Episode 530: Choosing Levered Funds (Gambling Problems!), Balancing Portfolio Goals And Trade-offs, And Fun With A ChatGPT Analysis

In this episode we answer emails from Eli, Optimus Bill, and James.  We discuss variations in fund approaches for adding leverage, when fees are more likely to matter, what kinds of people and goals can benefit from risk parity style approaches, the trade-offs in lower and higher equity approaches (with a recent insight from Bill Bengen), and a ChatGPT analysis from a listener.

Links: 

Father McKenna Center Donation Page (please mention Risk Parity Radio in the comment section with your donation):  Donate - Father McKenna Center

Catching Up To FI with Yours Truly:  Are Bonds Dead?: Fixed Income Fundamentals (Part 1) | Frank Vasquez | Episode 229

Afford Anything Podcast #618:  They Ran Out of Money. I Didn’t. Here’s Why.

Afford Anything Risk Parity Portfolio Blueprint:  Afford Anything frank-vasquez-risk-parity-portfolio-BluePrint.pdf - Google Drive

FI Physician Article:  How Withdrawal Rate Influences Diversifiers in a Risk Parity Portfolio

Breathless AI-Bot Summary:

You can build a portfolio that looks elegant on paper and still miss the only question that matters: what is this portfolio supposed to do for your life? We dig into listener mail that forces the issue, starting with a smart (and very specific) proposal to add leverage using return-stacked ETFs instead of daily-reset leveraged funds. We talk through what these products are trying to achieve, why “macroallocation” often drives the long-run behavior, and where the real uncertainty lives: rebalancing mechanics, limited history, and the practical cost of complexity.

From there, we zoom out to risk parity in retirement. We answer whether there’s a minimum nest egg size to use a risk parity portfolio (spoiler: it’s not about size, it’s about goals), and why many people with very low withdrawal rates simply don’t need a portfolio engineered to maximize safe withdrawal rate. If you’re in the 0% to 3% withdrawal camp, you may have far more freedom than you think, and your asset allocation can optimize for something else entirely, like long-term growth, simplicity, or personal comfort.

We also get tactical: Treasury STRIPS funds as a form of bond “pseudo-leverage,” how that can free up space for growth assets while keeping recession insurance, and how to think about minimum position sizes based on volatility instead of arbitrary percentage floors. Finally, we respond to a question about Golden Butterfly versus Golden Ratio style portfolios, sequence of returns risk, and whether a reverse glide path or bucket-style framing can help without turning your retirement plan into an overengineered project.

If you like practical portfolio design, risk parity investing, safe withdrawal rate thinking, and clear tradeoffs around leverage, fees, and retirement asset allocation, hit play. Subscribe, share this with a friend who loves tinkering, and leave us a review with your biggest takeaway.

Transcript

Opening Quotes And Welcome

Voices 0:00

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 0:18

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 0:36

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 one, three, five, seven, and nine. Yes, it is still in my memory, thanks. We have also created an additional resource, a collection of additional foundational episodes and other popular episodes.

Voices 1:07

We have top men working on it right now.

Mostly Uncle Frank 1:14

Top men. And you can find those on the episode guide page at www.riskparty radio.com. Inconceivable! All thanks to our friend Luke, who is our volunteer in Quebec. Zach. We'd be helpless without him.

Voices 1:35

I have always depended on the

Foundational Episodes And Episode Guide

Voices 1:38

kindness of strangers.

Mostly Uncle Frank 1:41

Because other than him, it's just me and Marion here. I'll give you the moon, right? We have no sponsors, we have no guests, and we have no expansion plans. Over the years, our podcast has become very audienced focused. And I must say, we do have the finest podcast audience available.

Voices 2:03

Top drawer. Really top drawer.

Mostly Uncle Frank 2:07

Along with a host named after a hot dog.

Voices 2:10

Light in the French.

Mostly Uncle Frank 2:17

Today on Risk Party Radio, we're just gonna do what we do best here, which is attend to your emails.

Voices 2:24

I could have told you that.

Mostly Uncle Frank 2:27

And so without further ado.

Voices 2:29

Here I go once again with the email. And first off.

