Voices [0:01]

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.

Mary and Others [0:19]

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 [0:37]

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 [0:50]

Yeah, baby, yeah.

Mostly Uncle Frank [0:52]

And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational, and those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. Whoa, and you probably should check those out too, because we have the finest podcast audience available.

Mary and Others [1:26]

Top drawer, really top drawer.

Mostly Uncle Frank [1:31]

Along with a host named after a hot dog.

Voices [1:34]

Lighten up Francis.

Mostly Uncle Frank [1:37]

But now onward to episode 386. Today, on Risk Party Radio, we're just going to do what we do best here, which is tend to your emails, and so, without further ado, here I go once again with the email. And First off. First off, we have an email from Pankaj. Wow, wow, wow. He's very nice.

Mary and Others [2:03]

And Pankaj writes Hi Frank, thanks for all you do for your audience. From the little I understand, the premise behind the risk parity portfolio is to maximize the safe withdrawal rate. Hence, one would invest in a risk parity type portfolio so one can maximize one's spend rate in a safe manner. However, if one has more money saved than required by one's spend rate in a safe manner, however, if one has more money saved than required by one's spend profile, well, who got more money than they know what to do with. What would be your suggestion for a portfolio construction from the perspective of ensuring safe withdrawal rate as well as maximizing legacy savings? For example, if someone has $1 million and the annual needs are only $10,000, how would you recommend they construct their portfolio? Should they invest only $200,000 in a risk parity portfolio, assuming a 5% safe withdrawal rate, and invest the rest in the S&P 500 to maximize legacy savings? Your thoughts on this topic would be appreciated.

Voices [3:07]

Donate to the children's fund. Why? What have children ever done for me?

Mostly Uncle Frank [3:13]

Well, the good news is, the more money you have and the less you plan on spending of it, the simpler this can be. I'm not a smart man, but first I do want to correct your initial statement, which is where you said you thought the premise behind the risk parity portfolio was to maximize the safe withdrawal rate. Actually, that is not the premise of academic or traditional risk parity, which was simply to balance the risk profile or profiles of the assets in the portfolio. If you just do strict risk parity, you end up with something that looks like that reference portfolio, the first sample portfolio called the all-weather, and so what hedge fund operators would do with something like that is then add leverage to it to goose up its returns. Now we're starting with that idea, but in order to maximize safe withdrawal rates, we need to focus on a couple other factors. One is that we don't want to put leverage in these portfolios. We don't have to. I know some people do.

Voices [4:21]

You can't handle the gambling problem some people do.

Mostly Uncle Frank [4:28]

You can't handle the gambling problem, but we know from a lot of research about safe withdrawal rates that you're going to get the best ones when you have equities that are between 40 and about 70 percent of a portfolio, and that knowledge goes all the way back to Bengen's original studies. I heard him talk on a video yesterday and he thought the percentage was somewhere between 46 and 70 percent now, and so if you take that concept and risk parity concepts and combine them, you end up with portfolios that look like the golden butterfly or the golden ratio portfolio or similar portfolios, and that's how you get a higher safe withdrawal rate.

Voices [5:03]

That's the fact, Jack. That's the fact, Jack. That's the fact, Jack.

Mostly Uncle Frank [5:07]

So the principle we are applying is actually our most important principle, which is called the Holy Grail Principle, which is about using diversified assets that are uncorrelated to form good portfolios. But both that concept and the concept of risk parity do come from the same source, which is Ray Dalio and Bridgewater, and I thought risk parity radio sounded a whole lot better than Holy Grail radio, which might confuse a lot of people.

Voices [5:35]

Well, whenever I'm confused, I just check my underwear. It holds the answer to all the important questions.

Mostly Uncle Frank [5:43]

All right, with that clarification, let's talk about your specific question. And the truth is, when you have a spending rate that is below 3%, you can hold just about anything you want in terms of a portfolio, because the withdrawal rate no longer becomes a critical factor in the process. And so Warren Buffett's solution to this problem is actually one of the best ones, and what he has said that he wants to leave to his heirs is a portfolio that's 90% S&P 500 and 10% T-bills. That is not a good portfolio for maximizing a safe withdrawal rate. That is not a good portfolio for maximizing a safe withdrawal rate, but if you do not need to maximize a safe withdrawal rate, that is a good portfolio for long-term accumulation. And so if you have billions and billions of dollars and you're likely to be spending 1% or less or, in your example, it's a one percent withdrawal rate you don't need to focus on the safe withdrawal rate as a issue for the portfolio billion, trillion, million, billions, trillions of orbiting snowballs.

