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 453: Managed Futures, Bengen's New Book, And Vanguard Personal Advisor Follies
In this episode we answer emails from Adam, Private Cowboy, and Jose. We discuss managed futures (again with references!), Bill Bengen's latest book and how it integrates into our approach, and the pros and cons of a Vanguard Personal Advisor-created portfolio and the hypocritical quandaries it creates with the gods of Simplicity.
Links:
Demystifying Managed Futures: Demystifying Managed Futures
Bloomberg Presentation On Investments In Inflationary Environments: MH201-SteveHou-Bloomberg.pdf
Dunn Capital Analysis: High-Vol-Trend-Following-Trend-Index-Edition-0825-DIGITAL.pdf
Kardinal Financial Video: What is Alternative Investing?
Interview of Bill Bengen: Episode 195: The 4% Rule and Beyond: Retirement Strategies with Bill Bengen
Weird Portfolio: Weird Portfolio – Portfolio Charts
Afford Anything Episode: #618: How to Retire at 50 While Supporting Aging Parents, with Frank Vasquez - Afford Anything
Corey Hoffstein Interview: Show Us Your Portfolio: Corey Hoffstein
Breathless AI-Bot Summary:
The perfect asset allocation isn't a formula—it's a framework built on uncorrelated assets that dance to different drummers during market storms. This episode dives deep into managed futures, one of the most powerful yet misunderstood portfolio diversifiers available to individual investors.
Three listener questions explore how managed futures fit within retirement portfolios, particularly for those approaching their post-career years. Frank breaks down why managed futures have essentially zero correlation to stocks, bonds, and even gold, making them uniquely valuable during both inflationary crises (like 2022) and deflationary periods (like 2008). He references new research from Dunn Capital comparing various alternative strategies and explains how ETFs like DBMF have democratized access to institutional-quality diversification.
Beyond managed futures, the episode synthesizes Bill Bengen's latest safe withdrawal rate research with Ray Dalio's "Holy Grail" principle of uncorrelated assets. While Bengen's new book doesn't explicitly analyze alternatives, Frank connects these complementary approaches to formulate practical guidelines: maintain 40-70% equity exposure divided between growth and value, use 15-30% treasury bonds for recession protection, allocate 10-25% to alternatives, and limit cash to under 10%.
The discussion takes a critical look at cookie-cutter financial advice, particularly questioning whether paying 0.3% annually to a Vanguard advisor provides value when their recommendations often involve overlapping funds and questionable international bond allocations. Frank challenges the "worship of simplicity" that permeates financial discussions while exposing the irony that these same advisors often recommend complex multi-fund portfolios.
What emerges is a call for "system two" thinking—the willingness to incorporate new information rather than clinging to outdated formulas out of consistency.
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.
Mostly Mary: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. Top drawer, really top drawer. Along with a host named after a hot dog. Lighten up Francis. But now onward, episode 453. Today on Risk Parody Radio, we got some long emails here. I hope Mary's ready.
Voices:Mary, Mary, why you bugging?
Mostly Uncle Frank:But the good thing is, or one of the good things is, that all of our emailers today are donors to the Father McKenna Center.
Voices:Yes.
Mostly Uncle Frank:As most of you know, we do not have any sponsors on this program. We do have a charity we support. It's called the Father McKenna Center. It supports hungry and homeless people in Washington DC. Full disclosure. I'm on 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 my email line. There are two ways to do that. First, you can go directly to the Father McKenna website, to the donation page, and give that way from your donor, advised fund or otherwise.
Voices:Show you the money. Oh no, no, you can do better than that, jerry. I want you to say what you would mean, brother, show me the money. I need to feel you, jerry. Show me the money, jerry, you better yell. Show me the money.
Mostly Uncle Frank:Because we are a 501c3 charitable corporation, or you can go to the support page at wwwriskprioritycom and become one of our patrons on Patreon, who give monthly from their credit cards. Either way, you get to go to the front of the email line and you shall receive my eternal gratitude.
Voices:But now, without further ado, here I go once again with the email.
Voices:And First off, but now without further ado here I go once again with the email, and first off. First off, we have an email from Adam. One Adam 12,. One Adam 12, possible 459 suspects there now One Adam 12, one Adam 12, 415.
Voices:Man with a gun. One Adam 12,. No one. Click x-ray item 483. One Adam 12, 415. Fight group Chains and knives.
Mostly Mary:And Adam writes Hi Frank, I discovered your podcast about a month ago through the episode you did with BiggerPockets. It has rapidly become my favorite financial podcast, replacing the White Coat Investor as my go-to source for useful financial information.
Voices:Surely you can't be serious. I am serious. And don't call me. Shirley.
Mostly Mary:I'm 50 and still working. However, due mostly to good fortune, my wife and I have become financially independent, and finding out about risk parity style portfolios to help manage our finances in an uncertain world was quite timely. I anticipate retiring or at least significantly scaling back to very part-time in five to ten years.
Mostly Mary:This email is mostly emissive, just to say thanks for taking the time to put this information out into the ether without seeking any personal financial gain for your work, though I will pose a question at the end about managed futures that has been on my mind and hopefully will be of use for other listeners. As a token of my appreciation and the value I've received from this podcast, I've made a recurring annual donation to the Father McKenna Center using my donor-advised fund. Top drawer, really top drawer.
