Risk Parity Radio

Episode 473: Merry Christmas From Testfolio, More Cowbell, KBWP, And Fund Seeder Mania

• Frank Vasquez • Season 6 • Episode 473

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In this episode we answer emails from JT, Phil, and Glenn.  We revel in the updates to the TestFolio tools, weigh how tilting toward small cap value can lift safe withdrawal rates but also reduces overall diversification, return to KBWP and how property and casualty insurance companies can provide value-tilted diversification, and discuss the tracking results reported on the About page at the website.

Links:

Testfolio 5% Withdrawal Backtest Comparison:  testfol.io/?s=74fuq6N5WWd

Testfolio Comparison of SCV, LCG, LCV and SCG:  testfol.io/?s=4eqimbZveGX

Weird Portfolio:  Weird Portfolio – Portfolio Charts

Testfolio KWBP and BRK-B Analysis:  testfol.io/analysis?s=l34pkinSxde

Fund Seeder Tracker Site:  FundSeeder - Empowering Top Traders with Capital and Insights

Breathless Unedited AI-Bot Summary:

Ready to push past rules of thumb and actually pressure-test a retirement portfolio? We dig into how far a DIY investor can tilt toward small cap value to raise a safe withdrawal rate, what history really shows across 30- and 50-year windows, and why correlation—not bravado—decides whether you can keep spending through ugly markets. Using new Testfolio features with 100-year factor data, we compare the Golden Ratio and Golden Butterfly against more value-heavy mixes and pinpoint where the extra “cowbell” helps and where it just adds stress.

We also open a less-traveled door inside equities: property and casualty insurers. Whether you own them through KBWP or direct index the top names, this sleeve has delivered rare intra-equity diversification, often keeping pace with broad markets while zigging in years like 2022. We share the practical trade-offs—expense ratios vs. tracking error, simplicity vs. tax loss harvesting—and explain when the ETF is the smarter, lower-hassle choice. If you already own Berkshire Hathaway for your value core, you’ll hear why insurers can complement or substitute without bloating overlap.

Context matters, so we pull back the curtain on our publicly tracked taxable account and why it can look extreme in a bad year and strong in a good one. The whole-portfolio view is far steadier, closer to a risk parity blend of stocks, long treasuries, and diversifiers like gold and managed futures. The takeaway: if you want a withdrawal rate you can live with, build for multiple regimes—blend small cap value and large cap growth, keep long bonds for deflation shocks, and add real diversifiers that cut correlation when you need it most. Subscribe, share this with a DIY investor who loves data, and leave a review to tell us where you’d tilt next.

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Voices:

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 Queen 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. And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Yes, it is still in my memory banks. We have also created an additional resource, a collection of additional foundational episodes and other popular episodes.

Voices:

We have top men working on it right now. Ooh.

Mostly Uncle Frank:

Top men. And you can find those on the episode guide page at www.riskparodyradio.com. Inconceivable. And all thanks to our friend Luke, our volunteer in Quebec. We'd be helpless without him.

Voices:

I have always depended on the kindness of strangers.

Mostly Uncle Frank:

Because other than him, it's just me and Marion here. I'll give you the moon, right?

Voices:

I'll take it.

Mostly Uncle Frank:

We have no sponsors, we have no guests, and we have no expansion plans.

Voices:

I don't think I'd like another job.

Mostly Uncle Frank:

Over the years, our podcast has become very audienced focused, and I must say we do have the finest podcast audience available.

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, episode 473. Today on Risk Party Radio, we're just gonna do what we do best here, which is attend to your emails. Sweet! But before we get to that, I'd like to thank all those who were involved in my Christmas present this year. On a recent podcast, I commented that it'd be nice if Testfolio would add the factor-based investments going all the way back to the 1920s. And lo and behold, some of you took that up, went to the people who run that site, and it is there. Now it is there. And every time I look at that site, there's a new improvement.

Voices:

Oh, sure. I think I've improved on your methods a bit too.

