. 25% each to SWTSX, sx, dfsv, ixus, avdv. Considering swapping SWTSX for SWLGX, ixus for EVF and adding AVES with five securities at 20% each, increasing XUS weighting Approximately 7%. R40, 401k. 80%. 20%. Fxaix, fspsx. Considering mirroring T401k if I make the changes noted, approximately 17.5% are across two Roth IRAs and HSA. 80% FZROX, 20% FZILX. Considering mirroring T401k if I make the changes noted 20% each FSPGX or FZROX, dfsv, efv, avdv, aves. Approximately 5% in three 529s.
Mary and Voices:Using the Vanguard target date 2041 portfolio. We'll look to use whatever is left after college in approximately 17 to 21 years to fund my kids' Roth IRAs. So currently approximately 70% US stocks, approximately 28% ex-US stocks and approximately 2% bonds and liquid alternatives. Key questions I'm conflicted between LCG and USTSM, assuming growth is due to underperform as it has begun to this year. Cue crystal ball sound. Drop Crystal ball can help you. It can guide you. I'm leaning towards increasing ex-US allocation, given I do not have any gold or other alternatives to hedge the US dollar market and, assuming the US is due to underperform, as it has also begun to this year, cue the crystal ball drop again. As you can see, I've got several here, a really big one here, which is huge. Note I added gold to my portfolio after starting your podcast from the beginning, then removed it after making it through some episodes and understanding it is not necessary during the accumulation. So I missed this year's run up and I am a bit neurotic, as you can see.
Voices:You are talking about the nonsensical ravings of a lunatic mind.
Mary and Voices:I am maxing out tax-advantaged accounts and saving regularly into taxable and throwing in excess bonus there as well, so understand that the deposits here will have more impact over the long term than the fund choices. But should I consider doing anything differently? Should I consider alternative assets at this stage or even a small allocation to LTT in my primary accounts? I also question if I have the right temperament to hold SCV, given it sometimes takes about 15 to 20 years for the premium to show up and assuming LCV is more likely to express the value factor premium in a passive investing world where larger market cap companies draw in the most dollars. I don't know, you don't know, nobody knows.
Voices:Does that make you different than most everybody dollars? I don't know, you don't know, nobody knows. Does that make you different than most everybody else? The answer is yes. Somebody says well, why is that? We don't know, what do we know you?
Mary and Voices:don't know, I don't know, nobody knows. I further question if value funds can even appropriately calculate value for modern companies where spending on intangible assets isn't captured in the book value. Just trying to get an approach that I can stick to for about 15 to 20 years and stop agonizing and tweaking, but very concerned about another lost decade in US stocks or if I'm missing something key.
Voices:You're insane gold member.
Mary and Voices:Lastly, what do you think about this modified golden ratio portfolio?
Voices:Mary, Mary, I need your huggin'.
Mostly Uncle Frank:Well, first off, thank you for being a donor to the Father McKenna Center.
Voices:We few, we happy few, we band of brothers.
Mostly Uncle Frank:As most of you know, we do not have any sponsors on this program, but we do have a charity we support. It's called the Father McKenna Center and it supports hungry and homeless people in Washington DC. Full disclosure I am in the board of the charity and am the current treasurer, but if you give to the charity, you get to go to the front of the email line.
Voices:Groovy baby.
Mostly Uncle Frank:And there are two ways to do that. You can give directly, as Michael has done here at the Father McKenna website, and I will put that donation page in the show notes. Or you can join us as one of our patrons on Patreon, which you can do through the support page at wwwriskparadisecom. And either way you can go to the front of the email line with that. Just make sure you mention it in your email so I can duly move it up, as it were. And the line is about two months long now, so it is worth something I should think.
Voices:That's gold, jerry gold.
