We literally just had Frank Vasquez on the podcast on Tuesday and I was so excited about the idea of creating a risk parity portfolio that we’re having him back on to walk me through exactly how to do it. As a reminder, a risk parity portfolio is one in which many people feel comfortable withdrawing at a 5% rate. For a two point five million dollar portfolio, for example, many following this portfolio feel comfortable spending a hundred and twenty-five thousand dollars per year, inflation adjusted, in perpetuity. Today, Frank is going to show me step by step how to create that same portfolio on Fidelity. This is an amazing episode to watch on YouTube because I am going to be sharing my screen. So if you’ve been waiting on the sidelines to open up a brokerage account because it feels too overwhelming, this episode is for you.
Hello, hello, hello and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen and with me as always is my risk-averse co-host, Scott Trench. Thanks Mindy, great to be here. I’m super excited to discuss the principles for spending principles of our investors’ portfolios here listening to Bigger Pockets Money. I am so excited to take a backseat today and learn even more from Frank. If you didn’t catch Tuesday’s episode, a quick refresher for everyone, Frank Vasquez is the host of the Risk Parity Radio podcast and a former lawyer turned retirement junkie. Frank, welcome back to Bigger Pockets Money. Thank you. It’s good to be here. It’s good to be here in the summertime. We’re going to have a little bit of portfolio camp today, so hope the campers are ready. Perfect. Frank, can you give us a quick rundown on what a risk parity portfolio is? Okay, a risk parity portfolio as it’s been commonly, that term is commonly used now, there are actually two definitions, one’s technical. I’m using the more colloquial definition. It is a portfolio that is extremely well diversified and is really designed for performing well in really bad markets so that you can take more out of it than you would out of a traditional portfolio that is just say stocks and bonds. And so we really focused mostly on diversification and less on the total returns of the portfolio, which is what you’d be interested if you were accumulating. This portfolio is designed more for decumulation or as it’s more conservative than a standard accumulation portfolio or even a traditional retirement portfolio. Awesome. Yeah, and just to chime in here, you know if you want to learn more about the theory behind this, we’ll go into it throughout the episode and ask Frank a bunch of questions. But a couple of tidbits from last episode are Frank discussed hey, this is not an accumulation phase portfolio. This is not something that you would want to do if you’re starting out, have less than a couple hundred thousand dollars in net worth and are many years away from FIRE. Second, this is a portfolio to transition into. Um, and Frank suggests doing so at about 80% of your FIRE number. So if your FIRE number is two point five million, a good time to start transitioning to this portfolio might be when you crest the two million dollar net worth mark. Any other key points like that, Frank before we get into this? No, I don’t think so. Um, I think, uh, that yes, the uh, we are going to spend much more time on the how and not the why, but I’m I’m happy to answer questions as we go through. And I’m going to just give you a simplified version of something, but recognize that this is only one variation of a risk parity style portfolio. There is no one portfolio that is the portfolio that everybody needs to have or everybody needs to follow. This is about applying principles in the broad sense, but today we’re going to be focused on just one variation of that so that people can see what one looks like and how it’s built. and then we can talk more about why the things are are in it. But I will basically be telling you what to put in it at this stage to make it uh easier for just somebody to follow and and and so they can see exactly how it’s built and I think at least what for what Mindy’s doing on Fidelity, this process we’re doing here is something you could follow for virtually any kind of portfolio. Basically designing it on a piece of paper and then translating that over to actually buying the components in your brokerage account. Okay, well let’s get started. What am I doing first, Frank? Today Mindy we’re going to build a risk parity style portfolio that is known as the Golden Ratio Portfolio. and a Golden Ratio Portfolio consists of five allocations or slots of assets and they are divided in what is the traditional golden ratio, which is about 1.61 to one. Actual allocations end up being 42%, 26%, 16%, 10% and 6% and that all adds to to a hundred. So we will put stocks in as the 42%, we’ll put bonds in as the 26% cause those are the two most important assets. and that actually looks like a 60/40 portfolio by itself. and then we have the rest of this portfolio which is 32% of it. and so for the 16%, we’ll be using gold for that, we’ll be using 10% in managed futures for the 10% allocation. Then the 6% allocation could be cash if you don’t have any cash, but we’re going to use that to add some more stocks into the portfolio, which I think we can use some international stocks which will fulfill that. and this gives you a a an idea of what one of these kind of portfolios looks like even though a lot of these uh assets can be moved around and the funds can be changed, but we’ll talk about the funds second, but