Mostly Uncle Frank:

It's very helpful. It's really become the go-to site for looking up a lot of stuff. And then one of you, I think it was HydraMod, who first sent it to me. Just a back test now of the Golden Ray Show portfolio against the Golden Butterfly against an SP 500, a three-fund portfolio, and a 6040. Going back to 1969.

Voices:

I got my first real six drink, but it at the five and done. Played it till my fingers bled.

Mostly Uncle Frank:

And you can't do managed futures all the way back there, but I put in utilities for the period when managed futures are not available and subjected it to a 5% withdrawal rate. And you could all check that out. I'll link to this in the show notes, but basically, you wouldn't want to hold those non-risk parity style portfolios if you're going to do that in that time period.

Voices:

That's not an improvement.

Mostly Uncle Frank:

So check that out and thank all of you who participated in that, especially the purveyors of Testfolio. It is a really awesome site for do-it-yourself investors. But now without further ado.

Voices:

Here I go once again with the email.

Mostly Uncle Frank:

And First off. First off, we have an email from JT.

Voices:

I've seen fire and I've seen rain. I've seen sunny days that I thought would never end.

Mostly Uncle Frank:

And JT writes.

Mostly Queen Mary:

Hi Frank and Mary. Thanks for continuing to invest your time in the podcast and answering your listener questions. I found Risk Parity Radio earlier this year, so I'm grateful that you continue to put out new content after five plus years so that new listeners like me can still find you.

Voices:

Wagon Train is a really cool show, but did you ever notice that they never get anywhere?

Mostly Queen Mary:

Just keep wagon training. I made a contribution today to the Father McKenna Center to take advantage of the opportunity to move to the front of the email line and to contribute to a great cause.

Voices:

The best, Jerry. The best.

Mostly Queen Mary:

Frank, I'd like to get your thoughts on higher weighting of small cap value stocks in a portfolio in order to support higher safe withdrawal rates. You've mentioned that sample portfolios like the Golden Ratio and Golden Butterfly can help support 30-year withdrawal rates of around 6%. When I test alternative allocations on portfolio charts, I find that more heavily weighting U.S. small cap value can push 30-year safe withdrawal rates closer to 7%, little leverage required. For example, if I modify the golden ratio portfolio to 42% U.S. small cap value, 26% long-term treasuries, 16% gold, 10% U.S. large cap growth, and 6% cash, the 30-year safe withdrawal rate goes up by a half a percent relative to the standard sample portfolio. If the 6% cash portion is also reallocated to U.S. small cap value to make it 48% of the portfolio overall, it pushes the 30-year safe withdrawal rate higher still.

Voices:

I gotta have more cowbell. I gotta have more cowbell.

Mostly Queen Mary:

Similarly, if I model the golden butterfly portfolio to 40% U.S. small cap value and 20% each across U.S. large cap blend, long-term treasuries, and gold, the 30-year safe withdrawal rate starts to approach 7%. Since higher allocations to small cap value stocks have tended to yield higher safe withdrawal rates, at least over the 55 years available through portfolio charts, can you talk about any reservation you'd have shifting more portfolio weight to small cap value, like in the examples above? Thank you both for your time, JT.

Voices:

Guess what? I got a fever. And the only prescription is more cowbell.

Mostly Uncle Frank:

Well, JT, first off, thank you for being a donor to the Father McKenna Center. As most of you know, do not have any sponsors on this program who do have a charity we support. It's called the Father McKenna Center and supports hungry and homeless people in Washington, D.C. Full disclosure, I am on the board of the charity and the current treasurer. But if you give to the charity, you get to go to the front of the email line here. Two ways to do that. You can go to the donation page at the Father McKenna website, which I'll link to in the show notes. Or you be can become one of our patrons on Patreon, which you can do at www.riskparty radio.com on the support page. Either way, you get to go to the front of the email line. Just make sure you mention it as JD has done here, so I can duly move you to the front of the line. And I should say, since we're coming to the end of the year, I really wanted to thank so many of you who have supported the center this year through our top of the t-shirt campaign or otherwise during the year. We're a pretty small charity. We have a budget of about one and a half million dollars a year, and we have eight staff members. But we get most of our work through volunteers who are mostly high school students and young adults, but also some older folks. But they provide another equivalent of eight more staff members, if you can believe that or not. But we have about a thousand people who volunteer at the center every year. We don't pay any rent because we operate out of the basement of a church that belongs to the Gonzaga College High School. So pretty much all of the donations go straight into providing services for the clients that we serve. I'm happy to report we've also been able to replace some of our kitchen equipment this year and also replace our broken down van that we use to pick up a lot of the food donations from local supermarkets.