Email From Eli On Leverage

Mostly Uncle Frank 2:35

First off, we have an email from Eli.

Voices 2:38

Eli Porter! Would you like to come forward and share your thoughts with us?

Mostly Uncle Frank 2:48

And Eli Wright.

Mostly Queen Mary 2:50

Hello, Frank. Condolences to you and your family on the loss of your mom. Glad your family was able to gather to say goodbye. I made a donation to the Father McKenna Center top of the t-shirt campaign through my donor-advised fund. I am contemplating adding leverage to my portfolio, but am a bit turned off by the high fees and daily rebalancing in UPro or SSO. You have a gambling problem. Have you contemplated using return-stacked ETFs such as Wisdom Tree or Resolve to get the leverage as an alternative to the UPRO used in OPTRA? Those seem to have lower fees and trading costs. I was thinking of a portfolio that is 20% GDE, 20% RSST, 20% GOVZ, 40% AVUV. That would get 146% leverage with target allocations of 26% SPX, 27% small cap value, 20% long-term bonds, 12% gold, 14% managed futures. The fee for GDE is only 20 basis points, while RSST is closer to 1%. That compares pretty favorably to DBMF's 85 basis points. I take the point that you lose the precision of being able to rebalance specific asset classes, but since those ETFs will target their 50-50 exposure, that seems like a manageable problem. And without the daily rebalancing, it seems like lower trading cost slash variant strain. Are there any considerations I'm missing? Thanks for all the insightful and entertaining content, Eli.

Voices 4:37

Really funny. What do you mean I'm funny? Sorry, it's funny. You're a funny guy. You mean the way I talk? It's just, you know, you it's you're just funny. It's funny, you know, the way you tell the story and everything. Funny how? I mean, what's funny about it?

Mostly Uncle Frank 5:02

Well, first off, thanks for your condolences about my mother. I think once people get over age 90, you recognize they could probably go at any time. But it still feels a little weird, all things considered. We're mostly worried about my dad, who's 97 and he's in assisted living and having a lot of trouble with his short-term memory. But my niece, Melissa, went over there yesterday to check on him. And he seems to be doing okay, she said. He said he's depressed, but for my father, him saying he's depressed actually means he's interacting with you. If he was really depressed, he wouldn't talk to you. So that's a good sign, actually, the way things work in our family. We do know he's not hiding in his room and is interacting with the staff and the other residents there. But we'll keep checking because as many of you know, when you have a couple who lives together that long, when one of them goes, it's often the case that the other one goes pretty quickly thereafter, and he does not seem like he's in any kind of additional decline other than the normal aging that he's been experiencing. But thank you and everyone else who has sending in a message or a card or even the best wishes in your heart. Thank you.

Matching Funds And Charity Campaign

Mostly Uncle Frank 6:18

But I guess second off, we have to talk about the Father McKenna Center and the top of the t-shirt campaign. As most of you know here, we don't have any sponsors on this program. We do have a couple charities we support. Fairfax Casa for Mary and the Father McKenna Center for Yours truly.

Voices 6:33

I'm voting for yours truly. Well, I'm voting for yours truly too.

Mostly Uncle Frank 6:38

Okay. I'm with you fellas. Full disclosure, I am on the board of the Father McKenna Center and am the current chairman of the board, actually. So we are running this top of the t-shirt campaign, like we did last year, to raise money for our walk for McKenna, which occurs in September, and all the walkers get t-shirts, and the sponsors who raise the most money get their logos on the t-shirt and closer to the top of the t-shirt if they give more money. So, as I mentioned back in episode 518, we're currently doing that right now. We have two generous donors, Matthew 63 and 4J, who have put up $25,000 in matching funds. I do need to see whether we've completely matched that. I'm pretty sure we have, but I haven't got a total from this and have not been paying attention to it for various and sundry reasons. But I should have more info on that later this week or early next week. In any event, if you give to the top of the t-shirt campaign, you get to go to the front of the email line here, which is what Eli has done. And I invite you to participate if you have not already. You can do that through the link in the show notes or from the support page at www.riskparty.com. And thank you for your support