I just wanted to give you the the framework first. Perfect. Can you can you explain one more layer of depth behind this golden ratio. What is what is driving that? The way I arrived at this is by studying other kinds of um portfolios to see which ones had the highest safe withdrawal rates and this happened to be one formulation like that. And it seemed to work pretty well just using the classic Golden Ratio as the ratio between the the assets. But it really does follow the application of three principles. The first being what I call the holy grail principle which is Ray Dalio’s diversification principle. The second one is the macro allocation principle which is about focusing on those macro allocations first and then funds second. And then the third one is the simplicity principle to make this as simple as possible but no simpler as as Einstein says. When we talked with you last week Frank, you casually mentioned that you would be willing to do this portfolio with me to show me exactly how to set this up and I thought what better way to do this than to do this on a podcast, on a video so people could see what I’m doing in real time how to actually set this up in Fidelity. So uh can I share my screen with you so we can walk through this together? Yes, sure. Okay Frank, this is my screen. This is my uh ten thousand dollar portfolio. I set this up uh so that I had the money in the account so I could start allocating it. Um I set this up last week and uh you will notice that I have already made 14 cents on this portfolio so I’m already winning in life. But nothing is allocated right now except it like they put it in something called short term. I did nothing for that and I I want to make a note to anybody who’s looking at something like this. When you set this up, Fidelity is going to put it in something. I guess they put it in short term but that’s not what we want. We want all of these different allocations, the uh the stocks that are bonds, the gold, the managed futures, and more stocks. So how do I get that in there? It’s nice Fidelity does put you into a money market fund by default and it’s probably paying somewhere between four and five percent right now which is nice because Schwab doesn’t necessarily do that. Vanguard I believe does it. Um but that’s where you want your cash to be when it’s just sitting there. At least it’s earning something like a high yield savings account. But to get to now to start allocating these things and we’re talking about the 42% in stocks first, we need to go to the the trading screen of this. Select an account. Make sure you’re selecting the right account if you have more than one. And there it is. Okay, so we talked about 42% in stocks. The simplest formulation for that is to use two funds. One that represents value and one that represents growth. The reason you want to divide up your stocks that way in this kind of portfolio is that that kind of division tends to lead to the highest safe withdrawal rates. Those two things tend to perform differently at different times. and so in years like 2022, your growth stocks might have been down 30 or 40%, your value stocks might have been up or flat. You want to be able to have that separation so you can uh rebalance them against each other and against the rest of the portfolio. To make this simple, I’m I’m just going to give you the kind of funds that I would use and then we can talk about why that’s a good one or a bad one. The first one we’ll use is a large cap growth fund from Vanguard. It is called VUG. So you need to go to symbol there, type in VUG. So we’re going to buy so you’re going to click on that. Okay. Now you have two options here. You can buy a number of shares or you can buy in dollars. and that’s also a new feature for ETFs in the past five years. You used to only be able to buy shares but now we can buy dollars just like a a mutual fund. And so, particularly if you’re constructing a small portfolio like this, it’s just easier to use dollars. If you were talking about, you know, a million dollars and not ten thousand dollars, uh you would probably want to buy in shares cause it’s easier to to keep records of them long term. The dollar amount for this, remember we had we wanted 42% as our total stocks and so we want to divide that into just two funds to make it as simple as possible. So this is 21% of 10,000, which is 2100. So we’re going to buy 2100 dollars worth. Now, the next thing is to do market or limit. If you are using a lot of if you are making very large transactions like tens of thousands of dollars, you should use limit orders. If you use a limit order, you get to set the price. But you see up there that the bid and ask there, that is what this is currently trading at, somewhere between four hundred and forty five dollars and eighty six cents and four hundred and forty five dollars and ninety three cents. Um and in the background in the market, there are many, many trades going on and that’s just the when we brought the screen up, that’s what the market looks like right now. If this were a large amount of money, I would use a limit order. For this purpose, we can use a market order because this is a small amount of money and we’re not, we’re we’re doing this for demonstration. Um but I just wanted people to be aware of the difference between those two things. The market order will transact immediately and it will usually transact at somewhere around that ask price when you’re buying something. Click on market there. Were there any questions, Scott or Mindy? Nope, that was pretty straightforward. Okay. Alright, click on preview order. and this is where you look at the screens and make sure that you essentially filled out the boxes the way you wanted to. So we’re buying twenty one hundred dollars at market of VUG. Okay, you can go ahead and place the order. and the order has been received. Would you like to see how I build a risk parity portfolio? Frank will walk me through it right after this. When you are ready to start your business, Northwest Registered Agent helps you do more than just file paperwork. 