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.

Mostly Mary [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.

Mostly Mary [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 [1:38]

But now onward, episode 429. Today, on Risk Parody Radio, we will be attending to your emails, but before we get to that, I just wanted to let you know that I did an interesting roundtable for Stacking Benjamins yesterday, which is streamed on YouTube and it's there already, although it will be processed into a proper podcast in the near future, but it featured me and Karsten yeska welcome to another edition of thunderdome and dana anspach, along with joe selsey. Hi, joe asked karsten and I to behave, and we mostly did oh how very clever.

Voices [2:21]

But I don't know why you'd say something like that, knowing that I might come after you with butchering tools.

Mostly Uncle Frank [2:28]

He was lucky that Dana was there. He probably invited her just to make sure there was something salvageable out of the episode. This is pretty much the worst video ever made, and she didn't seem too appalled at our behavior. I have a feeling we're not in Kansas anymore, but the most important thing we learned from it was that Carson's favorite soundbite from this program is this one I award you no points and may.

Mostly Uncle Frank [2:53]

God have mercy on your soul. Anyway, I will link to it in the show notes on YouTube and you can check it out at your leisure.

Mostly Mary [3:03]

Don't be saucy with me, Bernays.

Mostly Uncle Frank [3:06]

But now let's get to the main event.

Voices [3:08]

Here I go once again with the email.

Mostly Uncle Frank [3:11]

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

Voices [3:17]

Astronaut Brent Trapped by the swaggering, brutal master race of apes who dominate the Earth.

Mostly Mary [3:24]

And Brent writes Hi Frank, brutal master race of apes who dominate the earth. And Brent writes Hi Frank, I sent a $250 donation via Fidelity Charitable to the Father McKenna Center for the Matthew 6-3 matching gift yeah, baby yeah. I'm grateful for all the knowledge and ideas I've learned from your podcast over the last four years. Thank you for building this awesome resource and community. All the best, Brent.

Voices [3:47]

My God, did we finally do it Did?

Mostly Uncle Frank [3:54]

we finally really do it. Well, Brent, thank you so much for your contribution to our matching campaign for the Father McKenna Center.

Mostly Mary [4:04]

It's top drawer, really top drawer.

Mostly Uncle Frank [4:08]

As most of you know and we've been talking about one of our listeners, matthew 63, put up $15,000 to donate to the Father McKenna Center as matching funds.

Voices [4:18]

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

Mostly Uncle Frank [4:23]

Now the Father McKenna Center is our charity that we support here. It supports hungry and homeless people in Washington DC. And full disclosure I am in the board and am the current treasurer, but every dollar you give these days will be doubled.

Voices [4:36]

Double your pleasure, double your fun.

Mostly Uncle Frank [4:40]

And then we will get our logo put on the top of the T-shirt. When it comes time for the annual Walk for McKenna, which occurs in September, I am amazed and grateful for the support we've already received. All of the emailers today are donators.

Voices [4:55]

The best, Jerry the best.

Mostly Uncle Frank [4:57]

Because, as the other bonus you get for donating to the Father McKenna Center, you get to go to the front of the email line.

Voices [5:03]

Oh, how convenient the Father McKenna Center.

Mostly Uncle Frank [5:04]

You get to go to the front of the email line, ooh how convenient, and so, if you want me to tend to your email earlier rather than later, I suggest you become a donor. Never been a better time than right now. Thank you for your support and thank you for your email.

Voices [5:20]

Show me the money, jerry, you better yell.

Mostly Uncle Frank [5:24]

Show me the money, jerry, you better yell, show me the money Second off.

Voices [5:31]

Second off, we have an email from Peter. Hello Peter, what's?

Mostly Mary [5:34]

happening. And Peter writes Hi Frank, I can't believe it's been two years since my last one-on-one consultation with you.

Voices [5:43]

And it's gone poof.

Mostly Mary [5:47]

I retired shortly after that session and things are going well.

Voices [5:50]

Snooze and dream, dream and snooze. The pleasures are unlimited.

Mostly Mary [5:56]

I have come to realize that you and your podcast have had a larger impact on my financial strategy than any other resource and with the matching program you have right now, it's a good time for me to show my appreciation by donating to the Father McKenna Center. I attached the confirmation below. On to the questions First I want to get your thoughts on my asset allocation. I'm retired now and open to risk, looking to have a solid portfolio for the long term that I don't have to tweak too much. My current target asset allocation is as follows 1. Large cap 40% VTI. 2. Small cap 20% VIOV. 3. Long term bonds 15% VGLT. 4. Gold 10% GLDM. Gldm Five managed futures 7.5% DBMF. Six preferred shares 5% PFFV. Seven cash 2.5% three-month treasury bills. Anything you would change here.