Mostly Mary:A quick aside. I live in Denver and for several years I've made a small charitable contribution to the Food Bank of the Rockies to support their efforts. However, I've never personally volunteered at the Food Bank. Last night we had some extra chipotle left over after my daughter's 12th birthday party and my wife and I decided to make a couple of meals and I hand-delivered them to the less fortunate folks in our city. The individuals who received the food were tremendously grateful and it was truly a heartwarming experience for me. Thank you for being a starfish thrower in a society that currently seems to place more emphasis on punishing the starfish for washing up on the beach.
Voices:People will come Ray For reasons they can't even fathom. They'll turn up your driveway not knowing for sure why they're doing it. They'll arrive at your door as innocent, as children longing for the past, for it is money they have and peace they like past, but it is money they have and peace they like.
Mostly Mary:Now my question I am currently in the process of considering various risk parity style portfolios, as I plan to transition my assets from their currently largely stock and bond allocations into a portfolio that closely resembles a golden butterfly style portfolio with 20% VTI, 20% small cap value stocks, 20% long-term bonds, 15 to 20% gold and 10% short-term investments. I'm mulling over what to do with the other 10 to 15% of the portfolio and debating between REITs, managed futures, the extra 5% gold mentioned above, or perhaps keeping 5% tips. No need to rail about these. I know your thoughts and probably won't wind up going for this option. You've probably covered this inquiry somewhere in your catalog, as I've only made it through 25 to 30% of the entire canon over the past month.
Voices:You are talking about the nonsensical ravings of a lunatic mind.
Mostly Mary:But I'm curious about the risks and benefits of managed futures in my portfolio compared to the other alternative options. As I see it on the plus side, managed futures seem to offer another uncorrelated asset and may do well in economically challenging conditions. These two features appeal to me. On the contrary, their expense ratios tend to be higher than other options. It's very hard to backtest them for any substantial length of time. I'm not sure I fully understand them and it seems like they rely quite a bit on making good bets. Performance momentum chasing these are features I find less compelling. I'm curious why you switched from REITs to managed futures in the modeled golden ratio portfolio and how you would think about the relative advantages and disadvantages of adding 5 to 10% managed futures in my portfolio as opposed to using this space for REITs or additional gold. Thanks so much again for all you do, adam.
Mostly Uncle Frank:Well, first off, Adam, thank you for being a donor and being a starfish thrower in your local community.
Voices:It's a part of our past, ray. It reminds us of all that once was good and it could be again. Oh, people will come, ray. People will most definitely come.
Mostly Uncle Frank:For those of you wondering what the reference to sea creatures is all about, you'll have to go back and listen to episode 441, because I'm not going to dwell on that today, but it is quite true and has been well researched and written about that. One of the ways of improving your own well-being is to get involved in some kind of charitable work, and that may involve giving some money. It may involve some time. Hopefully it'll involve some additional or improved relationships, because I can tell you, one of the things you should be thinking about in retirement is what do I want to get involved with? Go, get involved with organizations and activities of people that actually want to be there, Because you will find those people are a lot more enjoyable to be around than people who are required to be somewhere. It's the difference between teaching a college or graduate level elective and teaching junior high schoolers, but I digress, that goes without saying.
Mostly Uncle Frank:So you want to know about managed futures? Well, we've talked about those a lot here and let me give you some references, because I've got a couple new ones today. Actually, that just came to my attention this past week. The reason this strategy is interesting for a diversified portfolio is that it has essentially zero correlation to stocks, zero correlation to bonds and even zero correlation to something like gold, and so it fits very well into our primary principle that we're following or implementing here, which is Ray Dalio's holy grail principle of trying to find uncorrelated assets and combine them and reap the benefits of that free lunch known as diversification, and that goes all the way back to our foundational episodes of 1, 3, 5, 7, and 9. The reason this has become more interesting in, say, the past five to seven years is that we now have funds of reasonable cost to implement this kind of strategy that you can take off the shelf. They're just ETFs like DBMF, and DBMF is actually the closest thing we have to an index fund in this area, although there are a number being rolled out this year even, and although this strategy has been around as long as I've been alive, it was typically very difficult to implement without running an institutional-sized portfolio.
Mostly Uncle Frank:So if you want to read about the theoretical underpinnings of this, we just posted a paper in episode 446 called Demystifying Managed Futures. It's written up in a financial journal, so it is kind of technical and academic, but it does give you the history and the academic underpinnings and shows you how it's used. Now, as you surmise, this strategy actually tends to do the best in markets that are otherwise often very bad for either stocks or bonds or both, so it does very well in high inflation environments and in deflationary environments, and examples of those would be 2022 and 2008. There's a paper or presentation I haven't cited in a while from Bloomberg about which assets perform well in inflationary environments and going through a whole list of them, including managed futures. I'll link to that again. I think it's very useful to show this phenomenon I just described and why this asset in particular is a better zero-correlated asset than many others you might pick.
Mostly Uncle Frank:Now there is a short paper I just ran across last week and I'll link to it.