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Alright, welcome back to the show. Next one, I’m going to give you a fund called AVUV. and this is a small cap value fund. And I want AVUV, not X. Correct, that’s the mutual fund version of it, we want the ETF version of it. Okay. So this fund is going to be your value representation in this portfolio. If you only are going to have one value fund and you’re going to match that against a large cap growth fund, a small cap value fund makes a good pairing because they’re very far apart in terms of diversification properties. The reason we picked this one, well you can blame or credit Paul Merriman for his research. Um if you go to Paul Merriman’s site, he’s got best in class for all kinds of different funds like small cap value funds and international funds, but he’s got a whole list of ones that they’ve analyzed based on their analysis and the history of this fund and funds like it. This kind of fund does perform tend to perform better than a lot of other standard small cap value kind of index funds. And you may have heard of some of those. Vanguard has two of them, one is VBR, I’m just going to tell you what they are, one is VIOV, you may have heard of a fund called IJS, that’s an iShares fund that’s like VIOV. There is a Russell 2000 version of this. All of those are based on slightly different indexes. This family of funds does also put a profitability filter on top of the other small cap value filter. So basically it filters out the really the worst companies that you could have bought that other funds might include and so it has a history of outperforming other kinds of index funds. It still is an index fund in its characteristic. Really what an index fund is, you should think about it as an algorithmic fund. That it is constructed based on a computer algorithm. So you put a formula in, it picks the stocks based on that formula, and that’s how you pick the stocks in that fund. And that’s the way all index funds work, whether it’s VTSAX or any other kind of index fund. It’s really just an algorithm that is used to pick the stocks in the fund and put them in the proportion the algorithm says. We’re going to use this one for our small cap value fund, our value allocation and put buy and we’ll do dollars again and this is also 2100 for 20 21% and we’ll do another market order because it’s small. And I’m going to place my order. Yep. Woohoo. So, next we have the 26% in bonds. This is the roof of our house. So what we’re going to use for this is a Treasury bond fund and what typically works best in this slot in this kind of a portfolio are bonds that do two things. First, they want to you want to use the bonds that are the most diversified from stock funds and so that is US Treasury bonds. The second criteria you want to use is you want the bonds that will do the best during recessions. Things like 2020 or 2008 or the early 2000s, you want something that is actually historically gone up in value during a recession because the purpose of bonds in this portfolio is to be recession insurance. and those happen to be intermediate and long-term Treasury bonds. And you could mix those but we’re going to make this as simple as possible. So we’re just going to use long-term Treasury bonds for this portfolio. So put in VGLT. And again, this is a Vanguard long-term Treasury bond fund. Vanguard has really expanded its offerings over the past 10 years, so it’s got a whole suite of ETFs and you don’t have to just buy a total bond market fund there anymore. You can buy long-term Treasuries, intermediate-term Treasuries, short-term Treasuries, you can buy the whole group of corporates. What is nice about this is it’s a very cheap fund and it allows you to specifically buy exactly what you want and not have to fiddle around with with other things that you don’t want. Um and in this case what we want are US Treasury bonds that are intermediate or long-term. Um so we’re going to buy those. I think I want to split it up. Instead of 26% in long-term, I think I want to do 13 in intermediate and 13 in long-term just so I can track the difference. Okay, we can do that. You’re making it more complicated, Mindy. That’s okay. I get criticized a lot cause it’s not simple enough and now you’re- Well, you didn’t suggest this, I did. So if you want to email Mindy, you can email tell somebody else at Idon’tcare.com. Okay. I think that’s a great observation though, right? We have we have the simple path to wealth, right? If you were saying what’s the best 50-year returns you can get in a portfolio passively, you buy something like a total market index fund, right? Not not even one of the two that we we we discussed here. You buy something like VTI or VOO, right something like that. Actually Scott, if you would have bought those two funds and held them for 50 years, you would have outperformed VTI or the S&P 500. Fair enough. Okay, we could buy either these two funds or something like that. But the concept