Return-Stacked ETFs And Macroallocation

Mostly Uncle Frank 7:55

there. So it looks like you've constructed a nice return-stacked portfolio there. Just to clue everybody in as to what is in this portfolio Eli has constructed. The fund GDE that he's got 20% in, that is a combination between the S P 500 and gold. And so it's like 1.8 to 1 with 0.9 and allocation to gold and 0.9 of it towards the stock market. Then the 20% RSST, that is one of Resolve Asset Management's return stack funds. And that fund is a combination between total stock market, or I should say S P 500 and managed futures in their own formulation there. And that is a two to one exposure. So for every dollar invested, you get one dollar exposure to each one of those assets. Then you have the Treasury Strips Fund and the Small Cap Value Fund, A V U V. These funds are becoming more popular because they seem to be fairly efficient for what they do. And I know a lot of our listeners have been playing around with them. I don't like them more for personal reasons and personal preference reasons, I mean. I just like to be able to keep the assets in separate funds for the purpose of rebalancing. But that's not to say that these combination funds can't be used just as well or better in various combinations. And you were asking whether this formulation is going to be different than a different formulation where you have the assets separated out into separate funds. And I think the macroallocation principle tells us that there probably isn't going to be a whole lot of difference over time for either one of these formulations. Because if they have the same macroallocations, they should perform generally the same overall. Where the differences are going to be is in the rebalancings and how that plays out over time. And honestly, I can't tell you with these composite funds how that's actually going to play out. I just don't know. And I don't know that we have enough data to do that kind of research. I do think you get some simulated things like GDE and some of these other ones over at Testfolio. So you probably could simulate at least some of this and compare it to another portfolio that had all of the assets separated out into separate funds. My guess is they're going to perform substantially the same due to the macroallocation principle, but it is just a guess. The fees are interesting, but they're not that determinative because as we know, something like AVUV, which has a higher fee than a standard small cap value index fund, has really outperformed those funds by leaps and bounds, and so definitely covers the fees. And I'm wondering about some of these other funds whether they would cover their fees or not. The interesting things about fees is that they are relative to the expected performance or returns of whatever the fee is on. So if the expected performance of the asset is high, stock market returns or higher, that fee matters less than if it were, say, some bond fund that only is expected to yield 6% and it had a 1% fee on it. Obviously, that would really cut into what it's really doing and what it's really worth. But that's where I look at these levered funds and recognize that the fee relative to the expected return is really the sort of the ultimate measurement of what you're talking about here. And that juice can be worth the squeeze, depending on the formulation of things. So I will be curious to see how this all plays out as you go forward with it, assuming you're doing it in a test portfolio of some kind. It does have a essentially an 80% equity exposure out of the 146% overall exposure with the leverage. And so it is going to be similar in some respects to that Opter portfolio, which has a 72% exposure to equities. Although I think the overall leverage in that portfolio is less than the one you have here. It's close, but there it's less. Anyway, with all these experimental portfolios, I'm always curious to see what happens. And it's gone. Poof. Even if I express my curiosity from the sidelines. So hopefully that helps. Thanks again for your condolences. Thank you for being a supporter for the Father McKenna Center and the Top of the T-shirt campaign. And thank you for your email.

Voices 12:43

Second

Optimus Bill On Norway Prices

Voices 12:44

off.

Mostly Uncle Frank 12:44

Second off, we have an email from Optimus Bill.

Mostly Queen Mary 12:51

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

Mostly Uncle Frank 12:55

And Optimus Bill writes.

Mostly Queen Mary 12:57

Frank, Optimus Prime here.

Mostly Uncle Frank 13:00

I am Optimus Bill.

Mostly Queen Mary 13:02

Just returned from a fantastic family land-based trip to Norway with our adult children. The power of financial independence at its best, Jerry, the best.

Voices 13:12

The best, Jerry. The best.

Mostly Queen Mary 13:14

Spending on the trifecta of family experiences and things you can't or don't want to do, like dog sitting and work. Boy, was Norway expensive.

Voices 13:22

Top drawer. Really top drawer.

Mostly Queen Mary 13:26

Gas was $12 a gallon. Electric cars make up at least 30% of the nation's fleet, and new car purchases are 95% electric. Car rental for six days was $3,000. Hotel rooms, depending on the location, summer capacity, and demand, and quality, varied from a minimum of $300 to $400 to almost $1,000 a night.