Mostly Uncle Frank:It's from Dunn Capital and this is an interesting paper that is comparing managed future strategies both a low volatility managed future strategy and a high volatility managed future strategy with about 15 other alternative asset strategies, including private equity and hedge funds and long short things and things like that, and it also compares it to a total stock market in a 60-40 portfolio, and it's a relatively short analysis it's just this century but it does show you how, using that in a simple portfolio of 50% stocks, 30% bonds and 20% alternative strategy is better in many ways than either without the alternative strategy or compared to the other alternative strategies, if that makes sense.
Mostly Uncle Frank:One of the other interesting findings in the paper was that the higher volatility managed futures strategy also tended to help the portfolio more in terms of overall risk reward. And for those of you who are interested in that in particular, there's a new ETF that just came out from Bob Elliott, who's a former Bridgewater guy. It's called HFMF and I think it's only been out for two months, but it is a higher volatility managed future strategy and it's also a replication strategy like DBMF. It has not been out long enough to say anything about it. In fact it's barely traded. I bought a few shares just to monitor it and see what it does, but it joins a crowded field now of many such strategies, including ones from Fidelity and iShares that came out earlier this year. So I think you'll find that Dunn Capital paper to be interesting. And then we also have a nice video that was just sent to me by my friend, bill Yount, in his downtime at the emergency room he works in. That's enough of that noise huh, who needs it anyway?
Voices:So you had a big scare up there. Huh, oh yeah.
Mostly Uncle Frank:Want to see something really scary, and this is created by a solo financial advisor who works under the name of Cardinal Financial, which I believe is relatively new. He's relatively young he's a CFA though that's what I'm talking about but he has adopted strategies similar to the ones we talk about here, using risk parity and the efficient frontier to develop portfolios with better risk-reward characteristics, and has made a couple of nice little videos. One I'm going to link to also has some links in it to some research from AQR and others that goes back to 1880, actually, and shows how this kind of strategy has worked in many different environments. So you'll definitely want to check that out too. Now, as to your question as to why I switched from REITs to managed futures in the model golden ratio portfolio, as I actually explained when I made that switch, the reason we made the switch is because it now looks more like what I actually hold in real life. In the past, I've held both REITs and managed futures in our real accounts, but that is much more tilted towards managed futures today than REITs, and that's just been a migration over time. As we've discovered these newer funds that allow us to do this in a cost effective way, it's also a better implementation of that holy grail principle in that managed futures are more diversified from the other assets in the portfolio than, say, reits.
Mostly Uncle Frank:That doesn't mean you can't use REITs anymore. Remember, these are sample portfolios. They're not intended to actually be quote model, unquote portfolios or formulas. And many people do use REITs in these kind of portfolios, particularly if you want to make it a little more aggressive and have essentially more stocks in it, because REITs are stocks. They're just one of the two sectors that is the most diversified from the rest of the stock market, the other one being utilities. So the advantage of using managed futures in a portfolio like this, as opposed to REITs, is that you're going to have a lower volatility overall, probably shallower drawdowns and hopefully a higher safe withdrawal rate. But it's going to be pretty similar whether you're talking about 5% or 10% of the portfolio in one thing or another, but it's going to be pretty similar whether you're talking about 5% or 10% of the portfolio in one thing or another. The advantages to holding REITs in the portfolio is the portfolio is going to be more aggressive and so, over very long periods of time, is likely to outperform in terms of compounded annual growth.
Mostly Uncle Frank:You need to remember that the overall purpose of these portfolios is to have higher safe withdrawal rates. And there is a sweet spot that Bill Bengen has talked about and talks about in his new book. That seems to be somewhere between 40-something and 70-something percent in equities which yields the highest safe withdrawal rates. And the other factor or general guideline I found works well, is that the best allocation to alternative assets in a portfolio seems to be somewhere between 10 and 25 percent. Well, that is certainly not written in stone. Anyway, if you're curious about managed futures and I think you should be then you should read some of those materials that I reference, because if you're not curious enough to read the materials then I probably can't help you too much, and I will link to all of them again in the show notes. So hopefully that helps. Thank you for being a donor to the Father McKenna Center and thank you for your email.
Voices:What's your situation, adam 12?. It's a standoff, mac. We can't go in. He can't come out. Suspect is armed with a shotgun. Request an ambulance and tear gas. Suspect is wounded. That's a roger. Anyone else been wounded? He shot a man in the liquor store and fired at both of us Looks like we're going to have to do it the hard way.
Mostly Uncle Frank:Second off Second off.
Voices:We have an email from Private Cowboy.
Voices:What kind of training son Army training sir.
Mostly Mary:Army training sir and Private Cowboy writes in about four years. As I'm 47 now and the kids are still in school, for four more years I will probably pursue some type of seasonal employment, but I'm looking forward to the flexibility as I contemplate what the next season of life looks like.
Mostly Mary:I do appreciate the reading material recommended for those of us in this spot which I am consuming now. I need to do a deeper dive into our expected annual expenses, but I estimate I'm close to FI now and expect to be fully FI in four years, as our annual spend is approximately $80,000. In four years, as our annual spend is approximately $80,000. We have $40,000 to $50,000 in residential rental income after expenses, depending on CapEx, and have about $800,000 in 401k IRA, with another $200,000 in a taxable account. I will be saving heavily in the taxable account over the next few years and continue to contribute to the 401k IRA pool. I have a couple of questions. As I contribute predominantly to the taxable account, I'd like to work towards a golden ratio style portfolio. I'd like to leave the rentals basically unchanged and just reinvest our income, as that has been pretty stable, yielding around 4-5%, and represents basic living expenses. I have my 401k split 50-50 between what I have available to emulate large growth and small value, which happens to be a Fidelity S&P 500 index, and PIMCO small value managed fund, pmjix. Our 401k does not have an index small value alternative. I will be focusing my taxable account investments in the alternative asset classes and need to prioritize how I fund those.