of that this passively managed index fund that tracks market performance that is 100% exposed to equity will over very long stretches of time almost certainly outperform the portfolio we’re constructing here. The simple path to wealth is a great answer to accumulating money. This is the complicated path to actually spending what you’ve accumulated for the rest of your life and actually living your best life and and decumulating to a certain degree. Is that a good way to put it, Frank? I wouldn’t say it’s that complicated. It’s it’s more unfamiliar than complicated. The kinds of things I see people doing otherwise involving many bucketed strategies or ladders or other, you know, flower pots full of various assets, very confusing um things that are difficult to manage. What we’re going to end up with here is something that, you know, it has between six and ten funds, but it’s easier to manage overall. We’ll talk about that when we’re done building it. So Mindy’s ahead of us. So you bought both of the intermediate and the long-term treasury bonds? I did. And you suggested only long-term. I want to see how the intermediate performs versus the long-term and see what happens. We’ll have this I’ll have this portfolio for a long time. So I’ll just see how how it’s going. And those two funds were VGLT and VGIT. They’re both Vanguard funds, um and they’re both very useful. So, the next thing we need to buy is our first alternative, which is gold. It’ll be 16% in this. We’re gonna buy GLDM. G L D M. Yes. Gold Mini Shares Trust. Okay, and that is one of the two most least expensive gold funds you can buy. Okay. And I’m doing these in dollars again. We’ll do this all in dollars. This is 16%. So it’ll be 1600. Oh. Oh, you’re going to need to hit review agreement. Okay, you are placing an order. So I I went to buy this and a window popped up that says you are placing an order for a security that requires you to execute Fidelity’s designated investments agreement. This occurs um often times when you buy an alternative asset or or if you were buying something like uh a Bitcoin fund or a leverage fund or some other thing that is not a typical stock or bond fund. You only need to do this once fortunately. Okay. My options are review the agreement and then of course I’m going to read this 100% as you always should. This is a CYA from Fidelity. Well and I I think that’s great. With the other ones, the stock funds, it didn’t ask me to do this. But this is asking me to agree that I am a sophisticated experienced investor. My risk tolerance is high. I understand that I am responsible for educating myself regarding designated investments. I independently analyze the risks and have the sophistication and experience to do so. I think if something like this pops up and it scares you, you shouldn’t invest in that fund. I wouldn’t necessarily say that. You should learn you should maybe learn more about what the fund is. Ah, you shouldn’t invest at this time. Go learn first. That’s that’s a boiler plate thing and a lot of these funds are actually less risky than a typical stock fund. What Fidelity is concerned about is its own liability. As a lawyer, I can tell you why you would draft an agreement like this. Just check on most aggressive for this. Once you say you agree to this, then it asks you to place an order for a most aggressive. This is also them covering themselves. Well, I am in the most aggressive and I am fine with that. Your acceptance of the agreement and investment objective update have been documented. Preview order. Well, oops, market. Do I have to do all that again? No, it’s good that came up because because uh if you’ve already once you’ve done one transaction, it’ll never ask you that again unless it’s a different fund. Okay, this is a new little note when I hit preview order, it said, this security is subject to that designated investments agreement, which you’ve already read. So I’m gonna place my order for gold. This is how much I like you, Frank, putting gold in my portfolio. As Mindy holds her nose. And and Frank, remind us one more time, why why gold? Gold is traditionally both uncorrelated with both stocks and bonds and so when you put it in a portfolio that is largely stocks and bonds, it tends to smooth out the volatility of the portfolio and raise the safe withdrawal rate. If you’re looking for an analysis of that, a good one is in Big ERN, Early Retirement Now, safe withdrawal rate series number 34. And he did a hundred year analysis to determine what effect gold would have on a safe withdrawal rate and determined that holding somewhere around 15% in gold in a otherwise stock and bond portfolio tends to improve its safe withdrawal rate. What you’ll find is that gold has a return profile that is between stocks and bonds. So it averages about 7 or 8% as opposed to say 10 or 11% from stocks or 4 or 5% for bonds. But it has zero correlation to both of them, which is why it improves the portfolio overall. Okay, Frank, what’s next? All right. Now we’re going to buy the pink flamingo. Ooh, I love the pink flamingo. That represents the uh the podcast room in your house. So this this is going to be a managed futures fund. This is going to be in the the 10%. It’s also an alternative asset. and so the uh ticker symbol is DBMF. D B M F. IMG BDBI managed futures strategy ETF. This is a very old kind of strategy, but, you know, if you go back ten, twenty years, it was really a hedge fund strategy and you really had to both have a lot of money and pay a lot of money for somebody