Mostly Uncle Frank 13:49

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

Mostly Queen Mary 13:52

We did manage to stay in a harbor lighthouse and a converted opera theater, though. You know how Mr. Kensington feels about that.

Voices 14:00

OB. Yeah. Yeah, baby.

Mostly Queen Mary 14:08

Basic meals for four, except for fast food, were a minimum of $50 to $75 per person. The scenery was spectacular. The people were happy, warm, and welcoming. The food culture was hearty, meat, fish, and potatoes. The best meal we had was spectacular sushi. This was easily the most expensive trip we had ever taken, but boy was it worth it. Anyway, to my questions.

Do You Need Risk Parity Insurance

Mostly Queen Mary 14:31

I've been thinking about the cost-benefit of risk parity insurance based on a recent article by my friend Phi Physician. He has a 70-30 equity long-term treasuries and alternatives retirement portfolio, due in part to need, capacity, and ability to take risk.

Voices 14:49

That is the straight stuff, oh funkmaster.

Mostly Queen Mary 14:52

His withdrawal rate is less than 5% as his best life well-being expenses are met at a lower number compared to the withdrawal capacity amount of his investable and liquid assets. Essentially, he has a growth-tilted risk parity portfolio dictating and due to a lower safe withdrawal than he needs. The questions. One, is there an optimal or common minimum nest egg size to implement a risk parity portfolio? I tend to see higher net worth individuals desire to implement this wealth preservation insurance and max safe withdrawal strategy. I know you abhor other jobs, but have you polled communities on their investor distribution behavior profiles? Have you yet shared the data and results? Do you have a rough concept of the normal distribution of your listeners and the average, the median nest eggs and net worths, equity, defensive asset allocations, and safe withdrawal rates? It would be interesting to anonymously poll the listenership on these numbers, right? Am I right?

Voices 15:51

Am I right or am I right or am I right?

Mostly Queen Mary 15:55

Two. I don't know what he's saying here, Frank. Two, we know that an unleveraged risk party portfolio allocation composition maximizing the safe withdrawal rate to 5% plus, balancing the growth engine, inflation protection slash insurance, etc., around 42%. I have added imputed bond leverage with 11% VGLT and 11% GOVZ allocation in order to add international growth slash value equities, 6% each, and Bitcoin to the growth mix and push it to 52% growth, 48% defensive bond alternative assets without sacrificing much over the golden ratio metrics. My bond allocation is functionally 27.5% in theory, using the strips leverage of 1.5 to 1. I find bond leverage to be more emotionally palatable and allows me to right-size my recession insurance given that this market weather quadrant only shows up historically 15% of the time. My ability to max out bond insurance using its imputed leverage would push me into a strips cash allocation of 19% to 3%, the equivalent of an approximate 28% long-term treasury allocation, which would allow me to max my equity allocation around 58% to maintain roughly similar portfolio metrics and a pure bond leverage golden ratio 58-2220 growth bonds and cash and alternatives. Do you find leveraging bonds to increase the equity growth engine while maintaining bond recession insurance and alternative stagflation insurance at reasonable levels is a more prudent use of leverage other than using equity leverage or global portfolio leverage with a capital efficient margin loan? Three, is there a minimum optimal asset allocation required floor or recommended percentage for an individual asset in order for it to move the needle and do an adequate job in the market environment in which it needs to operate best? Would a 9 to 10% allocation of alternatives or any individual asset classes be the least we should hold in a portfolio? 4. Is there a minimum effective safe withdrawal rate below which the cost of risk parity insurance outweighs the benefit, given a certain portfolio size, robust required expense-spend ratio that maximizes well without needing a 5% or greater safe withdrawal rate? This would potentially maximize end-of-plan or terminal portfolio value for charitable or family wealth transfer legacy without becoming a hoarder or sacrificing maximum required lifetime retirement spending to meet robust for spending category well-being spending opportunities slash needs. Here's the Five Physicians article.