Mostly Uncle Frank:But now getting to your email, so I see you're at the age of 34. You're still quite young and still have a ways to go in terms of earning money and investing money. Your situation is actually very similar to our eldest son, who is not quite 30, but is also on this same track and also has some real estate, since he followed the formula in Set for Life by Scott Trench, which is an excellent book for people in their 20s, and so he's ended up with a rental property that is appreciated in value substantially in addition to the current house he's living in, which is also house hacking. Once you have a family, house hacking is probably not for you, at least if it's only one dwelling, forget about it.
Mostly Uncle Frank:So just some general observations first. First, you should consider your situation as you sitting on a giant pile of future cash that you have not invested yet, which means that although your investments are substantial right now, they are not substantial when you compare it to all of the investments you're likely to make in the future, which means you can take a lot of risk and should be essentially 100% equities in most of your invested assets. So the real estate is great if it's rental real estate and if it is producing positive cash flows. That is really the key here, and that's, after all, of your expenses. I would just make sure it's not taking up too much of your time, because your time is probably better spent earning more money if you're in a high-earning career and spending it with your wife and children.
Voices:Why? What have children ever done for me?
Mostly Uncle Frank:Real estate makes actually the most sense for people who are in lower yielding careers and have more time. But as long as you're enjoying that, just keep with it and it will be an excellent thing to have long term. All right. It says you also have 16% in cash. That is probably too much cash, because if you have a million-dollar portfolio, you have $160,000 in cash. Now I realize that you will need some of that to support the real estate, obviously, because you have to be in a position to pay for repairs and deal with vacancies and things like that. But above and beyond that and whatever you need in terms of an emergency fund, generally, having just big piles of cash sloshing around is not ideal, unless you have a specific thing you were planning to spend it on in the next few years.
Mostly Uncle Frank:Here, what may work better for you is what our eldest son does with his extra money essentially, which is to create an intermediate term portfolio that is essentially a retirement portfolio. So it looks like a risk parity style portfolio. In fact, he uses a variation of the golden ratio, and so he's got his long-term assets in retirement accounts, et cetera, which are essentially 100% equities, his short-term assets in retirement accounts, etc. Which are essentially 100% equities, his short-term stuff, which is enough cash to support his real estate, and a small emergency fund. He really doesn't need much, because he doesn't have a wife and children like you do.
Voices:All we need to do is get your confidence back so you can make me more money.
Mostly Uncle Frank:But then the rest of this goes in an intermediate kind of portfolio that is allocated something like a golden ratio. The reason something like that works as long as you have, say, three years of possibility is because those kinds of portfolios tend only to be down three or four years max. So it can be used as this kind of intermediate accumulation portfolio. And so the last thing he used it for was to buy some solar panels for one of his houses, and if he needs to buy a replacement car he can just buy it out of that.
Mostly Uncle Frank:But if you have something like that, then you are not stuck with just big piles of cash that aren't yielding very much. So basically, the way his finances work is fills up all the retirement accounts, accumulates the cash in the checking account and emergency fund type thing and then, as that money kind of overflows or builds up, it then goes into this intermediate account which is then invested in this golden ratio kind of portfolio. All right, the 7% in private securities. Yeah, you have an ESOP. That's great. Take advantage of that. It is what it is and it goes with the job, so take it with the job as part of your compensation.
Voices:I don't think I'd like another job.
Mostly Uncle Frank:The 2.5% in a venture capital fund yes, think I'd like another job. The 2.5% in a venture capital fund yes, that is playing around, so that's a small amount you can play around with, so it's no big deal. 0.5% physical gold and silver plus some crypto Again, that is playing around money. As far as I'm concerned, make sure you don't actually lose your physical metals, or make sure you also keep them in a safe place and do not advertise that you have them, lest you become a target for burglars or disreputable cousins or somebody else who might want to take it what jimmy really loved to do.
Voices:What he really loved to do was steal. I mean, he actually enjoyed it. Jimmy was the kind of guy who rooted for the bad guys in the movies.
Mostly Uncle Frank:It looks like the rest of it. You have some playing around money. Looks like you're experimenting with a return-stacked kind of portfolio involving some leverage. That's fine too, as long as it doesn't get too large.