to run a strategy like this, like somewhere between two and four percent. These new funds that have come out in the past five to seven years, this one in particular is based on an algorithm, so it’s like an index fund of this of this strategy. Um and it’s also the cost is less than 1% which makes it a viable alternative asset to use and it’s interesting, Fidelity has come out with one of these in the last month and also iShares, BlackRock came out with one about three months ago because this is becoming a very popular thing for registered investment advisers to add to client portfolios. So all of the big fund providers want to be in on this now. Um and uh DBMF happens to be one of the the the better ones and kind of the OG of of algorithmic versions of this uh kind of strategy. Could you describe for folks who are new to this what this is? I think people understand stocks, are you participating in the earning growth of companies. Bonds are yielding interest, gold is owning a rock, shiny yellow rock. What is managed futures? This is actually following an index put out by a French bank called Societe Generale, nickname SocGen. It’s called the SocGen CTA Index. and what a managed futures uh strategy does in particular is trend following. So it will pick up a particular asset when the asset starts to go up or down and either bet with it going up or against it when it’s going down. and it has a formulaic way of getting in and out of the asset. Now, because this is a strategy fund, it actually covers many assets within the fund. So it will cover currencies, it will cover commodities, commodities are including things like energy, it will cover interest rates when the interest rates are going up or down, and it will also cover stock indexes both domestic and international. So it’s changing its makeup all the time, but it’s always following trends. Where this strategy works the best is where stock and bond funds have the most problems. So in a year like 2022, this fund was up over 20% by itself, whereas stocks and bonds were both down. And I mean I can show you studies showing basically where this performs the best is when you have horrible times like 2008, everything’s crashing, it’s collecting on those, everything going down. or inflationary times like 2022 or the 1970s where you’re seeing interest rates go up in particular, it is essentially betting on the fact that interest rates are going to continue going up. So it’s an inflation fighting fund as well. One of the best ways to fight inflation is to have a a fund like this because you do get out performances in those really bad years when everything else is doing terribly. Now in most years when everything else is doing fine, it will sit around 0%. It’ll be up a couple percent, it’ll be down a couple percent. It’ll just kind of sit there and not do very much. Um but it’s there as as also another kind of insurance, if you will, against these very bad markets. But 10% is enough for this. If you want to just go ahead and buy it, it may give you that other thing again. Okay. It did tell me that I this security is subject to the designated investments agreement which you have previously signed for this account. So I am going to hit buy. So, now, as I may have mentioned before, one way of running a portfolio like this, if you didn’t have another source of cash, you would probably allocate this to your your cash and you’d just leave it in the money market. Um but since we are actually allocating this portfolio and making it um more interesting and more aggressive, this is going to be actually like your your extra deck or extra large pantry or addition to your stocks if you will. and I am going to give you a nice special fund to buy that’s actually relatively new. It’s an international fund and it’s called AVNM. Avantis all international markets equity ETF. Okay. I decided to just give you one fund for this. You could also divide this up into two funds, which you would if you’re buying a lot of it, you would actually pick two funds. You pick a growth one and a value fund. Because it’s only 6%, if you want to do something else, we can do the two funds. We would do 3% in each one. This one actually though does include some kind of just regular large cap international, some uh value stocks, international value stocks, both regular and small, and then also emerging markets value stocks. This is actually a fund of funds, so it’s got five funds within it. But since it was only 6% of it, I thought one fund was enough. This is our final break and we’ll be withdrawing both from this podcast entirely and from Mindy’s account after this. When you are ready to start your business, Northwest Registered Agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one, a business address, website, phone number, operating agreement, free guides and more at no extra cost. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC service in the US with over 1500 corporate guides. These are real people who know your local laws and can help you in your business every step of the way. With Northwest, your business is set up to stand on its own from day one. 