Mostly Mary [7:03]

I've had VTI for a long time, which is why it is my large cap ETF. Part of this is FOMO, but wondering if I should consider adding some of the newer asset classes being discussed. I have a very large amount of cash from some proceeds I received at the end of last year and need to invest it. So asking these questions now 1. You pro wondering if it is getting more important to have some leverage in a portfolio, even if just 5%. Should I consider moving some large cap here or other? Any other leverage ETFs I should consider?

Voices [7:37]

You have a gambling problem 2.

Mostly Mary [7:41]

Avdv and or IDMO. I keep going back and forth on whether I should have something international in my portfolio. 3. Kbwp Looks interesting. I know you self-indexed this, but it's not something I'm interested in. Should I consider the fund? Second, I will have some large amounts of cash coming in from the liquidation of alternative investments and I'm trying to decide how to handle it. Originally I was going to add it to my portfolio and increase my withdrawal accordingly, but running the numbers it seems like I would get more benefit if I use it to reduce my expenses over several years and thereby reduce my tax liability in those years. My drawdown in the early years becomes much lower and the plans ending asset balance doesn't change by much. Obviously, I give up the potential growth of that money. Curious if you have a view on how to handle this scenario.

Mostly Uncle Frank [8:52]

Apologies for the long email and thank you for your kind words and thank you for a donation to the Father McKenna Center.

Voices [9:02]

Winner winner chicken dinner.

Mostly Uncle Frank [9:07]

Two years ago. Huh, I guess I have been doing this for a while. In case anybody's wondering yes, I still do one-on-one consultations, but I never mention it unless somebody else does, because guess what?

Voices [9:22]

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

Mostly Uncle Frank [9:25]

But if you're interested in that, you'll have to email me and we can set that up. I do charge $300 an hour for a two-hour minimum of financial coaching. Is what it is, and I do about one a month and that's more than enough, since I only started doing it by popular demand.

Voices [9:45]

He's been in the basement all morning chewing on coca leaves. Please give your undivided attention to Senor Matt Foley, Hola niños.

Voices [9:55]

Me llamo Matt Foley Y yo soy un motivational speaker. Yo tengo tres ente y cinco años, I have 35 years, I am divorced and I live and die around the world.

Mostly Uncle Frank [10:26]

Your portfolio looks good to me. It has all of the parameters of a portfolio that generally has a higher safe withdrawal rate. And just to review what those kind of rules of thumb or parameters are is to have a portfolio that is 40 to 70% in equities you have 60% in equities. Have a portfolio that is between 15% and 30% in treasury bonds you have 15% in VGLT. The preferred shares also act like a kind of bond, so I would include that as a extra bond allocation that pays a little bit more. Then the next rule of thumb is to have between 10 and 25 percent in alternatives, and you have 17.5 percent in alternatives. And then the final rule of thumb is to have less than 10 percent in cash and you have 2.5 percent in cash. So all of those things will get you a higher safe withdrawal rate generally than some kind of standard stock and bond portfolio.

Mostly Uncle Frank [11:26]

And I usually say well, I always say generally. You want to have your stock portion of the portfolio split between growth and value and it's slightly tilted more towards growth and value, but it's not significantly, because VTI is a large cap blend fund. Most of the time it tilts towards growth when things are growing well and I certainly wouldn't be running out selling out of that if it's going to cause you tax problems in particular. So I don't see any reason to change anything. In particular if you're comfortable with this, because I'm really not that dogmatic on exactly what people hold that's not in keeping with what we're trying to do here, which is to apply three principles the Holy Grail principle, the macro allocation principle and the simplicity principle, which you have done, and that's why we say our sample portfolios are just sample portfolios. They are not magic formulas or dogmatic edicts for somebody to follow. Now, as to your other options or questions, first of all, you pro, I don't think you'd probably want to have that in your portfolio.

Voices [12:34]

You have a gambling problem.

Mostly Uncle Frank [12:36]

Just because, unless you've held leverage things before, they move around a lot and that is generally not very pleasant watching things in a retirement portfolio potentially go down by large percentages in a day or a week, even if they can do the same thing on the upside. So if you were going to do anything with that, I would just hold a very tiny amount of it and see if you really want to handle something like that. I would not really make it an allocation, if you will, to the portfolio in any meaningful sense. Now, avdv and or IDMO and those are an international small cap value fund and an international large cap momentum fund. That's really a large cap growth fund. Those look exciting.