Voices:

It's got a cop motor, a 440 cubic inch plant. It's got cop tires, cop suspension, cop shocks. It's a model made before catalytic converters, so it'll run good on regular gas. What do you say? Is it the new blues mobile or what?

Mostly Uncle Frank:

And now we're actually working on our plumbing. Which sounds mundane, but we do provide showers for a lot of the clients who need to get cleaned up before they can go to job interviews and things like that. So all of this does go to the direct support of the people who really need it. And I wanted to thank everyone who's participated this year. And if you haven't, and you were thinking about getting in that 2025 charitable tax donation since they're changing the rules for that stuff next year, you've still got a couple of weeks. So please do consider us if you have not allocated all of your charitable donation dollars this year yet.

Voices:

We've got an understanding. We're on a mission from God.

Mostly Uncle Frank:

But now let's get to your email. So you were wondering whether you could just go all small cap value in one of these kind of risk parity style portfolios. And actually, if you go look at the weird portfolio at portfolio charts, which is the value stock geeks contribution, that's basically what he's done. And there's nothing wrong with doing that, but bear in mind there is a debate going on in financial analyst land about whether small cap value will outperform in the future. And if you do look at statistics like going back through essentially my investing lifetime back to 1990, you'll see that small cap value and large cap growth have largely performed the same over the past 35 years or so. They've just performed better or worse at different times. And so for that reason, and because I don't really want to be operating a crystal ball where I'm trying to pick which corner of the market is going to perform the best in the future.

Voices:

We don't know. What do we know? You don't know, I don't know, nobody knows.

Mostly Uncle Frank:

I just assume that those two things will perform comparably over long periods of time, and that it's better just to own some of each. And so that's the theory that my allocations are based on, and that I don't need to engage in this endless debate about whether small cap value will outperform in the future. I'm not a smart man. So long as it performs just as well as the stock market in the future, we're gonna be fine.

Voices:

That's the fact, Jack! That's the fact, Jack!

Mostly Uncle Frank:

But certainly, if you go particularly prior to 1990, you will see that small cap value has outperformed everything if you go back the whole hundred years. Which you can now do at test folio. You can run small cap value by itself or in combinations with other things and see the hundred-year returns on that thing. But then if you move the date to more recent decades, you'll see that the performances are more equaled out. Another thing that you'll also see is that both large cap value and small cap growth have tended to underperform, which is why we don't focus on those kinds of assets in one of these kind of portfolios, and why we're not trying to hold everything in all four corners of that style box chart, but it's best to hold the ones in the lower left-hand corner, small cap value, and upper right hand corner, large cap growth. But check all this out on Testfolio. I will provide a link in the show notes to get you started.

Voices:

And uh I'll go ahead and make sure you get another copy of that memo.

Mostly Uncle Frank:

Okay. So that's my thought process. If you did want to go more tilted towards small cap value, you're probably gonna have higher volatility and hopefully a higher ability to withdraw from. But I will leave that up to you because there's because there's more than one way to skin this cat, if you will. Anyway, I thought that was a great observation. It is the way value stock geek looks at it, and other people look at it. So thank you for your question. Thank you for being a donor of the Father McKenna Center, and thank you for your email.

Voices:

Babies, before we're done here, y'all be wearing gold-plated diapers. What does that mean? Never question Bruce Higgins. Second off.

Mostly Uncle Frank:

Second off? We have an email from Phil.