Voices:You have a gambling problem.
Mostly Uncle Frank:And then most of your money looks like it's invested in a variety of index funds, which is where it really belongs on your time frame, although I would get rid of this target date fund if you want to know why.
Voices:Go listen to episode 333.
Mostly Uncle Frank:Forget about it. I would just put that all in stocks, at least for the next decade, and then think about it after you kids get to high school around there. Okay, looking at your specific questions, you say you're conflicted between large cap growth and US total stock market. Well, I wouldn't be conflicted by that. Those are questions 99% correlated for the most part, so it's kind of six of one, half a dozen the other. This is one of these kinds of questions that seems important but it's not really important. And whenever you are thinking about two different assets, one of the things you should do first is go to a correlation analyzer. The one at Testfolio is actually the easiest one to use now. It's better than the one at Portfolio Visualizer, I think. So go there to the Asset Analyzer and you can see comparative performances and correlations. And when you have things that are that highly correlated, there isn't really a significant difference between the two of them. The reason that you would hold large cap growth has more to do with what else is in your portfolio, because if you are just holding one thing, you would probably just hold the total stock market. But if you're going to hold a variety of things across different asset classes, then you want some of that large cap growth as one of those allocations. Your reaction to it going down this year and large cap growth has underperformed If you look at the MAG-7, it's down like 20% and the rest of the S&P 500 is essentially flat. But that's a good thing in your circumstance, because of your time frame and that's what you really need to be thinking about. You actually want to have things that crash in the near term so that you can buy more of them or rebalance into them, like you would have done in 2022, when large cap growth was down 30 to 40 percent and value stocks were down zero to 10 percent or even up. That was a rebalancing opportunity, or an opportunity to focus more on the large cap growth and buy more of it. You are actually hoping that something like that happens. If you are investing in large cap growth and you are hoping that it happens in the next decade, because after another decade, then you will be thinking about moving to more conservative allocations. So, as large cap growth is going down right now, I would be inclined to be buying more of it, not less of it.
Mostly Uncle Frank:All right, your next question was leaning towards increasing the international allocation, given you do not have gold or other alternatives to hedge the US dollar slash markets. Well, I think that's fine. Just pick something and stick with it that you don't want to be jumping in and out of international stocks or funds. So if you are going to commit to a certain amount of allocation to that, make sure that's a long-term commitment and that you are continuing to invest in it when it underperforms and then rebalancing out of it when it overperforms. It's just like anything else. It just adds a level of complication, but it doesn't seem like that bothers you. In fact, it seems like you enjoy a little complication here. So this may be exactly for you.
Mostly Uncle Frank:To incorporate some of these international funds. I would use those ones recommended by Paul Merriman that are mostly the Avantis and DFA funds. I think they're just better formulated and better positioned and easier to use as part of a overall portfolio, especially if you are pairing a US large cap growth in with an international value fund. I don't think you really need anything, though, to hedge your portfolio in any way, shape or form, simply because you have such a long time frame that you're dealing with that. The time is the hedge and you should not be thinking about trying to reduce volatility at this point with hedges of any kind, and that's why it probably doesn't make sense for you to be using an alternative like gold in your portfolio right now, except for that intermediate portfolio we talked about before, because you do not expect gold to outperform stocks over long periods of time, like 15 to 20 years. It can and it will over short periods of time, but that doesn't always happen that way.
Voices:I love gold.
Mostly Uncle Frank:Usually you would expect it to perform somewhere between bonds and stocks overall over long periods of time, and its key attribute that makes it useful in a portfolio is that it's diversified from both stocks and bonds. But that's not of that much use to you when you're in an accumulation phase. To you when you're in an accumulation phase and I think that gets some into your final question that, no, you don't need bonds or other alternatives right now if you really don't want them. The reason that you would hold something like those things is wanting to sleep well at night, because there are people that like to accumulate in a risk parity style portfolio simply because they don't like the volatility of a regular accumulation portfolio. You do not seem to be one of those people.