Mostly Uncle Frank [13:27]

This year I think ADVD is up 10% or something like that and IDMO is up over 20%, which is unusual. But a lot of that has to do with the fall in the US dollar. A very large portion of the outperformance of international stocks this year has to do with the weakening of the US dollar against other currencies and not, in particular, anything going on in these countries. Oh, there is something going on in a lot of these countries that's more positive than the US right now in terms of growth potentials. So I don't think you necessarily need these things, but they wouldn't be wrong to hold.

Mostly Uncle Frank [14:03]

If you really wanted to add that extra complexity, I would not be running off throwing big chunks into them right away. I would probably dollar cost average into one or the other one and probably out of your VTI allocation. But if you're going to do that, you really need to commit to holding these things for the long term. I'm talking about the next 10 years because if the dollar re-strengthens again, you could watch these go down versus your US stocks and it would look like the last 10 or 15 years when international underperformed and I can't predict the future on that.

Mostly Mary [14:40]

A crystal ball can help you, it can guide you.

Mostly Uncle Frank [14:45]

So I don't think you need them, but if you want them, I would sell some of your VTI dollar cost average into these things, but plan to hold them for the long term. All right then. Moving to KBWP, this is the property and casualty insurance companies. The fee is kind of high it's 0.35. It used to be 0.45. But these are very useful.

Mostly Uncle Frank [15:08]

As we've talked about, I own these companies in a direct indexed format. These are companies like Chubb and Progressive and Travelers and Allstate. What's nice about them, at least the time I've held them in the past 10 years, is that they do perform just as well as the rest of the stock market. I wouldn't expect them to perform any better, even though recently they have, but they also exhibit a lot of positive diversification qualities to them, including being up in 2022 when most things were down. They are a mid-cap value fund is where you would place them in terms of growth and value. But the thing is, I mean, this fund has not been around that long. I think it's been around since 2010. And so I don't have any long-term analysis showing that a fund like this is a good holding to have, say, over the past 50 or 70 years or something like that.

Mostly Uncle Frank [16:01]

I have to believe it probably is simply because people like Warren Buffett load up on things like this and it's the baseline for their investment philosophies, which is why I looked at these things in the first place. And, in Warren Buffett terms, they do have gigantic moats around what they do, since they're in a highly regulated environment. They're very large, they're very stable and they get very large streams of income from all directions because they sell property and casualty insurance policies to millions of people. So again, I come out in the same place I did with the other two you asked about. It would not be wrong to move some of your VTI money into KBWP, but if you do do that, you need to commit to it long term. What I really worry about when people ask these kind of questions is whether they really have that commitment in mind or they're just looking at something because it happens to look good recently.

Voices [16:57]

A-I-D-A. Attention, interest, decision, action. Attention, do I have your attention Interest? Are you interested? I know you are. Decision have you made your decision for Christ and action?

Mostly Uncle Frank [17:14]

And that is a real problem that most amateur investors like to look at what has done well recently and by recently I mean between the one and last 10 years and jump on those funds. But the truth is, if something performed better than the market in the last one to 10 years, there's a good likelihood it'll perform worse than the rest of the market in the next 10 years, at least if it's just some kind of large index or sector kind of thing. And that is my caveat to these kinds of decisions. I do hold all three of those funds in our personal portfolios, but I've held them all for quite a while, except for I may have only acquired IDMO in the past couple of years because I only found it recently, but I had some other large cap international fund that I exchanged for it. Now moving to your second question, the large amount of cash coming.

Voices [18:08]

It's time for the grand unveiling of money.

Mostly Uncle Frank [18:12]

Yeah, this is an interesting situation. I think you're probably correct in not investing it and simply spending it, and I would probably say that with anything that is less than one to three years of cash as far as your expenses are concerned, because you're correct that by investing it and then turning around and taking the money out, there's going to be tax liabilities that go on there and just in terms of the management of it, it's going to be a lot simpler if you just spend it and you'll probably have the same kind of result you would as if you would have invested it in that short of a time frame. I can tell you I still get dribs and drabs of money from legal work and other things that I do, and we just spend whatever it is and use it to reduce expenses at the time, and I probably would do that with anything that's less than like two or three years worth of expenses. So I think the simplicity principle really says hold the cash and spend it rather than putting it back into something that just will make your life more complicated and probably not add much of anything to your investments.