Voices:

I have been stabbed, shot, poisoned, frozen, hung, electrocuted, and burned. Oh, really?

Mostly Uncle Frank:

I am an immortal. And Phil writes?

Mostly Queen Mary:

Was wondering if you've compared the performance of your stock selection to Direct Index KBWP with their combined performance versus the ETF. Of course, it's a short time frame. I get that. I've been monitoring the sample portfolios. I began in March, April, and May of 2024 and October 2024. I made an allocation in each portfolio to property and casualty insurance companies. The idea made a lot of sense. In the October 2024 portfolio, I added some BRKB too. Only one of the allocations has outperformed slightly compared to KBWP, even considering the expense ratio. I used the relative size used in the portfolio construction of the top 10 companies in KBWP at the inception of each of my sample portfolios for my allocation. The leading strategy has changed position over their short life. I used Google Sheets to set these up. They are continuously updated in nearly real time using the Google Finance functions. No second job here. There's no ongoing work required.

Voices:

Looks like you've been missing a lot of work lately. I wouldn't say I've been missing it, Bob.

Mostly Queen Mary:

Monitoring my portfolio's behavior is really interesting. Occasionally I add more things to answer questions I have. What do you think about trying to save an ER by directing investing now that it's been a few years? I was on board, not sure now. Maybe just go all KBWP or maybe BRKB. Recently, EG and PGR have offered some tax loss harvesting opportunities. I did TLH some EG for PGR. It's not a perfect analysis. I don't want a second job either. It quickly becomes not simple. The discussion and thought process is great. Thanks, Phil.

Mostly Uncle Frank:

Well, Phil, thank you also for being a donor of the Father McKenna Center.

Voices:

I'm a God. You're a God. I'm a God, I'm not the God.

Mostly Uncle Frank:

But now let's get to your question. So just to orient everyone and why we're talking about this at all, I've mentioned in the past that one thing I learned from Warren Buffett and studying Berkshire Hathaway is that Berkshire Hathaway has a very large allocation to insurance companies and property and casualty insurance companies in particular. And so at some point, maybe eight, 10 years ago, when I was trying to analyze what we should hold as part of the value side of our portfolio, I wondered, well, if you just had an allocation to property and casualty insurance companies, how would that affect returns and diversification and all those other things? And as it turns out, it has a very positive effect. There is a fund that Phil has mentioned, KBWP, that invests just in property and casualty insurance companies. It's got like 20 things in it, and the biggest ones are things like travelers and progressive all-state, and of course, the Chuber. With a name like Chubb, it's gotta be good. With a name like Smuckers, it has to be good. And so if you analyze that fund, it has some very nice properties. And you can check this out in test folio, but what you'll see is that since its existence in 2010, first of all, it performs almost the same as Berkshire Hathaway and performs, in fact, a little bit better. The second thing you'll see is that it has a really low correlation to just about anything else in terms of other combinations of stocks. And so the correlation with, say, large cap growth or small cap value is only like 0.4 to 0.6. And so you see things like in 2022, that fund, instead of being down like the rest of the market, was up 10%, which is about as good a diversification you can get out of just another fund that is just stocks and not some other asset entirely. And then it also tends to keep up and perform in terms of returns, pretty much like the S P 500 over long periods of time or over the length of its existence. And so the only drawback I saw to it was the fact that it charges an expense fee that used to be 0.45, now it's 0.35, which I thought was a little expensive. So what I've done in our personal portfolios is create another allocation to that that is effectively direct indexed. We're just taking like the 10 top things in that fund, since I think 40% of the fund is in those top five companies that I mentioned, and call that my allocation to property and casualty companies. And it's worked out pretty well, and it's useful to have it direct indexed for the purpose of tax loss harvesting, as you've been able to do. So that also helps out. So, with all that backdrop, what Phil's been analyzing is whether these allocations, individual direct index allocations, in fact perform better or worse than KBWP, and at least in his experience, have performed worse. I have actually not pulled out exactly what we have and compared that over time. And I think it would be difficult to do at this point because we bought and sold some things in there in the six or seven years I've held this kind of an allocation. You do notice things like Progressive used to be the best performer in there and was the largest company, but now it's Chubb that's the largest company in there. That fund by cap waiting. That may be because Berkshire Hathaway's been buying Chubb. I don't know. With a name like Smuckers, it has to be good. So, no, I don't have a particular explanation as to why your particular allocations or whether or not even my particular allocation to individual companies has performed or outperformed KBWP, except to note that that would be normal. That anytime you are doing something like this, you will get something that's called tracking error, either positive or negative. And it will change over time. But oftentimes that's pretty randomized and there isn't any way of predicting in advance what kind of tracking error you're going to get. I would say that you're probably correct that if your allocation to this is relatively small anyway, you might as well just use the fund. Because the hassle of managing a bunch of companies, even if it's only ten companies, can be an annoying hassle. And you can get similar results out of just using the fund, as you've observed here.