Mostly Uncle Frank [6:57]

So if your goal is to maximize the amount of money at death, Death stalks you at every turn.

Mostly Uncle Frank [7:06]

You would probably want to stick with something that is 90 to 100% equities, Maybe carve off that 10% cash or less to make it easy to spend it and just go forward with that and a nice portfolio, for that is half small cap value and half large cap growth. However, I do question whether this is actually a good plan overall in terms of managing your family's wealth, because what is likely to happen is that your children assuming they're going to be your heirs are going to get this gigantic pile of money when they're about 60 years old and not really know what to do with it and not really have a purpose for it. In fact, there are a lot of bad ideas floating around out there about how to manage family wealth, and they often revolve around either hoarding money until death or hiding the wealth from potential heirs, which often results in very bad family dynamics and strained relationships. I'm going to give you a link to a podcast, a Rational Reminder podcast interview of a fellow named Jim Grubman, who is involved in helping families with a lot of wealth manage it appropriately, to try to maximize family harmony, if you will.

Mostly Uncle Frank [8:24]

To try to maximize family harmony, if you will, Because if you are in this fortunate situation, I would not be focused on the management of the finances. You've already solved that problem by not spending much money. What you should be focused on is the reality that you will die. This money will go somewhere and somebody else is going to decide how it gets spent, and I can tell you that trying to just control it from the grave is not a very good process or idea.

Voices [8:55]

Oh, where were we?

Mostly Uncle Frank [8:59]

It's my belief that it's a better process or practice to begin distributing this money while you are alive, which is what we've already begun doing, in which case you do raise your safe withdrawal rate to accommodate that distribution and then it gets back to a risk parity style portfolio or other portfolio for maximizing safe withdrawal rates. But for people who have a lot of money, besides the tax issues, which can be complicated, there is almost a paradox that you need actually less planning when you're well over-saved and yet you see people like that coming up with more and more different ways to save or invest their money, making it more and more complicated in some kind of financial playing with themselves, which is really serving no purpose other than some kind of psychological satisfaction.

Mostly Uncle Frank [10:03]

And actually most financial gurus that you can think of, fall into this trap. I'll give you some examples. I was listening to an interview of Paul Merriman the other day, who I greatly admire, and one of the things I greatly admire about him is that he admits to his faults, one being that he has trouble spending money. So he said he is three times over-saved for the amount of spending they're doing. Three times over-saved, which means he's essentially in that Warren Buffett category that he could invest in anything he wanted and it really wouldn't matter, particularly since he's 80 years old now. But what has he got going on? Well, in his main portfolio it's a Merriman Ultimate portfolio that's got 10 different funds and that's half of the portfolio, and then there's an allocation to treasury bonds for the other half of that portfolio. But that's not all of his assets. He's also got a managed portfolio at his old firm that is market-timed and involves momentum strategies and other complicated things.

Voices [11:10]

And the truth is he doesn't need any of that.

Mostly Uncle Frank [11:14]

He could do the Warren Buffett 90-10 thing and be fine, because he solved his problem by not spending much money. I'll give you another one. Check out. William Bernstein written a lot of famous and excellent books. At some point last year he decided that he would also like to add a 30-year tips ladder to his arsenal of investments.

Voices [11:41]

There's no way under the sun that he needs a 30-year tips ladder.

Mostly Uncle Frank [11:48]

Alan Roth did something like that too.

Voices [11:54]

Neither one of them need any kind of construction like that.

Mostly Uncle Frank [11:57]

Because they're well over-saved and they can hold just about anything they want.

Mostly Uncle Frank [12:08]

I saw Bill Bengen get interviewed recently and he said that he retired a little over a decade ago and was taking somewhere around four and a half percent, I think, originally out of his portfolio, but it's grown so much that he's taking well below two percent now, because, as we know from most research, people do not tend to inflate their lifestyles in retirement, but under-inflate them or underspend. And so he's also now in a position where it doesn't matter what he holds and in fact he holds an extremely conservative portfolio, but I think is only something like 20% in equities. I think Larry Swedrell holds something like that too. And then what's popular in personal finance today is to hold something involving all kinds of buckets of cash or ladders of CDs, or flower pots full of cash or some kind of weird hose of cash, pie cakes of cash, lots of gardening and kitchen references and these sorts of things. The truth is, most of those people are just underspending their portfolios anyway. They don't need any of that. They're playing with themselves.