Mostly Uncle Frank [19:16]

Overall, I'm not a smart man, in addition to potentially creating tax issues if you were to invest it and you wanted some of these other funds yes, that you would probably buy some of these things you were considering, because that's also a possibility for new money in terms of an allocation Assuming you're not over allocated to stocks right now you probably are not. So I think you're in good shape and you have a lot of good options here, and it was very nice to hear from you. Again, thank you for your contributions to this podcast and thank you for your email.

Voices [20:03]

Last off.

Voices [20:04]

Last off is an email from Psy off in an email from Cy.

Mostly Uncle Frank [20:17]

And Cy writes.

Mostly Mary [20:19]

Hi Cousins, frank and Mary, thanks for the opportunity to contribute to the work at the Father McKenna Center. Okay, here's my question. If I were using direct indexing as a portion of my golden butterfly portfolio, how would I handle a rebalancing event If the direct index had fallen below its band? Would I buy the down companies, rebalance the entire direct index, buy an equal allocation of each company? With all the recent discussions around direct indexing, I thought this would be a good time to let you know about the unspeakable experiment I've been running with small cap value stocks In the golden butterfly portion of our portfolio. We use IJS for the small cap value portion. I was curious to see if a more concentrated basket would do better, given that about half of the RUT isn't even profitable. I didn't find similar data about the S&P 600 small cap value index, but I went with that same idea. Here's how I set it up Small cap direct index screen Screen 4,.

Mostly Mary [21:25]

Roic is greater than or equal to 15%. Net debt earnings are less than or equal to 2. The market cap is between $200 million and $2 billion. The closing price is between $10 and $500. The PE is less than or equal to 50. Exclude companies and countries without rule of law. Adjust market cap rate to include 29 to 33 companies. Initial process 14,500 invested in 29 companies, plus money market fund to hold dividends equal weight by market cap.

Mostly Mary [22:04]

Two accounts Fidelity, roth and Fidelity Joint WROS On February 7, 2025, reallocate cash quarterly 221, 524, 821, 1121. Reallocate equal amount to each company. Rebalance annually 334 days after purchase. Sell losing companies to capture short-term capital losses and avoid wash sales 51 weeks after purchase run screen 52 weeks plus one day after purchase. Sell companies not in new screen. Withdraw 5% from Roth, first from cash, then from best performers to simulate drawdown phase. Joint will simulate accumulation phase. Calculate new equal weight amount. Buy new companies phase. Calculate new equal weight amount. Buy new companies. Buy new equal weight amount of new stocks. Sell shares as necessary with long-term capital gains. I attached an Excel workbook with two sheets tracking and positions. I have found a new appreciation for why we pay fees for these funds. If I had to vote for 600 panels of directors, I'd charge more than 0.8%. What a pain. I just ignore the emails.

Mostly Uncle Frank [23:24]

Well, first off, thank you for also being a donator to the Father McKenna Center and our Top of the T-Shirt campaign.

Voices [23:32]

You are a fun person. I like you. I want to kiss you always.

Mostly Uncle Frank [23:38]

I always marvel at the complex things that the listeners to this podcast often choose to implement, but I know we have a lot of curious investors out there and I don't see anything outrageous here, although it does make your life more complicated.

Voices [23:54]

Hearts and kidneys are tinker toys.

Mostly Uncle Frank [23:57]

I will say the issues you've raised really show you why direct indexing does add some complexity to whatever you're doing, because you do have to make all these kind of decisions and it's not clear in any circumstance which is quote the right way unquote to do these things. Here are my general thoughts on these things, although this is more my opinion than anything I've really researched in detail, based on just what I know and what I actually do with our direct index stuff, which is those insurance companies and a couple other things. So I first look at the whole pot, if you will, because these are part of an overall allocation, in your case to small cap value, and so I would be considering that whole group of companies as one allocation in terms of deciding whether it needed to be rebalanced or not. I typically do not rebalance inside the direct index portion because it's more complicated and I'm not sure that it really helps. There's an interesting difference between holding a fund and an individual company that individual companies are more likely to just keep doing well if they are already doing well, whereas because funds are always changing their mix based on their algorithm, it's not the same when you're looking at a fund versus looking at a company.

Mostly Uncle Frank [25:27]

The other way of saying this is let your winners run, which is often a good tack to take here.