Mostly Uncle Frank 19:07

It's just as long-winded as he usually is. And this is only one of a series of emails that we've got in the stack from Optimus Bill. But we will dole them out judiciously every week or two. Because I'm sure we don't need to have every podcast have an email from Optimus Bill that's a page and a half long. And for being a good friend. And all that has moved you to the front of the line. But let's get straight to your questions here. Your

No Minimum Nest Egg Size

Mostly Uncle Frank 19:55

first question is whether there is an optimal or common minimum nest egg size to implement a risk parity portfolio. And in theory, the answer is no. But in practice, it's really going to depend on who you're talking about here. Because for people with smaller portfolios, something like Social Security is their main source of income, or maybe even more than half of their income, and maybe they have a pension or other sources of income. And so in any of those cases, the portfolio itself may not be required even for the mandatory expenses the person has. And in some cases, it's not required for any of the expenses at all, in which case you kind of have free reign with the portfolio as to what you really want to do with it, whether you're leaving it for somebody else, going to spend it as you would say a regular retirement portfolio where you're trying to spend a lot of money out of it every year. Or you just want it to be really, really conservative because that's your preference. So when we started this podcast and the way this is set up to begin with, we are pretending, for better or for worse, that somebody is just going to live off whatever this portfolio is and they don't have any other sources of income. And that's why we do focus on specific safe withdrawal rates for something like that. That is actually not the reality of most people, but the more money, obviously, you have, the more that the portfolio becomes the significant source of retirement spending, unless other things like Social Security, so the more the portfolio construction matters. In terms of conducting formal polls, you are correct that I don't think I'd like another job like that. It's a problem of motivation, all right? I will tell you over time that my informal knowledge of our listener base is that the people here tend to have assets typically between two and 15 million, or they're on their way to having assets between two and fifteen million. And so they do qualify as essentially people in the top five percent of wealth in the United States. But a lot of them have things like real estate and all sorts of other assets that aren't strictly portfolio assets, so there's a lot of variation there. But it is funny, I am getting requests from potential sponsors who do seem to want to target high net worth individuals. And it's like, no, you're not getting my audience. Forget about it.

Voices 22:41

Rex Quando, we use the buddy system. No more fun though.

Mostly Uncle Frank 22:45

But it is really important to me that you guys are not ever going to be for sale here.

Voices 22:50

You need somebody watching your back at all times.

Mostly Uncle Frank 22:53

And I appreciate that a lot of you do want to preserve anonymity. Did I say that right?

Voices 23:01

Are you stupid or something?

Mostly Uncle Frank 23:03

Anonymity is how you say that. Anonymity. Having trouble today. Which is another reason I think I won't be conducting any polls. Forget about it. But I guess in the end, the answer to your question is is there a minimum nest egg size for one of these kind of portfolios? The answer is no, because the answer does not depend on the size of the nest egg, but on the purpose or goal for the portfolio, which is why you can also use these as intermediate accumulation portfolios, for instance. So that's going to be my story, and I'm sticking with it.

Voices 23:40

The thing is, Bob, it's not that I'm lazy. It's that I just don't care.

Mostly Uncle Frank 23:47

Now moving on to your second question.

Using Treasury STRIPS As Leverage

Mostly Uncle Frank 23:50

And this is about whether Treasury strips funds make a good form of leverage, or it's really pseudo-leverage, because basically you're taking a fund with longer duration and substituting it for funds with shorter duration so you don't have to hold as much of it. And I think it is an efficient way of doing things with one of these portfolios. A lot of it is from what we talked about in the last email, which is that's a lower fee exposure. That the fees on these Treasury Strips funds are often pretty low. And it does just free up space in the portfolio because you just don't have to hold as many bonds. Because honestly, if they didn't perform their function as recession insurance, they probably wouldn't have a role in these kind of portfolios. Because you're certainly not holding them for their return profiles. They have one of the lowest return profiles of all the assets that you might be holding. So yeah, I think those treasury strips funds can improve the efficiency of your portfolio and let you have more exposures to other things. Now moving to question three.