Mary and Voices:I think I've improved on your methods a bit too.
Mostly Uncle Frank:And, in any event, you do have this substantial allocation to real estate as well. You also ask some questions about value generally and small cap value.
Voices:I'm telling you, fellas, you're going to want that cowbell.
Mostly Uncle Frank:What you should recognize is that when your large cap growth stocks are falling, they are likely to fall much more than your value stocks. And so if you get another year, like 2022 or the years between 2000 and 2003, those value stocks will give you an opportunity to rebalance into the growth stocks which have fallen substantially. And that's the reason you hold the two of those things together, because they tend to work well in rebalancing scenarios. And now, if you look at a style box chart, like you see at Morningstar, looks like that tic-tac-toe board with size from small to large going on the vertical axis and then value versus growth on the horizontal axis. If you look at that upper left corner the large cap value box, left corner, the large cap value box that box, we know pretty well, is going to have overall lower returns and lower volatility. So it's generally not something you want when you are accumulating, unless you are just looking for lower volatility for some reason. But think about that. If you take that box out of the total, what you have left then is going to be the rest of the market, which is going to be higher volatility and higher potential returns than what is in that large cap value box. And so the question then is well, what do you pick out of everything else in those boxes?
Mostly Uncle Frank:We know that small cap growth is extremely volatile, and its volatility probably outweighs its value in terms of performance.
Mostly Uncle Frank:So the best two things that tend to offer performance versus volatility tend to be in that upper right hand corner box, which is large cap growth, and the lower left hand corner box, which is small cap value growth, and the lower left hand corner box, which is small cap value, and those two things tend to work together pretty well. So I would actually not hold small cap value because you think it's going to outperform everything else in the market. All you really care about and all you really need is something that performs equally well but at different times than something like large cap growth. That is the lesson of Shannon's demon, which is the math behind modern portfolio theory that if you have two things that perform about the same but they perform differently at different times, holding both of them together will outperform either one of them alone because of this rebalancing possibility, and that's just math. And that's why you should be holding value stocks with your growth stocks, not because you think that there's crystal balls or there's going to be magical outperformances or other things like that.
Mary and Voices:Now you can also use the bull to connect to the spirit world.
Mostly Uncle Frank:But if you do happen to have a lost decade, like the 1970s or the early 2000s, you will be very happy to be holding any kinds of value stocks, whether they be small, large, international or whatever, because they will greatly outperform the growth stocks which are going to be dragging the rest of the market down in those circumstances. All right, your last question what do I think about this modified golden ratio portfolio? And I did not make Mary read all of these 16 funds that you stuck in it.
Mostly Uncle Frank:I think it's probably overly complicated, but it looks fine in terms of its overall macro allocations. I mean, just remember that the purpose of this kind of a portfolio is for drawing down. On that, she'll hopefully have a high, safe withdrawal rate, and so that's what you should be thinking of. And there are some general criteria that we know work pretty well, and you seem to have matched all the criteria here. I'm just going through those criteria. The first two come from Bill Bengen. One is to keep your equities somewhere between about 40% and 70% of the total portfolio, and you've done that here. Looks like you have around 50% in what you've got listed here.
Mostly Uncle Frank:The second criteria from Bill Bengen is to keep your cash holdings at 10% or less of the portfolio, and I would say you've done that because you have very little to no cash in this sample portfolio you've constructed. The third thing is to split your stocks between growth and value for the reasons we've been discussing, because they make good rebalancing pairs, and it looks like you've done that too. And then the fourth thing would be to have somewhere between 20 and 30 percent in treasury bonds, and it looks like you've got some strips in here and you've thrown a little preferred shares in there. I'm not sure you actually need those in this kind of portfolio, but it's not wrong to have some recognized there. Do not perform so much like treasury bonds, but they make sense.
