What I've been listening to and reading over the past month - with some additional commentary and links as needed. Here are eight things to check out, covering the 4% Rule, Withdrawal Rates, TIPS, Short Selling, Long-Term Bonds and more.
Lately on Risk Parity Radio…
1) Episode 294, question about the 4% Rule. The 4% Rule is one of the easiest but most mis-understood concepts in personal finance, and at some level, I suspect the confusion is strategic. Frank goes into a much-needed discussion about its origins, its assumptions, and its limitations, while also keeping in mind that it is, on the whole, a pretty good assumption of what can be withdrawn. Interested readers may like my own take:
Some points to add:
- Around the 14:35 mark, a discussion of how using different portfolios can change withdrawal rates. This right here is the core of Risk Parity Chronicles: I have twelve sample portfolios which are explicitly testing how different constructions can fare under a 4% withdrawal rate. Frank’s test portfolios do the same (though note that for some, he is testing out higher withdrawal rates). It’s also highly recommended to test various portfolios yourself to see how withdrawal rates can change. Here is a quick post on how to do that using two separate tools, including a screencast tutorial.
- Around 18:35, a brief mention of safe withdrawal rates (SWR) versus perpetual withdrawal rates (PWR). I’m a big fan of using PWR, and interestingly enough, PWR actually increases as one lengthens the time period. Again, this post summarizes that.
- Haven’t seen as much hand-wringing about the misguidedness of the 4% Rule lately, and that may be a consequence of what I talked about in my most recent post: with LT Treasuries yielding 4.7%, it sure seems like the 4% isn’t crazy. If retiring today, could you put 80% of your portfolio into 30-year Treasuries, and invest the other 20% in the S&P 500 just to stay ahead of inflation (over the long haul)? This is not financial advice, of course.
2) Episode 297, question about TIPS. Listener Eric asks the reasons for not being a fan of TIPS and covers a few reasons, including the measure of inflation that TIPS use and its limitations. I took a deep dive into TIPS last December, really trying to get at just what exactly TIPS do in a portfolio. It’s an eight-part series, but rather than give all the links, interested readers may want to check out the first post for an overview, the fifth post which features some backtests, and the last, in which I draw some conclusions from my deep dive. I agree with Frank that it’s really important to look at what TIPS actually do - not just what they say they do, but what they actually do.
3) Episode 296, question about Data Sets. Nice discussion here about data and how much we should rely on various data sets. Frank gives a breakdown of the pros and cons of the data sets behind three common tools for retail investors: at Portfolio Visualizer, Portfolio Charts, and Early Retirement Now. Wise words here, and worth reiterating: you’ll get different outcomes from each one, and no single one is definitive. Instead, best to use each as an approximation, and to understand the limits of the data, plus the inherent limitation of historical data in general.
For the record, I use Portfolio Charts when I can, but actually, I find that I can’t use it very much anymore as more and more of my test portfolios involve trend-following managed futures. I then turn to Portfolio Visualizer, but there, the data is so recent that it actually can't be relied on very much. Lesson: know what you are getting with backtests and be careful not to be overconfident about what they say.
Risk Parity Adjacent
Excess Returns, a podcast hosted by two principals from Validea Capital Management, is one of my favorites, but especially their series “Show Us Your Portfolio.” These feature various Big Kaunas in the industry going over their own investing strategy. In many cases, they do the same thing with their money as whatever the firm they work with does, but the interviews are a really accessible way to get to know different approaches. I put any new episodes in this series at the top of my queue, and here are some recent ones I’ve loved:
4) Episode 232 with Jerry Parker. Great interview with one of the O.G.s in the trend-following managed futures space. Great cross-over here with risk parity, including a nice discussion (about 60% of the way in) about position sizing and handling asset classes with varying volatilities.
5) Episode 227 with Andy Constan, head of Damped Spring Research. Constan was at Bridgewater early in his career and brings a Risk Parity-based approach to investing. Great interview here about his formative experiences in the industry and how he sees the world and markets now.
6) Episode 215 with Larry Swedroe. LOTS here that is adjacent and foundational to Risk Parity, namely heavy emphasis on finding multiple uncorrelated asset classes each with positive return, a.k.a. Ray Dalio’s Holy Grail. Great stuff about halfway in about various alternative investments, outside the stocks and bond tunnels.
Connected to a Recent Post of Mine
7) ReSolve Riffs, September 26th 2023 episode. Last week, I wrote about the drubbing of Long-term Treasury bonds recently, and wanted to pass this podcast along. It’s an episode of ReSolve Riffs featuring Bob Elliot, CIO at Unlimited Funds, and covers a wide-range of topics. Especially useful and connected is the first 20 minutes or so, which takes a close look at bonds and what’s going on with LT Treasuries.
Not Risk Parity but…
8) Security Analysis Podcast, September 20th episode. Chalk this up to the “things I have changed my mind about as I have learned more about investing” folder: Had a real moment of juxtaposition last week as I was watching Eat the Rich, the three-part Netflix series on the GameStop saga. My favorite part featured one of the main retail traders in the film who has an intense distaste for short selling, and the monsters who do it. At one point, there’s this grainy video of Jeffrey, the Toys-R-Us mascot, wheeling a piece of luggage out the store while the woman’s voice says, “they killed Jeffrey!” or something like that.
If I had been the me of ten years ago watching that, I probably would have agreed with her. I mean, they killed Jeffrey! What else is there to say?
I don’t probably need to go over with this audience why the anti-shorting argument doesn’t make much sense, or explain that if anyone did kill Jeffrey it was actually the customers (like her, presumably) who stayed away in droves.
Then, I heard this great podcast the very next day that contrasted so well with the sentiments in the Netflix series. It’s Value Stock Geek’s recent interview with Edwin Dorsey (@stockjabber). Great anecdotes in there with Dorsey talking about obviously fraudulent drone technology companies, sleazy and unethical insurance companies, and exploitative pharmaceutical companies. Way to go, Mr. Dorsey, for playing such a needed role in the investing ecosystem! Well worth a listen.