Mostly Uncle Frank [25:34]

So, for instance, in our group of insurance companies, progressive has been the best performer for the past several years. I do not sell Progressive to buy one of the other companies in that group of direct indexed insurance companies. I would only sell parts of the grouping to rebalance against the whole rest of the portfolio. And then, when doing that, there is then a consideration of tax loss harvesting, depending on where the assets lie, because you can always sell a loser with a winner to get that tax loss harvesting and then buy something else that's similar and is also in the index. And that's really what I'm looking at when it comes to the rebalancing operation, because I care more about the overall allocation than I do about any particular company in the direct index sleeve, and I just want to minimize the number of transactions direct index sleeve and I just want to minimize the number of transactions. So what you've come up with is a far more complicated plan than I would want to engage with in terms of reallocating within the sleeve.

Voices [26:40]

I'm going to end up eating a steady diet of government cheese and living in a van down by the river.

Mostly Uncle Frank [26:49]

But I cannot say that what I'm doing is preferable or better to what you're doing. My way is just simpler. The other thing that I would note, though, is you noted the pain that it causes dealing with all of these companies. I probably would not try to index small cap value or any small cap funds, because of the odd way that a small cap fund is constructed. Once a company gets too large as in it's too successful, it gets dropped from the fund, and so it is really a buying the worst things all the time and selling the best things all the time is the way that algorithm works. Now that probably works well for 600 companies or so, because it's almost impossible to tell which ones are going to perform better, particularly when they're small cap companies. You can appreciate the difference if you think about what a large cap fund does, which is act as a momentum fund, that it just keeps buying more and more of the company as it gets bigger and bigger and keeps growing, and it never graduates or gets dropped because it gets too big. So for that reason, I think that direct indexing with larger companies and just holding them is more like what you would be doing if you were buying a fund. It's more similar to that than trying to direct index a small cap fund, where you are trying to recreate an algorithm of some kind or invent one of your own.

Mostly Uncle Frank [28:29]

And the other reason I'd be less sanguine about trying to direct index small cap funds is the work of Hendrik Bessembinder, and this is an academic. I think he's from Arizona or Arizona State, but he's been interviewed several times on the Rational Reminder podcast in particular. I'll see if I can find one of his interviews. He's done very interesting research that shows that a very small portion of the entire index say something like 4% is responsible for the great proportion of actual returns of the entire index, and that's true of the S&P 500, but it's generally true of any kind of index you can think of. What that tells you is that stock picking is really hard. And I think it's even harder when the companies are small and there's more variance to it, because at least with something that is larger, you know that it has been successful in the past. It has a reason for success.

Mostly Uncle Frank [29:27]

With the smaller ones, you don't know why they're there, whether they just had recent success because their area of business has been growing, or there's something that they're doing.

Mostly Uncle Frank [29:37]

You just don't know. So I think it's even harder to pick stocks that are small and is more the reason just to go with funds and not try to index them. If you want to go see something interesting, go ask a AI bot, a chat GPT or something, how these individual small cap value funds are constructed and what index they're following, because they're different. They're more different than you'll see with large cap funds, which is why you get more varied performances between the Russell version and the S&P version and the CRSP version and then the DFA or Avantis versions. But I think that's also very informative because some of the indexes already employ a profitability factor on top of just the small and value factors, and those funds tend to be generally more successful. So I would be very curious to see how your experiment turns out. I do not have any basis for saying that it's going to be better or worse than just a fund or some other algorithm that you might use.

Mostly Mary [30:42]

I would place it over a candle and it's through the candle that you will see the images, into the crystal candle, that you will see the images into the crystal.

Voices [30:57]

But it's interesting stuff to think about if you're curious and don't mind the complexity of it.

Mostly Uncle Frank [31:01]

Hopefully that helps. Thanks once again for your donations and thank you for your email, but now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank at riskparityradarcom. That email is frank at riskparityradarcom. 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. Follow a review. That would be great. Thank you once again for tuning in. This is Frank Vasquez with Risk Party Radio.

Voices [32:12]

Signing off death. Well, I don't know how many miles wake up the turn Of all the Nobel Prizes that I've never won, and I may be the mayor of simpleton, but I know one thing that's I love when the logic runs cold and all thinking gets done. You'll be warming the arms of the mayor of simpleton. Thank you, please be outstanding for the rare, simple, simple.

Mostly Mary [32:57]

Please be outstanding for the rare, simple, simple. The Risk Parody Radio Show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial investment, tax or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.