Mostly Uncle Frank:If you have a bond like thing you need to put in a taxable account because they pay qualified dividends. And then finally, you want to have between 10 and 25 percent in alternative assets and you have 16 percent in gold in this portfolio and about 6 percent in managed futures, and so that also fulfills that requirement or guideline also fulfills that requirement or guideline. So what you've constructed here looks like it works fine. Maybe you could try this out as your intermediate portfolio and see how it runs, although I'm not sure you really want to manage 16 funds and you really don't need that many funds to do something like this. But you can if you like.
Voices:Hearts and kidneys are tinker toys.
Mostly Uncle Frank:So hopefully all of that helps. Thank you for your support of the Father McKenna Center and thank you for your email. Put me in a state, a state of shock. We're doing it.
Voices:Come on, baby. She put me Woo it's.
Mostly Uncle Frank:Daddy's Talk. Second off, we have an email from Brian.
Voices:Hey, Brian, care to place a wager?
Mostly Uncle Frank:And Brian writes.
Mary and Voices:Hi Frank, thanks to you and Mary and all the good work, I've made a small donation to the Father McKenna Center. I'm a DIY investor currently using a stock golden butterfly allocation. After listening to Rational Reminder, episode 350, I became curious about an all-equity approach, especially in light of the Cederberg et al paper. Beyond the Status Quo, the authors conclude that for investors with access to international equities and no leverage, an all-equity portfolio is optimal through retirement, with no meaningful benefit to holding bonds.
Voices:That's not how it works. That's not how any of this works.
Mary and Voices:Out of curiosity, I compared the golden butterfly with a couple of all-equity 50-50 and 33-67 portfolios. Using Monte Carlo simulations and a 5% withdrawal rate. The golden butterfly showed meaningfully better outcomes at the 10th and 25th percentiles. I'm wondering am I missing something? I'd love to hear your thoughts. Best regards, brian. Yeah, you got money to pay for fake mustaches.
Voices:Huh yeah, how much you pay for that fake mustache? $2.99. Ah Ow.
Mostly Uncle Frank:Ah Well, I need to also thank you too, Brian, for being a donor to the Father McKenna Center, and that is why your email has also been moved to the front of the email queue here. But now, getting to your email, I see you have stumbled on this Cedarburg paper, which I don't know why the guys at Rational Reminder are so enamored with this, because it does not mean what you think it means.
Voices:Inconceivable.
Mostly Uncle Frank:And they are really honestly doing themselves a disservice by fixating on this. I guess there's a new version of it out now, but I really think it's damaging their credibility at this point as financial advisors, and we'll talk about why in a second here. But we've already talked about this paper over and over again and linked to a number of criticisms of it in its various guises and forms, and those episodes are episodes 307, 319, 320, 320, 323, 341, 388, and 406. And it actually has myriad problems. But the biggest problem is how this has been presented by PWL Capital and others as saying that a 100% stock portfolio is going to outperform a portfolio with bonds in it, because that is not actually what this study says. And if you think that's what this study says, you are under a misimpression or have been misled by somebody.
Voices:Oh no my young Jedi, you will find that it is you who are mistaken about a great many things.
Mostly Uncle Frank:So you need to appreciate what is actually being compared here. This is a very strange model they are using for this academic study. What they've done is they've taken 10-year segments from a variety of countries. I think it's like 30-some. So let's just pick a country, say France.
Voices:You don't fight an ass English pig dogs. Don't fight the nice English pig dogs.
Mostly Uncle Frank:So what they are comparing there on one side is a portfolio that has only French bonds in it as its bonds and the French equivalent of T-bills and then some stocks. That is one portfolio that is generally about a third in French stocks and then the rest of that in what is international stocks from the French perspective, which is mostly US stocks, because the US market is the largest. So when it says international in that comparison it is actually in most cases talking about a majority in US equities. And then they take a whole series of those 10-year segments and jumble them up. So you're in France one decade, then the next decade you're in Germany, then the next decade you're in Sweden, then the next decade you're in the US.