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Thanks for sticking with us. Let’s pretend like we were doing we’re dealing with a two and a half or five million dollar portfolio and we want that diversification and by both if that’s all right with you Frank and Mindy. Yes. Okay, then we’ll we’ll get rid of that one. We won’t buy that one. We’re going to buy a fund called IDMO. Invesco S&P International Developed Momentum. What this actually is or what it’s got in it is large cap, mostly tech stocks outside of the US that have the biggest momentum. So your your Spotify is in this. Your your SAP in Germany. like the big tech things that are outside the US are are going to be included in this fund. It’s very large, very growthy and it’s it’s all the way out there just like VUG. I think it’s up over 25% this year because this is a good year both for those kind of a stocks and for international stocks. Okay, so this is my growth. For value, we’re going to go back to the Avantis funds. We’re going to go to AVDV. which is international small cap value. Now I have three hundred dollars and seventy two cents left. Do I put that all in here or do I just do the three hundred? Just do the three hundred because it’ll I think you need to do dollar amounts. Okay, place order. You are fully allocated. Let’s go back to my portfolio. And this is this is also very similar to what I actually hold. What I actually hold is has more things in it. It’s more complicated but it’s in terms of the macro allocations to it, it’s it’s pretty close to what we have. So I I have a couple of observations here. One is the the the portal is not reflecting the portfolio allocation in the way that we you described it, Frank, and and had us do on a piece of paper. I think that’s such an important thing. You know, it it all starts with this piece of paper, right? It’s just you envisioning what that future portfolio looks like, understanding it, knowing what you want and literally drawing it or writing it down because the software and technologies are not going to allow you to spit that back. Yeah, I mean it’s like going shopping. First you make your shopping list and then you go and you execute the trades. But you should always you always want to write that down on a separate piece of paper or something because otherwise you’ll you’ll forget or hit the wrong buttons. But it’s just a a fail safe. Now, of course, if you made a mistake, you just go sell the thing. There’s since there’s no fees, it would be more of an annoyance than anything else, but you really want to write down your plan somewhere else um before you go into your brokerage and and execute it and I know a lot of people like to do this on phones now, particularly who are are younger. You can do this on your phone on with Fidelity, at least their app works pretty well. Um I I can’t speak for other broker’s apps, but I can tell you this one this one works pretty well and that’s another way to do it if you’re comfortable using the phone. Uh I I prefer the computer but you can attribute that to my age. Okay, so the second the second observation I have is that we’re already up $7.73. So we owe you a big mac. Uh yeah, it looks like the AVUV is uh got four bucks of that. Yeah, gold’s down so Mindy you were right all along on there. But but this is this is updating in real time on that which brings up which brings up I think a more serious question which is when do we rebalance this portfolio? How frequently should we revisit this and get back to these ratios that you gave us um at the beginning of of the the show here. For a complete rebalance, once a year is a good um time to do it. The studies have shown that rebalancing a portfolio more than once a year probably doesn’t improve anything. The questions being asked now are whether should we leave it run for more than a year. There’s no clear answer to that question. There are much more complicated ways of doing rebalancing where you are actually monitoring each asset class to see how far it moves and doing it like if it’s 5% more than what it started with, then we rebalance the whole thing. That’s called rebalancing on bands. Um but there’s no reason to make it that complicated uh for something like this. You can simply uh rebalance it next July 15th. That’s a fairly good random day to rebalance on. You don’t really want to rebalance like at the end of a quarter or at the very beginning of a year because there’s all kinds of big institutions making all kinds of transactions changing things and markets can move strangely at those deadlines. So it’s it’s better to pick a rebalancing date one that you can remember, you know maybe it’s your child’s birthday or your spouse’s birthday and that is just some random day and it’s not um at the end of a quarter or end of year. I would expect that a good chunk of people, even who build this portfolio, which is a withdrawal portfolio, you’ve designed it. The recipe for this calls for withdrawals. Many people will still accumulate cash despite that intent. whether that’s additional earned income, whether that’s an inheritance, whether that’s whatever comes in the future. And that was one way to rebalance the portfolio as well is instead of selling off high positions and rebalancing to lower positions, you simply inject additional cash that comes into your life in a way that rebalances the portfolio. Yeah, yeah, that that if if you got some uh windfall, you, I don’t know, you sold a property or got an inheritance or something, yeah, you would reallocate that into your portfolio and you could essentially true it up if you will, you’d buy the things that are behind to make them more is generally the most efficient way of doing that because you do particularly if it’s a taxable account, you really want to minimize the number of transactions you have, both for ease and for tax purposes. And that’s another, I guess guideline for retirement portfolios or portfolios