Voices:

That's my only real motivation is not to be hassled. That in the fear of losing my job, but you know, Bob, that'll only make someone work just hard enough not to get fired.

Mostly Uncle Frank:

For portfolio construction purposes, I think I do like KBWP a little bit better than Berkshire Hathaway, simply because it does have a lower correlation to these other things in the portfolio, whereas Berkshire Hathaway is going to have some more overlap with things like Apple and stuff like that. But it would appear that both of those things can perform the same kind of function in a portfolio in terms of being part of your value allocation, but something that has more diversification than many other things that you could pick. So for us, I definitely will not be changing our allocations to this in our taxable account simply because most of these things are now up over 100% in the time we've held them, and we need to be judicious about our tax loss harvesting and other moves in the taxable account. But if we're adding some more of this in a retirement account for whatever reason, I probably will be just adding KBWP and calling it a day with respect to that. So since we're being all test folio all the time these days, I will link to a little analysis of KBWP against some other things, including Berkshire Hathaway. So you can check that out on the show notes and be sure to check out the correlations there because I think they're really interesting. For the rest of you who are wondering why we don't include this in any of the sample portfolios or anything like that, it's because it simply has not been around since post-great financial crisis. And if you did hold some of these things like AIG during the financial crisis, it would have been really ugly. But at that time, a lot of these companies were structured quite differently and were more speculative instead of just being straight property and casualty insurance companies like the way Berkshire Hathaway holds Geico or something like that, because that's what I was really looking for at the time. So you should not view this as some kind of necessity to hold in your portfolio, but just another option if you are adventurous and already hold things like this anyway. Because if you already hold something like Berkshire Hathaway and were planning on keeping it, you might also consider KBWP as a another option there. Or if you had not created your value allocation yet and were thinking about what that should be, you might consider KBWP as part of that allocation as another option. Anyway, we're always trying to learn something here because you should never stop learning.

Voices:

We use the Socratic method here. You come in here with a skull full of mush, and you leave thinking like a lawyer. I'm holding you in contempt at court.

Mostly Uncle Frank:

So thank you for writing in about this topic. It is kind of one of the most pleasing things I've found in my investing career. So hopefully it helps. Thank you for being a donor of the Father McKenna Center. And thank you for your email.

Voices:

Do you think Phil's gonna come out and see a shadow? That's right, what Juck Juggers is.

Mostly Uncle Frank:

And Glenn writes?

Mostly Queen Mary:

Frank, thanks for being the lone voice in the wind so many years now.

Voices:

You're the gray rider. You would not make peace with the blue coats. You may go in peace. I reckon not.

Mostly Queen Mary:

I may be asking a somewhat personal question concerning the performance results you share on this page above.

Voices:

Do you think anybody thinks I'm a failure because I go home to Sterla at night? Forget about it.

Mostly Queen Mary:

For 2022, the results are a disappointing negative 38.8%.

Voices:

Of what? It's gone. It's all gone.

Mostly Queen Mary:

I have tried to recreate this dismal result with the portfolios on the site for 2022, but I cannot.