Mostly Uncle Frank:Obviously nobody actually invests that way, so this is only of academic interest, but at its fundamental basis it is essentially comparing in most circumstances the bonds of a country that is a non-reserved currency country at the time, in particular like France historically and the US equity market.
Mostly Uncle Frank:So, as you can imagine, in most circumstances owning bonds in some country that could be war ravaged or have some other problems historically to the US equity market, the US equity market's always going to win. And because that is the major component of these total stock market allocations and what they're comparing it to. That is why the 100% equity portfolio looks so good. It's not because of the equities, it's because of the bonds that they're using to compare with the equities, which in most cases are bonds in non-reserved currencies, some of which are highly speculative in these circumstances. So since nobody actually invests that way and nobody would recommend that somebody invests that way, this study is only of really academic interest and that is why, when you put in the links that you compared the golden butterfly into just regular portfolios that people would actually be investing in, you see that the more diversified portfolio does outperform the all equity portfolios in drawdown scenarios and nothing in that study has changed that fact.
Voices:That's the fact, Jack. That's the fact, Jack. Change that fact.
Mostly Uncle Frank:So when you say, am I missing something? The only thing you're missing is that you've been misled about what you think that study means.
Mostly Uncle Frank:And unless you've read it, and really thought about it, you will not get a correct impression of the limitations of it. If you want to look at something that's much more interesting in terms of global portfolios involving various countries over time, tyler over at Portfolio Charts did an excellent study last year looking at a variety of different countries and different portfolios in those countries involving domestic equities, what would be international equities for each country, domestic and international bonds and gold, and you'll see some interesting results there. I'll link to that in the show notes. We've linked to it before, but that would be a much more interesting and useful thing to be looking at than this Cederberg study.
Mostly Uncle Frank:Forget about it and that's about all I have to say about it. I'm sorry. You've been misled whether you've been misled by that rational reminder podcast or another and it's really out of character for those guys because they usually don't do that, but in this case they've really gotten wound up on this one study and methodology. That doesn't, frankly, make a whole lot of sense given the business that they're in, because I don't think that they are recommending that their clients adopt these kinds of portfolios. But everyone makes mistakes and I hope they stop making this one soon enough.
Voices:Here to reply to a recent editorial is Miss Emily Lytella. Here to reply to a recent editorial is Ms Emily Lytela. I'm here tonight to speak out against busting schoolchildren. Busting schoolchildren is a terrible, terrible thing. I hear this is going on all over the country. The food in jail isn't good, and even though they get bread, I don't believe they can get toast or nice cake. Now, who will tuck them in? Where will they hang their leggings? Where will they set up their little lemonade stands? No, they don't have toys in jail, except maybe tiny tears dolls. And did you know? They have little holes in their bottoms there, the tiny tears and you can get. Where will they put their toys away? Excuse me, If they have toys.
Mary and Voices:Miss Vitella. Yes, I'm sorry, the editorial was on busing schoolchildren B.
Voices:Yes, I'm sorry, the editorial was on busing school children Bussing, bussing, oh Not busting, I'm sorry, never mind.
Mostly Uncle Frank:Hopefully that helps and thank you for your email.
Voices:So, brian, we're even now right Ready to start a new life in England. I've got my money. Your wounds have healed up nicely. What do you say? We let bygones be bygones. Hmm, you shot me in both my knees then lit me on fire. All right, all right, I tell you what you get one free revenge shot at me, okay, but I'm not going to tell you when it's coming.
Voices:Ah, this is going to be fun.
Voices:Last off. Last off.
Mostly Uncle Frank:Last off of an email from Ed. Hello, I'm Mr Ed, and Ed writes.