Minimum Allocation Depends On Volatility

Mostly Uncle Frank 24:58

Is there a minimum optimal asset allocation required floor, recommended percentage for an individual asset in order for it to move the needle or do an adequate job in the market environment in which it needs to operate best? Would a 9% allocation of alts or any individual asset class be the least we should hold in a portfolio? And the answer to that is actually no, because the real question is what is the volatility and return profile of whatever this asset is? And yes, for common assets like stocks or managed futures or gold or something, which actually have similar volatilities, you do probably need at least 10% for it to be a meaningful percentage. But if you had something leveraged or something like Bitcoin that had a much higher volatility, you could hold a lot less of it and still have a meaningful amount. I think if you go all the way back to the Bitcoin episode that we did at the beginning, it's like episode 20 something. I mentioned this very fact that since at that time Bitcoin was something like 10 times more volatile than stocks or gold, that you would want to hold basically one-tenth of it to get the same effect in a portfolio. And so that's what you really need to be thinking about when you're thinking about these assets. What is the volatility and return profile of this asset? And that will give you kind of a clue as to how much of it is going to be a meaningful amount that goes in a portfolio. But I think ultimately the best thing to do is construct these things and then do back tests in Monte Carlo's and things like that, and then to get a better sense of how that all is going to play out. But I don't think it's an accident if you go to portfolio charts and look at all the sample portfolios there. You hardly ever see a portfolio with less than about 10% of an asset class for an allocation, because otherwise it's just not that meaningful in most cases.

When Risk Parity Is Worth It

Mostly Uncle Frank 26:54

And then your last question with a reference to this article from the Five physician, whose name is David, and I actually have heard from him recently too, just through a messaging app. It's funny, he lives in Montana too, and he's been working on building out his own risk parity style portfolio. And so the answer to your question is I do agree entirely with the article. The article pointed out that you really only need a portfolio like this if your goal, in fact, is to withdraw more money than somebody else, have a higher safe withdrawal rate, and that's the whole purpose of these portfolios, to have a higher safe withdrawal rate so you can withdraw a steadier amount of money. But that's a trade-off, that you are giving up long-term returns. And that's why if you go to that portfolio matrix tool or at portfolio charts and you sort the portfolios by various things, the risk parity style portfolios all have the highest safe withdrawal rates and the lowest ultra rates and things like that. But if you want something that is just going to be accumulating or growing, you want something that looks more like a 100% stock portfolio or a has a high percentage of stocks in it. And it really does all come down to what your goals are. So last month, Paul Merriman reached out to me and was asking me questions about risk parity style portfolios and things. We ended up playing phone tag and then he went off on a cruise to the Baltics. And so I ended up just writing him a long email explaining what was going on here and what we were doing. But one of the things I pointed out in the email was that for a lot of people in personal finance, their withdrawal rates are so low, I mean, in like the 0 to 3% range, that they don't need a portfolio that maximizes a safe withdrawal rate. They can hold virtually whatever they want, whether they want to continue accumulating and playing Warren Buffett and having a 90-10 kind of portfolio, or they want to be extremely conservative and have some kind of 30-year tip slat or something like that. When you have those withdrawal rates that are that low, your portfolio does not need to have the purpose of having the highest safe withdrawal rate or a higher safe withdrawal rate. So it can be focused on other purposes, because in fact you're not using that feature of it. So why focus on that feature of it if you're not going to use it? And so I told them that these kind of portfolios are for people who want to extract the most money out of their retirement portfolios as possible. And they were specifically not appropriate for people who are accumulating, who should be 100% stocks or close to it, and they can hold one of his portfolios or something similar in that vein, or people who have decided that they're just not going to spend much money and they're going to continue to accumulate in retirement, that that 0-3% withdrawal rate person, and they can basically hold whatever they want. And in my mind, that is why when you look out in personal finance land, whether you're looking at Paul Merriman or Rick Ferry or Rob Berger, any number of other people, all those people are essentially underspending and will continue to accumulate. So they can hold whatever they want. And that is why, in my mind, we have all these different portfolios held by all these people. Because as I pointed out to Paul in the email, I said, I thought you guys all had different strategies when I first looked at it. And then I realized actually you all have this same strategy, which is just to underspend the portfolio. And after I realized that, I realized if I wanted to spend more, I'd have to do something different, essentially. And that's the kind of research and work I was doing between, say, 2011 and 2016, which I recounted in episode 618 of the Afford Anything podcast with Paula Pan.