Mostly Mary:I ran the golden ratio tickers through the optimizer at Testfolio and it seemed to favor managed futures over the other non-equities assets. I seemed to get a little better performance shuffling the alternative assets around in the golden ratio. I came up with managed futures 26%, tlt 16%, gold 10%, cash 6%. When optimized for sharp ratio, the tester waits towards managed futures. Is this an anomaly of the data set? It seems like the golden ratio portfolio can basically be constructed as more or less aggressive based on the percentage of equities held, ie 42%, 52%, 62%, etc. Although no longer conforming to the ratio Ha. But I am wondering how to optimize the alternative assets as I build out that portion of the portfolio. Should I be wary about overweighting managed futures or shuffling around the order of the non-equity assets? Thank you so much for any insights into this.
Voices:State of formation. Targets just ahead. Targets should be clear. If you're going low enough, you'll have to decide, you'll have to decide, you'll have to decide, you have to decide.
Mostly Uncle Frank:You have to decide. Well, this is an interesting email, coming on the heels of the last one. You want to use more managed futures because you've seen some good results out of analyzing them. Yes, I do think that's partially due to the data sets you're working with, because the end of the 1990s and the first decade of the 2000s was a good environment for managed futures, particularly compared with other assets, and you will get differing results depending on what aspect of the data set you're working with. I think the longest managed futures data set they have in there is KMLM SIM, which goes back to the early 1990s. If you're working with DBMF SIM, that only goes back to the year 2000. And if you're working with other individual tickers, you may not be going back that far.
Mostly Uncle Frank:But there is no clear answer to this. But there is no clear answer to this and I will tell you that many people that recommend or use managed futures want to use up to 40% of the portfolio or even 100% managed futures for the people that are really professionals in that area, who run hedge funds. So you can certainly use variations on the theme here. I think you will find, once you start, adding 30% or more of alternatives into a portfolio, you get a lot of what is called tracking error, which means that your portfolio is going to perform vastly differently than, say, some standard stock bond portfolio, which may cause you some psychological discomfort over time. But that doesn't mean it's wrong if you can stick with it and I wouldn't worry about conforming explicitly to the ratio. A lot of these things are approximations. A 60-40 portfolio is actually a golden ratio portfolio involving two assets, as is a 50-30-20 portfolio that's a golden ratio portfolio involving three assets. Essentially, anything that looks like part of the Fibonacci sequence fits into that Inconceivable. But there are many variations you can use. So I know some of my listeners do something like a portfolio that's 50% in stocks, 25% in bonds and then the other 25% is in alternatives, which is usually some combination of gold and managed futures.
Mostly Uncle Frank:You are correct that the aggressiveness of the portfolio is generally determined by how much inequities are in the portfolio, and if you look at something like the weird portfolio which is Value Stock Geek's contribution to this effort that's over at Portfolio Charts, that has 60% inequities in it. But I wouldn't get too wound up over trying to optimize or find some kind of perfect portfolio, because such a thing doesn't exist. That's not the way reality works. In a probabilistic world, the best you can do is get into a good ballpark that is likely to have a high safe withdrawal rate as the goal that we're seeking here, and I've outlined some basic guidelines that seem to fit that bill here. And I've outlined some basic guidelines that seem to fit that bill. I did go over these in the Afford Anything podcast that I was on, which is episode 618 of that series, and there's also a cheat sheet there.
Mostly Uncle Frank:But the basic four guidelines I would use is that you probably want to have somewhere between 40 and 70% in equities in the portfolio.
Mostly Uncle Frank:You want to divide those equities into growth and value, and you can chop them up in other ways, adding internationals or sectors or other things, but make sure they're at least just divided into growth and value. On the bond side, you want to use treasury bonds. You're just using them as portfolio insurance in a recession. So what you probably want there is somewhere between 15 and 30 percent in intermediate and long-term treasury bonds, because they do the best at that without taking up too much space. You want between 10 and 25 percent in alternatives. I would say that's the most flexible category that I have the least data for, but that is my best estimate today. And finally, you want to have 10% or less devoted to cash in your portfolio because as you go above that it tends to drag in the portfolio. And that's from Bill Bengen's original research going back to the 1990s and he's reconfirmed that in his recent book. And that's frequently where people run awry these days, just holding too much cash arranged in buckets, ladders and flowerpots.
Voices:There be treasure, ha ha ha, ha ha.
Mostly Uncle Frank:Which does not actually improve your safe withdrawal rate. In fact, in most cases it tends to reduce one's safe withdrawal rate rather than improve it. So in the end you may be on to something, but my general preference is to just use enough managed futures to make the portfolio work pretty well, because they do have these strange performance characteristics where they typically perform around zero oftentimes, or in the low single digits either positive or negative and then every once in a while have this bang out year where they go up 20 or 30 percent, like we had in 2022. So in many years you're just going to be sitting looking at them, watching them do next to nothing, like they're doing this year, which may cause you some psychological discomfort. So I would say, probably don't overdo it. You could probably add more later if you find that it's really something you find particularly attractive.