Mostly Uncle Frank [13:19]

Which always makes me laugh, because the same people say, oh, we need a very simple portfolio, only two or three funds, and then they're going through all of these machinations on the side with these buckets and ladders and hoses and things. That's not simple, that's complicated. The truth is, if you had a better portfolio to begin with, maybe you wouldn't be engaged in all of these complications. And you don't need it anyway because you're underspending your portfolio and that is your solution. So if you are planning on a 1% withdrawal rate, I would do something like Warren Buffett does 90% or 100% equities in index funds and then just leave it alone. Take what you need, you'll be fine. Just don't go running around on the side with all this other stuff telling people how glorious and wonderful their wicker man full of cash is because, you're really wasting a lot of people's time and causing a lot of confusion when you do that.

Mary and Others [14:23]

That's not an improvement.

Mostly Uncle Frank [14:25]

Hopefully that helps and thank you for your email.

Voices [14:29]

Billion, billion, billion, trillions, million, million, million, million, billion, billion, billion, billion, billion, billion billion.

Mostly Uncle Frank [14:37]

Second off. Second off we have an email from Matthias.

Voices [14:42]

My dad said he listened to Matt Damon and lost all his money.

Mostly Uncle Frank [14:45]

And Matthias writes.

Mary and Others [14:47]

Hi, I'm 36, $3 million in stocks. I have 70% in global stocks and want to put 30% to a levered portfolio with a very long accumulation to go. I have a high risk tolerance. Can you provide thoughts on how you would set up a levered portfolio to boost returns where stability isn't the core issue due to the long horizon? Would you lever up Optra Remove gold?

Voices [15:12]

All right, dude, can we lay off the Matt David jokes please? They're just getting old.

Mostly Uncle Frank [15:17]

Well, you know what we like to say about you people who are fiddling with the leverage.

Voices [15:22]

You have a gambling problem.

Mostly Uncle Frank [15:25]

But it's always an interesting topic. Watching people juggle fire is always interesting, or more interesting than juggling things that aren't burning.

Voices [15:35]

Okay, everybody, that cake should be ready now. Why don't you sing a song while I take it out of the oven? Stupendous Ow Ow, I'm burning, this sucks oh goodness. Ow Ow Ow, I'm burning. I can't help it. This sucks oh.

Voices [15:57]

Please Cool Fire, fire, fire Fire.

Mostly Uncle Frank [16:01]

This is actually a very interesting topic that we've talked about before, and it begins with the academic research that Rational Reminder has gone over in videos, saying that there are essentially two ways to outperform the market, one being to take a concentration in something you believe is going to outperform, and the other being to take leverage. And so you end up with a couple of questions if you're talking about leverage First, how much? And then how are you going to do it, whether it's through leverage funds or margin accounts or other things. We've actually talked about this in a number of other episodes. I'm going to give you. They are 251, 319, and 361.

Mostly Uncle Frank [16:41]

One of the more interesting articles that we referenced there was one that was trying to determine what would be the optimal amount of leverage in a portfolio, and whenever I've seen people do this, it always seems to come back to somewhere between one and two, and you can find articles about what they call Warren Buffett's alpha, that you can model Berkshire Hathaway as essentially a leveraged portfolio due to the float created by the insurance companies in there, and that's at about 1.7 to 1 in leveraged terms. People who are working on things like return stacking now with Corey Hofstein and the Resolve Asset Management. People are generally looking at leverage about 1.4 to 1. People are generally looking at leverage about 1.4 to 1. So I probably would stick somewhere in that range of 1.25 to 1 to 1.75 to 1. I certainly wouldn't go over 2 because, as you can imagine, if the stock market falls by 50% and you have something that's double leveraged, it goes to 0 or close to it. I think the simplest way to lever up a portfolio would be simply to create a two-fund accumulation portfolio that is essentially large cap growth on one side and value or small cap value on the other. And so you could take a fund like Upro, which is three times the S&P 500, or TQQQ, which is three times the NASDAQ, which could go to zero in a big downturn. Say, put 25% of that in a portfolio and then for the other 75%, use value tilted funds, either small cap value, or you could use that AVGV, which is a global value-tilted fund, or some combination of those. What that would give you is essentially 1.5 to 1 leverage, but also that nice balance between value and growth that you can rebalance over time and that has tended to work better than most things as a simple portfolio that outperforms the S&P 500. That outperforms the S&P 500.