Voices 30:42

Well defending God!

Mostly Uncle Frank 30:46

So I thought David's article made a whole lot of sense in terms of matching your portfolio's purpose to whatever your actual goals are, and not picking the wrong portfolio for the goal in particular. One other thing that came up recently that is at least tangentially related to this is something I heard from an interview with Bill Bangin actually this morning. He's been working on all kinds of different alternative portfolios subsequent to his book, experimenting with things like Geitenklinger guardrails and different allocations and things like that. And he was talking about the fact that while he was focused on a 55% equity portfolio in his book, he thinks that a 65% equity portfolio with some other modifications might be better. And in the interview, they were asking him, well, does it have a higher safe withdrawal rate? He says, No, it has exactly the same safe withdrawal rate. What it has a higher thing in comparison is that it has a higher average safe withdrawal rate, is what he said. And that makes a whole lot of sense to me because I've been always thinking, well, I know these portfolios between say 40 percentage in equities and 70 percentage in equities, those are the ones that have the highest safe withdrawal rates. But what is the real difference between, say, the one with 50% and the one with 60%? And I think that is the real difference that he's figured out, that the difference between a risk parity style portfolio with more equities in it as opposed to one with less equities in it is the one with more equities in it, essentially more risk exposure. I would say less in bonds too, will have a higher average withdrawal rate, even if it doesn't have a higher worst case scenario, safe withdrawal rate. And obviously, you're gonna have more volatility with a higher equity tilted portfolio as well. But that's been something I've been scratching my head about for years. And just maybe that's the short answer to that conundrum. What's the answer? What's the answer? What's the answer, Mr. Sacred Geometic, Sacred Geometer, Sacred Geometer The Golden Ratio? The Golden Ratio. Anyway, sounds like I'm becoming just as long-winded as Optimus Bill, doesn't it?

Voices 33:04

One trick is to tell them stories that don't go anywhere. Like the time I caught the ferry over to Shelbyville. I needed a new heel for my shoe. So I decided to go to Morningville, which is what they call Shelbyville in those days.

Mostly Uncle Frank 33:22

Thank you for your friendship, Bill. I know we'll see you in Karen later this month. Thank you for your donations to the Father McKenna Center. Thank you for having me on your podcast recently talking about bonds. I'll link to that in the show notes.

Voices 33:35

Shut it up, you. Shut it up, me.

Mostly Uncle Frank 33:40

And thank you for your email.

Voices 33:43

The wind whisper.

Golden Butterfly Versus Golden Ratio

Mostly Uncle Frank 33:55

Last off an email from James.

Voices 33:59

Hey Jim Baby! I see you brought up reinforcements.

Mostly Uncle Frank 34:03

And James writes.

Mostly Queen Mary 34:06

Hi, Frank. The attached is a very long back and forth with ChatGPT. About three-quarters of the way down, page 95, I asked for comments regarding the golden butterfly compared to what it believes your risk parity portfolio stands for. Essentially, it says the golden butterfly portfolio is better for the early years of retirement with a gradual shift to your portfolio after getting through those early sequences of returns risk years. Just curious if there's anything to consider on this since I have already started shifting from the golden butterfly that I have held for the past several years over to your risk parity portfolio, and I am getting ready to retire soon. Thanks in advance if you do get a chance to read it. If not, I totally understand. Thanks for all you do. Regards James in Arizona.

Voices 34:55

Well, I'm waiting for you, Jimmy Boy.

Mostly Uncle Frank 34:58

Well, that was quite a lengthy discourse you had with ChatGPT. Just so everybody understands, the document is 135 pages long, and I did read through at least part of it after page 95.