Mostly Uncle Frank:I would also check out that research I just mentioned in connection with the last question, and then you might also go over and check out Resolve Asset Management. Those are the people that have created these return stacked kind of portfolios, which are pretty interesting, and they talk a lot about managed futures and how they use them in various portfolios, and I know Corey Hofstein is somebody who uses something like 30% or 40% in his own personal portfolio. I'll see if I can find his interview on Excess Returns, which is a podcast where they interview a lot of people about their personal portfolios, and you might find that to be an interesting watch or listen. So hopefully that helps and thank you for your email.
Voices:Razzle, dazzle One, two, three, four. So hopefully that helps and thank you for your email.
Mostly Uncle Frank:Last off, we have an email from Jose.
Voices:No way.
Mostly Uncle Frank:And Jose writes.
Mostly Mary:Hi Frank and Mary. I heard Frank's appearance on the Bigger Pockets Money podcast back in July and since then I've binge listened to most of your episodes. We have some things in common.
Mostly Uncle Frank:You know like nunchuck skills, bow hunting skills, computer hacking skills.
Mostly Mary:I'm also a lawyer and my wife of 36 years shares your wife's names. Cue the Run DMC song. We're both big believers in giving to good causes, so giving to the Father McKenna Center via Patreon was a no-brainer. We also donated directly to the Father McKenna Center site. Should you consider the email should be better addressed by your financial coaching, mentioned in episode 449.
Mostly Mary:Here are my questions. One, given your discussions of William Bengen's new book, I purchased it and just finished reading it. While I enjoyed the book, I'm confused that it did not discuss the principle retirement investment should include some uncorrelated asset classes to reduce your risk, ie your Holy Grail principle. Mr Bengen's new book expands the number of stock assets from his prior work, but there does not appear to be any consideration for correlation of assets other than stocks versus bonds. Did I miss something? Two, your discussion of your three principles to follow really makes sense to us and caused us to review our investments.
Mostly Mary:Neither my wife nor I are as adept as you are relating to investing. We've used Vanguard for over 30 years, started with making small monthly investments in the VG S&P 500 fund and only recently started using a Vanguard personal advisor. Every time I hear one of your episodes relating to financial advisors, I do cringe a bit and hope that's not what we have with our advisor. It's all one big crapshoot. Anywho, this service costs 0.3% of our assets and we do find the services he provides ie rebalancing, planning to convert traditional IRA to Roth helpful. However, I am troubled a bit by the selection of the assets in our plan and that there appears to be some overlap Traditional and rollover IRA, vbtlx, bmdx Brokerage account, vxus, vxf, voo, vti, vtclx, vmlux, vwlux, vmiux.
Mostly Mary:For various reasons, the majority of our investments 71%, is in a brokerage account, with the remainder in traditional IRAs and a rollover IRA. Our portfolio is currently 50% in equities and 50% in bonds. We've been told that our income is the reason for the municipal bond funds and VTCLX in the brokerage account. I assume once I retire and my income goes down, I won't need these investments. I am 61 and plan on at least semi-retiring in four years. Given our annual expenses, we have more than enough assets to last us through retirement, fingers crossed. We are interested in your thoughts on how to transform this portfolio into a risk parity portfolio, whether we should keep our Vanguard advisor and any other issues you spot. Thank you so much for what you do.
Mostly Uncle Frank:Well, first, thank you also for being a donor to the Father McKenna Center, and I forgot to thank Private Cowboy for that as well. I'm getting your questions talking about Bill Bengen's new book. Okay, first remember that when we look at expert material here, we don't look at somebody as a guru. We just take everything they say as gospel and then ignore everything else in the world. We use the Socratic method here.
Mostly Uncle Frank:We apply Bruce Lee's principles here what the which is. Take what is useful, discard what is useless, add what is uniquely your own. So Bill Bengen's book and his research is not about principles and it's not about theory. It's about baseline observations of essentially what works and what doesn't in a historical sense. So it's very data driven. He does not attempt to discuss why different assets perform the way they do, which is fine, but that is a limitation. Man's got to know his limitations.
Mostly Uncle Frank:What that book and that research is great for is identifying potential sources of improving a safe withdrawal rate, and whether that is based on portfolio construction or based on a variable withdrawal plan or based on other factors. The best way to use that book is to identify categories of things that you can adjust to therefore create a portfolio that suits your purposes, particularly if you're trying to get the most money out of it. It's basically telling you where you should be looking and where you should not be looking. So you should be looking at better portfolio construction. You should not be looking at different allocations of cash or rearranging them.