Mary and Voices:Hi Frank, I enjoy your show, both for the entertainment value and advice you never know what you're going to get. We are in our 40s and have saved to our retirement plans at work and also have a brokerage account. We have about 20 years or so left before our decumulation phase, when we will have a golden ratio or golden butterfly type portfolio. What are your thoughts for our accumulation phase portfolio now, so that the eventual transition will be easy? Our 401ks have limited options, mainly index funds and target date funds. Thanks, ed.
Voices:Market drops five points, I'm glad my money's tied up in hay.
Mostly Uncle Frank:Well, thank you for your email, ed.
Mostly Uncle Frank:Yes, I think, since you're still two decades from retirement, you should just stick with index funds, and which ones you use is almost not that important, particularly if it's in a 401k and you can make transactions anytime you want without paying any taxes, including when you get towards retirement anytime you want without paying any taxes, including when you get towards retirement. So you could just do it in a total stock market fund or add any number of other things. Like our first emailer today, what I like to use is something that is half large cap growth, or a total stock market fund or an S&P 500 fund, and pair that with something in the small cap value category. But if you don't have those things, you don't. And pair that with something in the small cap value category. But if you don't have those things, you don't have those things. I would avoid small cap growth funds and things that are allocated to small cap growth. Other than that, I'd be more sensitive to the fees being charged by these funds than anything else. Do not use target date funds.
Voices:Not going to do it Wouldn't be prudent at this juncture.
Mostly Uncle Frank:If you want to know why, go listen to episode 333. They will only slow down your accumulation.
Voices:You're going to end up eating a steady diet of government cheese and living in a van down by the river.
Mostly Uncle Frank:Now, if most of your money is in 401ks, your transition will be relatively easy, simply because you're just going to move it to an IRA and make the transactions you need and then have the kind of portfolio that you want.
Mostly Uncle Frank:If you have money accumulating in taxable accounts, I would focus those on all equities, and if you were wanting to add small cap value to your portfolio, oftentimes that's a good place to put it, particularly if you don't have that available in your 401k. Now you can also have IRAs and put different index funds in those to match whatever you have available in your 401k. So what a lot of people end up doing is they have, like an S&P 500 fund in their 401k because it's cheap, and then they use their other accounts to add in either international funds or small cap value funds or whatever else they want for their accumulation, and then, when you get to your transition phase, you do most of your transactions in the retirement accounts to avoid any taxation at that point in time. Now I realize you're not a beginning investor, but you might be interested in listening to the advice to beginning investors which is in episode 208. It's on a Wizard of Oz theme.
Voices:What kind of a horse is that? I've never seen a horse like that before now and never will again. I fancy there's only one of them and he's it.
Mostly Uncle Frank:These are yours, of a different color you've had tell about but I really think that most people can successfully accumulate with between one and four index funds and it doesn't need to be any more complicated than that. The main key is to just pick a formulation and then just stick with it and not be jumping around from fund to fund, because that's really how amateurs underperform. They look and see something that's performed well in the last one to ten years and allocate to that or primarily to that, and then it underperforms and then they jump to a different fund and then that underperforms and they jump to a different fund, in which case what they're essentially doing is buying high and selling low. You want to avoid that by just picking some reasonable allocation to a few funds and just sticking with them, or just adding other funds later on as you accumulate more money. At the beginning, just having one fund is just fine, as long as it's a low cost index fund. So hopefully that helps and thank you for your email.
Voices:A horse is a horse, of course, of course, and this one will talk to his voice, his horse. You never heard of a talking horse.
Voices:Well, listen to this.
Mostly Uncle Frank:I am Mr Ed, but now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frankatriskparityradarcom. That email is frankatriskparityradarcom. Or you can go to the website, wwwriskparityradarcom. Put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like subscribe. Give me some stars, a follow, a review. That would be great. Okay, thank you once again for tuning in. This is Frank Vasquez with Risk Party Radio Signing off.
Voices:Thanks for listening. And the wind screams. Will the wind ever remember the names it has blown in the past? But with its crutch, its old age and its wisdom, it whispers no, this will be the last.
Mary and Voices:And away cries Mary. Thank you very much. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.