Mostly Uncle Frank [18:52]

You should also check out the leverage funds and leverage portfolios discussed at Optimize Portfolios, where they talk about this in great detail, including going down to individual funds and discussing them. At some point, I do think you need to think about how much you actually need out of this whole exercise, because you're 36 years old. You have $3 million in stocks. That is going to get to eight figures relatively quickly if you do nothing. So by age 50, you're going to have eight figures. Once you start having that kind of money, you really need to be thinking about tax optimization issues and you're probably going to need to be thinking about tax optimization issues and you're probably going to need to hire somebody to help you with that stuff. But I really would start thinking about what you think the end goal of all this is likely to be, or you want it to be. But, as they say, it's good to be the king.

Voices [19:45]

It's good to be the king, it's good to be the king.

Mostly Uncle Frank [19:49]

So check out those other podcasts and check out the links that are in those podcast notes, because they have all these articles and things.

Voices [19:58]

I'm not going to repost them all here it's not that I'm lazy, it's that I just don't care that was 319, and 361 for reference, and thank you for your email.

Voices [20:14]

Last off.

Mostly Uncle Frank [20:16]

Last off, we have an email from Ian.

Voices [20:19]

You don't fight the nice English pig dogs.

Mary and Others [20:23]

And Ian writes Recently discovered Risk Parity Radio and loving your work. I'm based in the UK so many of the funds included in your portfolios aren't easily accessible to me as a non-US resident. Do you know if anybody has ever looked at how to set up these portfolios with funds easily accessible in the UK?

Voices [20:43]

Thanks, Now go away or I shall taunt you a second time.

Mostly Uncle Frank [20:48]

Thanks, Now go away or I shall taunt you a second time.

Voices [20:57]

Well, this is a timely email, because I recently discovered a good source for those in the United Kingdom for a lot of this information. We're knights of the round table. We dance whenever we're able.

Mostly Uncle Frank [21:03]

And that source is a YouTube channel run by Pension Craft and then a podcast that they also run called Many Happy Returns, and so these are a couple of UK-based financial advisors who are very user will link to in the show notes, which was all about his analysis of portfolios from various different country perspectives, and that is actually a place where you can find some references to funds and things like that. If you go to Portfolio Charts and pull up any of the sample portfolios or the calculators and pull up any of the sample portfolios or the calculators, At the top right of the page in a black box with white lettering, you can change the country from the United States to about 10 other countries. And then, if you go down on the right side, in another black box with white lettering, it'll say Asset Description. If you click on that, you can change it to sample ETFs and it will give you sample ETFs for various countries.

Mostly Uncle Frank [22:13]

Now I have not vetted any of those things, but there is a source there that at least you can ask that information and I'm sure if you sent these questions into PensionCraft, those guys would be able to tell you pretty quickly what your options are EngineCraft those guys would be able to tell you pretty quickly what your options are.

Mostly Uncle Frank [22:30]

There are a lot more options all the time for low-priced funds, for a lot of this stuff. So if you wanted, say, the funds for a UK-based Golan Butterfly portfolio, go pull that up at portfolio charts, change the home country from the United States to the United Kingdom and then change the asset allocation thing to ETFs and it'll give you a list of ETFs there. And I would also suggest you start listening to the Many Happy Returns podcast, because I have found that is one of the more interesting, newer podcasts that I have encountered in the past few months, and they not only focus on the UK but Europe in general, and so thank you very much for your email. It's always nice when somebody gives me a question that I have a really good answer for, but they probably haven't heard yet.

Voices [23:16]

The good news is I think I can help you.

Mostly Uncle Frank [23:20]

But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank at riskparityradarcom. That them to frankatriskparityradarcom. That email is frankatriskparityradarcom. Or you can go to the website, wwwriskparityradarcom. Put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like subscribe. Give me some stars, a follow, a review.

Mary and Others [23:46]

That would be great Okay.

Mostly Uncle Frank [23:49]

Thank you once again for tuning in. This is Frank Vasquez with Risk of Parity Radio signing off Billion.

Voices [23:57]

Billion Billion, billion, billion, billion, billion, billion, billion, billion, billion, billion, billion, billion Billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions, billions billions.

Mary and Others [24:29]

The Risk Parity 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.