Mostly Uncle Frank:Because, as I just mentioned, he did confirm in that book that holding more than 10% in cash in a portfolio, regardless of how you organize it, is not going to help you have a higher safe withdrawal rate. It's going to detract from it. Now, getting to what is missing and this is both a strength and a weakness of the book is why things would perform that way, or an attempt to explain that, and in many respects, it's better that he did not attempt to do that, because it gives a more unbiased, honest presentation of the findings. Well, where you will find that is going to somebody like Ray Dalio or somebody who is at the institutional level, who has looked at these things from a more theoretical perspective, and that is where you get to these four quadrant models about which assets perform well in different economic environments. That's where the Holy Grail principle comes from, and so what you want to do, and what we tried to do here, is synthesize the best ideas from multiple sources. I am a scientist, not a philosopher.
Mostly Uncle Frank:So remember it's not my principle. In fact, I try to have as few original thoughts about this as possible. I'm not a smart man, because other people have already done the work and it's just a matter of going out there and finding it and then synthesizing it into something that makes sense.
Voices:We do brain surgery here. I train your mind. You come in here with a skull full of mush and you leave thinking like a lawyer.
Mostly Uncle Frank:So you didn't miss anything from the book, except for the idea that this is not the be-all and end-all of this discussion. What that book lays out is kind of the new starting point for the discussion, updated from the original starting point he had in the 1990s, and it lays out what I believe are essentially table stakes. If you're going to be a serious thinker in this area, that you should at least be able to incorporate or discuss all of the issues in that book in terms of your portfolio construction and what you're using and what you're not using, and why. Because if you're just ignoring some of those things like portfolio construction, you're basically not playing with a full deck or playing with one hand tied behind your back.
Mostly Mary:That's not an improvement.
Mostly Uncle Frank:Which gets to our other principle, or another principle we have here, which is that foolish consistency principle. A lot of the reasons in which you're going to see people ignoring what Bill Bangan's new book has to say in favor of his old research because people just don't want to change. They've come up with some formula that they've been using for a decade or two decades and it causes them cognitive dissonance to get new information that they can't incorporate without actually making some changes to what they're doing. That's basically system one thinking. If you think of Kahneman's thinking fast and slow, you really want to be a system two thinker here or a Bayesian thinker that is going to take new information and incorporate it and change based on that new information.
Mostly Uncle Frank:If it is compelling and a lot of what Bengen has to say in this book is compelling but it is also missing certain kinds of analysis.
Mostly Uncle Frank:For example, he did not analyze alternative assets.
Mostly Uncle Frank:Now he did acknowledge in the book that he had not done that research and if you listen to his interviews about the book, one of which I just heard yesterday from Wade Pfau and company on the Retire With Style podcast, Bill Bengen says that alternative assets like gold, if you add them to what he's constructed would actually improve the safe withdrawal rate as well, and I'll link to that in the show notes and you should listen to that, because what it shows you is that Bill Bengen is a system two and a Bayesian kind of thinker, that he does not believe that this book is the end of the research and that there's much more research to be done.
Mostly Uncle Frank:And that is really the kind of way you want to be thinking about all of this, that it's like an evolving technology and it's not like some kind of Dead Sea Scroll that was laid down and you just read it and follow it for eternity ever after, which is the problem with a lot of the ways that people approach personal finance, particularly if they're following something like baby steps or formulas or something like that and not principles baby steps or formulas or something like that and not principles.
Mostly Uncle Frank:And, as we've discussed in many other episodes, the analysis of gold as a diversifier that improves the safe withdrawal rate has been done and you'll find it in the Earlier Retirement Now blog series, Safe Withdrawal Rate, blog entry number 34, which is a 100-year analysis showing that even taking the kind of non-performance of gold prior to 1970, it still adds to the safe withdrawal rate or still improves the safe withdrawal rate if you add 10% to 15% of it in your portfolio. And so you want to synthesize information like that with what Ray Dalio has to say and what's in Bill Bengen's book.
Voices:At times you may feel that you have found the correct answer. I assure you that this is a total delusion on your part. You will never find the correct, absolute and final answer.
Mostly Uncle Frank:And those three principles that we talk about here are a synthesis of a number of sources. Now, getting to your second question about your Vanguard portfolio, I have a number of thoughts about this.
Voices:You are talking about the nonsensical ravings of a lunatic mind.
Mostly Uncle Frank:First, you need to remember what the purpose of a portfolio is. It is not to adopt what is popular or what only one company has to say, or to conform what Risk Parity Radio has to say about it.
Voices:You must unlearn what you have learned.
Mostly Uncle Frank:The purpose of a portfolio is to meet a particular financial goal, and that's actually what's missing from your question. I'm not sure exactly what your financial goals are for this portfolio, because without knowing that, it's impossible to tell you anything about whether this is the right thing for you or not. I surmise, based on what you've said at the end of your question, that you are planning to underspend your portfolio, because you said you had more than enough assets to last through retirement. So I'm interpreting that as you're going to be spending less than 4% of your accumulated assets in retirement, and if that is the case, then you have a wide variety of choices that are going to work just fine, including what you've got here A 50-50 stock bond portfolio of some basic index fund type. Things is going to work for your purpose, and the only real question here, then, is well, how much are you going to have left when you're dead? Because you're going to have a whole lot left if you're not spending much of it. Dead is dead.