Voices 35:13

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

Mostly Uncle Frank 35:16

It did seem like ChatGPT was a little bit confused. It was thinking that the portfolio that I used looks like the all-seasons portfolio, which is very bond-heavy. And actually, I've said many times before that that portfolio, I believe, is too conservative to be used as a retirement portfolio unless you are having lower withdrawals off of it. And that the reason we keep it as a sample is as a reference portfolio, since that was what Ray Dalio gave to Tony Robbins back in 2013 when this got published in Money Master the Game. But once you got to the discussion where they were actually comparing a golden ratio portfolio with a golden butterfly, that made a whole lot more sense. This does actually go to what I was just saying about what I learned from Bill Bangin this morning, is that when you compare a golden butterfly portfolio with a golden ratio portfolio, the golden butterfly portfolio is just more conservative. And so it's going to have a lower ulcer index. It has a much larger exposure to short-term bonds, which is really the biggest difference between the two sample portfolios, at least. And so they're going to have similar safe withdrawal rates, but it's likely that the golden ratio portfolio is going to have a higher average rate, if you will, that you could take advantage of. Say if you plan to withdraw more money later on, which is actually kind of the opposite of what you probably want to do, but it's an option. In some respects, though, I think it was probably making too big a deal on the difference there, because if you look at the performances, they both recover within three or four years. So it's just a matter of which one's going to have a larger drawdown and a kind of a worst-case scenario. And the golden ratio is probably going to have the larger drawdown and a worst case scenario between those two portfolios. But either one of them is going to be fine. It's interesting that this email

Reverse Glide Path And Buckets

Mostly Uncle Frank 37:16

is coming up now. You did send this to me back in February, but you may have noticed recently that we decided to do a reverse glide path with our sample golden butterfly portfolio. And so over time we will be increasing the equities in there. And I could imagine if you wanted to do something more complicated than that, you could start with a golden butterfly portfolio and transition it to something that looks more like a golden ratio portfolio. It may be just too much work and too clever by half. I don't think you actually need to do that, and it makes things more complicated. But you could do something like that if you like, and you'd probably get pretty good results out of that. Because it's funny if you look at that golden butterfly portfolio and consider that the 20% in short-term bonds there is like a bond bucket, if you will. That in many respects, the golden butterfly performs the same function as these complicated ladders, hoses, flower pots, and bucketeering strategies that people talk about in time segmentation. And so you could imagine just relabeling a golden butterfly portfolio and saying, okay, the 20% in short-term bonds is actually going to be my short-term bucket that I'm going to pull from in early retirement. So I have the first five years or four years of my retirement covered. And then if you did just pull from that and reduce the overall exposure to short-term bonds, you are going to end up with something that it looks like it's on a reverse glide path because the allocations to the other assets will have to go up if you're only pulling from the short-term bonds. And voila, you have your own version of a time-segmented bucketeering strategy.

Voices 39:04

You've got the word of Long John Silver. Shipmates.

Mostly Uncle Frank 39:13

You can even call it a pie cake if you'd like.

Voices 39:27

Milkshake! I drink it out every day. I drink it out.

Mostly Uncle Frank 39:32

Anyway, I'm glad you're using AI to explore these sorts of things. One thing you also might want to do is take that blueprint that Paula Pant created, which kind of summarizes not only a golden ratio portfolio, but just the general parameters of these kinds of portfolios, and throw that into your analysis and see what it has to say. Because as that blueprint says, you can have one of these kind of portfolios with anywhere from 40-ish percentages to 70th percentages and equities and a variety of other configurations that you could potentially use. And so a lot of the listeners here just have different variations of that depending on their personal preferences and goals. And you can too.

Summarizing Long AI Chats

Voices 40:17

Yes.

Mostly Uncle Frank 40:18

But if you do get a text out of a chat GPT or a conversation that that is that long, what I should suggest you do is copy the whole thing and put it into Gemini notebook, and then you can have that summarize it for you and create all kinds of tables and reports and slideshows and things like that. And that's probably going to be an easier format to digest the whole thing with. Anyway, hopefully that all helps. And thank you for your email.

Voices 40:48

The 9000 series is the most reliable computer ever made. No 9000 computer has ever made a mistake or distorted information. We are all, by any practical definition of the words, foolproof and incapable of error.

How To Reach Us And Reviews

Mostly Uncle Frank 41:06

But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to Frank at RiskPartyRaver.com. Email is Frank at RiskPartyRaver.com. Or you can go to the website www.riskpartyrade.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 and 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.

Advisor Disclaimer

Mostly Queen Mary 42:53

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.