Voices:

You are correct, sir. Yes.

Mostly Uncle Frank:

Now, here's a peculiar thing, and let me explain why it looks so strange. Because basically, you're only looking at part of an elephant here. So this refers to a report of returns that you can find on the about page at www.riskpartyware.com. And what it is, it's a tracker of our main taxable account at Interactive Brokers. And this is tracked by a service called Fund Seeder, S-E-E-D-E-R, which is something created by Jack Schwager, who wrote all the market wizards books. Anyway, about 10 years ago, he created this site to attract people to track portfolios with the idea that if you were really good at this, it would be a place where people could verify your abilities and then perhaps have you manage a fund or something like that. I thought it was kind of a fun thing to do, and there weren't many of these kind of trackers out there at the time. So we hooked up the Interactive Brokers account to that, and it's been running since 2016. Now that account has changed over time because it's only part of our holdings. And as you know here, we look at all of our holdings as one big portfolio. And so, since a lot of our holdings are in retirement accounts, they're not accounted for here. And so what you see there, particularly since 2020, is essentially all of the riskiest stuff and growtiest stuff, or most of the grothiest stuff. So there is a lot of large cap growth stocks in that thing. And right now there's a lot of gold in that account because we've been selling all of the gold in the retirement accounts first to avoid the taxes on them. And pretty much most or all of the managed futures and bond funds are in the retirement accounts and not in this account. And so when you look at this account, you get these great distortions. There's also leveraged in this account, or at least there has been since 2020, because after I retired, we were stuck with a bunch of money that was essentially locked up in cash that could not be invested for various reasons. And so to compensate for that, we took leverage in the form of margin in this account, which made it even more volatile. It is why it was down 38% in 2022, because that was mostly these growth stocks getting hammered.

Voices:

Oh, Mr. Marsh, don't worry. We can just transfer money from your account into a portfolio with your study, and it's gone.

Mostly Uncle Frank:

You'll be pleased to know that in a year like this year, that account is up over 33% right now. So what goes around comes around is kind of what you should get out of that.

Voices:

What comes around goes around. I'll tell you why.

Mostly Uncle Frank:

But to me, that's just interesting. If you're looking at just part of a portfolio, you may get a distorted view over what the whole thing looks like. Because I can tell you what's going on in the retirement accounts is very boring when added in compared to this, and is always in the single digits essentially, in terms of returns, both positive or negative. Boring. Anyway, if you join the Fun Cedar website, you can actually see this account or partial portfolio compared to a whole bunch of other ones. It is in the top 8%, I will tell you that, over the past 10 years, according to their rating system, which accounts for both risk and reward and in a modified Sortino ratio kind of rating thing. Right now we are number 69 out of about a thousand portfolios. So anyway, I realize that's kind of a very convoluted story over the history of that account. But it is what it is.

Voices:

Really stones.

Mostly Uncle Frank:

Our overall portfolios look more like the golden ratio portfolio, but without 6% in cash in it. It's more like 50% in stocks, 25% in long-term treasury bonds, and the other 25% in alternatives. Roughly speaking.

Voices:

Fortune favors the brave!

Mostly Uncle Frank:

Poof. But it's good to know some people actually are looking at the corners of the website to see what's there. And so I do appreciate your curiosity.

Voices:

Why are you smiling? Because I know something you don't know. And what is that? I am not lapandon.

Mostly Uncle Frank:

Hopefully, you find that explanation somewhat entertaining. And thank you for your email.

Voices:

Nothing you have ever experienced can prepare you for the unbridled carnage you're about to witness. Superfall, the world sturdy, and they don't know what pressure is. In this building, it's either kill or be killed. Make no friends in the pits and you take no prisoners. One minute you're up half a million and soybeans, and the next boom, your kids don't go to college and they've repossessed your bently. Are you with me?

Mostly Uncle Frank:

But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to Frank at RiskPartyRoo.com. That email is Frank at RiskPartyRear.com. Or you can go to the website www.riskparty.com. 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 Purdy Radio. Signing off.

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