Mostly Uncle Frank:Now, if you want to maximize that, then you're going to want to maintain a more aggressive portfolio that looks more like an accumulation portfolio. So somebody like Jay Collins has 80% of his portfolio in stock still because he's underspending it and he wants to leave a whole lot at the end, and that makes sense for that financial goal. If you're going to maximize the amount of death, you do want to have more on the accumulation side of things. Death you do want to have more on the accumulation side of things. Now, if your goal is just psychological comfort, then you could have even less in stocks than you have in this portfolio, or you might choose to start using some simple annuity products. Those kinds of strategies are much less efficient financially and won't leave you with the most at death, but they may just make things a whole lot more comfortable and easier to spend your money.
Mostly Uncle Frank:As many psychologists and financial advisors have discovered about a lot of their clients, Something like that is usually known as a safety-first approach and is really geared more towards psychology than it is towards finance. Now, if your goal was to spend more money in retirement or increase your spending, then you probably want to modify this portfolio to give you something that has a higher projected safe withdrawal rate, like something we use around here. But you haven't expressed any interest in that. So it seems to me what you've got here is probably going to work for the limited purposes I can glean or surmise out of your question. All right, now let's talk about the pluses and minuses of this particular service that Vanguard's got, the personal advisor service. One thing that's true about all of these kinds of advisory services particularly if you're using one of the large institutions like a Vanguard, a Fidelity, an Ameriprise, Edward Jones, they have kind of a stable of funds that they use and if they create their own funds, like Vanguard does, you are going to be essentially limited to using only those funds in their stable.
Voices:Am I right or am I right, or am I right, right, right, right.
Mostly Uncle Frank:And that is just a broad limitation that goes with all of these kinds of funds. This is why you generally don't want that kind of advisor. What you want is somebody that is completely independent and, for example, is not being compensated by 12b1 fees like many of the Dave Ramsey affiliates are. That's why they use things like American funds with loads because they get compensated from that. Why Vanguard would only use Vanguard funds? They get compensated from that.
Voices:You are correct sir.
Mostly Uncle Frank:Yes, so Vanguard is only going to put you in Vanguard funds. Now, fortunately, vanguard has a lot of good funds and a lot of good inexpensive funds. But, as we've learned and if you've done research, they're not always the best fund for the purpose that they're serving. That's why, if you go to a site like Paul Merriman's, where he's got best-in-class ETFs and they've analyzed a whole set of these things from various providers oftentimes the Vanguard funds are at or near the top, but they're not the top, and I'd say that's particularly true when you're looking at international funds. Vxus is just kind of a mediocre milquetoast kind of a thing to be having in your portfolio, because there are just better options from Avantis and DFA and others, and we just had a discussion about that in episode 450 that I'm not going to repeat here.
Mostly Uncle Frank:Now. The rest of your stock funds are just overlapping, because if you take VOO and VXF together, you basically get the same thing as what's in VTI and that's a total market fund. Now, if you look at what a total market fund actually is in terms of its algorithm, it's a large cap weighted fund that operates on a principle of momentum, in which case it is buying more of anything that's growing and less of anything that's shrinking. And there's nothing particularly magical about that. It's just one algorithm out of many. All index funds have some kind of algorithm built into them. So when somebody says that, well, the total stock market fund is self-cleansing, what does that mean?
Voices:Are you stupid or something?
Mostly Uncle Frank:All index funds are self-cleansing. They have an algorithm, they run the algorithm. Some things drop out, some things are added. It's one of those terms that means nothing.
Voices:It is a tale told by an idiot, full of sound and fury, signifying nothing.
Mostly Uncle Frank:Because it's common to all index funds and all funds that are run with algorithms. So this stock holding you have is basically fine in an accumulation portfolio. It is not going to help maximize the safe withdrawal rate because it's not that well diversified out of large cap stocks. In order to do that, you would at least want to split it between growth and value and then probably between small and large as well. But as I said, if you're not going to be spending your money, then maybe you don't want to bother with that. I'm not sure what the fund VTCLX is doing for you. It is basically kind of like another S&P 500 fund. It says it's tax managed in some way, but in terms of just portfolio construction and diversification it's not really significantly different from VOO or VTI.
Mostly Uncle Frank:I can understand why they would put you in municipal bond funds in your taxable account if you were in a very high tax bracket, because they generally work well for people in the highest tax brackets I'm talking over 30 federal and a significant state tax as well. Other than that, they're kind of meh. If you will, you might also consider preferred shares funds if you're really looking for income out of those selections. It's unclear to me why you're holding those bonds to begin with, and maybe you should get more clear on that. But oftentimes if you take a preferred shares fund that is paying a high dividend rate in qualified dividends and they're like at 6% or 7% right now, that can be after taxes a better income source than a municipal bond fund might be, depending on your tax situation. But you do have to analyze that from a tax perspective. I think if you are in a situation where you're not going to be spending this money anyway, I don't see the point in holding this money in municipal bonds. I would just buy more stocks with it. It would be more volatile, but you would probably maximize your overall returns. But again, that's the question Are you trying to do that or not? Now, looking at what's in your IRAs, you've got the total US bond market fund and the total international bond market fund.
Mostly Uncle Frank:I've never understood why any US individual investors would be investing in an international bond fund. It just seems like a waste of space in a portfolio because it's basically a currency speculation. If the US dollar is stronger, it'll do worse. If the US dollar is weaker, it'll do better. But if you want to speculate on currencies, you should probably just do that directly with either gold or a managed futures fund or something else, so it's kind of a waste of space in a portfolio. I think Vanguard just likes to shove this into all of their target date funds and other things just for something to do with it, because, oddly enough, international bonds are more correlated with US stocks than US treasury bonds, and the reason for that has all to do with the fact that a weak dollar makes all stocks go up and international bonds go up, whereas if you have some kind of recession with a strong dollar, an international bond fund is not going to help you.
Mostly Uncle Frank:Vbtlx, the total US bond market, is kind of obsolete these days.
Mostly Uncle Frank:It's not really very efficient, and Vanguard has a whole suite of individual choices there, so they have a suite of treasury bond funds long, medium short, extra long, extra short.
Mostly Uncle Frank:They have a whole suite of corporate bond funds, and so I don't see the point of taking this kind of off the shelf thing, which is actually not all of the bonds anyway. It is just what they're putting into this aggregate bond index that's been around forever, and so it ends up being a mix of treasuries and high-grade corporates and all durations from very short to very long. But it would be better to get more specific as to what you're actually trying to do and then only buy the bonds that do that, as opposed to just kind of taking this throw-it-against-the-wall approach. But again, this is basically just Vanguard wanting to use its old popular funds in its constructions, and what you're getting out of this personal advisor is a very cookie-cutter approach. I'm sure what they do is try to assess your risk tolerance and then, depending on what it is, do 50% stocks and 50% bonds, or 70-30 or something else, and then after that it's just a cookie cutter formula that they throw you into.
Voices:C is for cookie. That's good enough for me. C is for cookie, that's good enough for me. C is for cookie, that's good enough for me. Oh, cookie, cookie. Cookie starts with C, oh.
Mostly Uncle Frank:Now is it worth 0.3% of your assets.
Voices:And I have a straw. There it is.
Voices:That's a straw, you see, my straw reaches across the room and starts to drink your milkshake. I drink your milkshake, I drink it up.
Mostly Uncle Frank:I would say no for the portfolio construction itself, because you could do the same thing on your own very simply. So the real question is do the other services they provide merit that amount of money? Only you can really answer that. While 0.3% is a lot less than 1%, it's going to be a significant amount of money over many years. If you have a large portfolio under management there and if they're only doing effectively a few hours of work for you every year, it's probably not worth paying that amount because only one thing counts in this life.
Mostly Uncle Frank:Get them to sign on the line which is dotted could pay somebody hourly to manage that, or a flat fee, and they'd probably do a better job than what you've got going on here.
Voices:You need somebody watching your back at all times.
Mostly Uncle Frank:Just one last comment or observation, which I think is actually pretty funny. You've got 10 funds here in this portfolio and one of the superficial criticisms I'm often subject to or anybody that's trying to do something with more than two or three funds is subject to is well, five or six funds. That's too complicated for anyone. Nobody can handle that. It's just too complicated. You need a target date fund or a two or three fund portfolio, because that's all any individual could handle. It's just kind of silly worship of this imaginary god of simplicity. I am not less perfect than Lore. I am not less perfect than Lore.
Mostly Uncle Frank:And usually these people are vanguard junkies and they're adopting these one, two or three fun portfolios and claiming that that is the be-all, end-all and nobody should ever do anything different. I am not less perfect in lore, so it's funny to me that Vanguard itself is putting you in a 10-fun portfolio that, if these simplicity worshipers were honest about, would say it's too complicated, it's too complicated and you shouldn't be doing that. So you wonder which side of the mouth they want to be talking about. You've got to keep this as simple as possible, or we should only do what Vanguard tells us to do.
Mostly Uncle Frank:Obedient no one Obedient no one, because you can't do both. In this case, I award you no points and may God have mercy on your soul. So, yes, in the end you could have a simpler portfolio with a higher safe withdrawal rate if you wanted one, but it's not clear that you actually want or need that in your circumstance. If you're not actually planning on spending the money anyway, I think you're probably going to be fine no matter what you do.
Voices:You're not going to be fine. No matter what you do, you're not going to amount to jack squats. 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:Because the truth is, in most environments, you could probably spend 5%, 6% or 7% of this portfolio, or basically any portfolio, and the only reason you could probably spend 5, 6, or 7% of this portfolio, or basically any portfolio and the only reason you need to spend less, is because of these worst-case scenarios that come by every few decades. So hopefully that helps. Thank you for your donations and your interesting questions and thank you for your email, but now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank at risk parody rave dot com. That email is frank at risk parody rave dot com. Or you can go to the website wwwriskparodyravecom. 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:Goodbye, michelle, my little one. You gave me love and helped me find the sun. Every time that I was down, you would always come around and get my feet back on the ground. Goodbye, michelle. It's hard to die when all the birds are singing in the sky. Bye, wish that we could both be there. We had joy, we had fun. We had seasons in the sun, but the stars we could reach Were just starfish on a beach. We had joy, we had fun, we had seasons in the sun, but the stars we could reach Were just starfish on a beach. We had joy, we had fun, we had seasons in the sun, but the wine and the song, like the seasons, have all gone All our lives. We had fun, we had seasons in the sun.
Voices:But the hills that we climbed just seasons out of time. We had joy, we had fun, we had seasons in the sun.
Mostly Mary:The Risk Parody Radio Show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial investment tax or legal advice. 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.