in retirement, turn off all automatic reinvestments because it will create more problems than it solves and the the other thing is the first thing you’re going to take out of this portfolio is the dividends that are going to get paid in cash. So a lot of times you need to take a distribution on this portfolio, you’ll just be taking accumulated cash out of it and and won’t have to sell anything or do anything. Okay, let’s talk about withdrawing. How do you um on there? You’ve already touched on the the first piece with the cash accumulation. That will almost certainly not quite cover our 5% withdrawal target on an annualized basis. So what is your recommendation for the approach to withdrawing cash from the portfolio? I should say if we had an allocation to cash already, we could have just taken out of that and then refilled it at rebalancing time. and often times that’s what people do. That that’s the original bucket strategy if you will. But we are having a portfolio that has no cash in it except for the dividends are going to get paid. So we are going to need to be selling things as we go whenever we want to take a distribution. To make it interesting, I suggest we start doing this monthly starting either, you know, end of August, beginning of September. and so what you will do at that time is look at the allocations and see which of the funds is performing the best. and you’ll take your allocation out of that. Just the one fund? Yeah, it’s easier to just do it out of one fund. You could do it out of more than one, but again, you’re just creating a lot more transactions. and what this does is two things. It first, it reduces the amount of rebalancing you’re going to be doing at the end of the year in the next year. and then you’re also always selling high essentially. the whole idea of rebalancing is selling high and buying low. So what you were doing is using the distribution mechanism to essentially do a tiny sliver of rebalancing, but you’re not buying anything. Okay. how does that change if I think in practice a lot of people who have a portfolio like this will have a big slice of it in tax advantaged retirement accounts, perhaps a combination of 401K, Roth and a slice in the after tax brokerage account. So if I layer in that complexity, how do you think about bucketing the dollars in the context of a situation like that and how does that affect the withdrawal or sale strategy there? What I’m about to say is not unique to this kind of portfolio. You have the same issue with all portfolios. So when you are considering having a portfolio, I assume you have at least some stocks and bonds in it somewhere and you’re taking distributions out of it and you know, part of it is in taxable brokerage, part of it is in IRAs and part of it is in Roths. I won’t go through all the ramifications about you needing to find ways to get money out of your portfolios early. but that’s a whole separate discussion for I I’m I’m over 59 and a half now so I don’t have that issue. But the way you want to organize your portfolio, your big portfolio for tax purposes is that you treat all of your accounts as one big portfolio and then you will take all of your bonds and put them in your traditional retirement accounts because those pay ordinary income and if you put them in a taxable account, you’re just going to be paying more taxes. So you want to put those all in your traditional retirement accounts. You put mostly stocks in your brokerage account and in your Roths and then you put the other things wherever they fit because everybody’s situation is going to be a little bit different depending on how big each one of these pots is. Well, this has been fantastic. I propose that we finish up here by actually distributing some of this account. I know it’s only been an hour and you just recommend doing it after a month. But let’s let’s close the loop on it and actually distribute from this account, uh if that’s okay with you, Mindy. That is okay with me. You may have a wash sale here, Scott, with your day trading. Okay. So, we need to first you need to figure out well how much are you going to distribute. I let’s distribute $5. It’s only been half an hour. 5% is what you say that my portfolio can be distributing and divided by 12 months, that’s about $41.50. You know, if it’s the same day, so we could do $1.50. What’s better back to that. Is it end up being 41 at let’s see. It’s it’s basically 500 divided by 12 which is $41.66. Do you want it to be 41 or 42? Usually you do this I I mean I suppose you could do it 41.66 if you want to. Well, let’s do 42 then. Nope. Let’s do $42. I’m going to go to dinner tonight. Now it’s convenient that you have everything in in one account because we can just look at the percentages there, account and quantity in that column next to the numbers and see, so you can see which one we have all the allocations and they’re almost what they are. but that one that’s at 21.04 looks like to be the best performer and that’s the AVUV. So the easiest thing to do is sell $42 worth of that. This is the part that, for whatever reason, Bigger Pockets Money listeners, me, Mindy, members of the FIRE community at large, retirees in general, said this is the part that everyone has trouble with for some reason mentally is actually mechanically selling a portion of their portfolio and inserting it back into their bank account to spend it. Yeah, well, I mean, I I do it every month so it’s more something just to get used to doing. This is such a tiny percentage of the portfolio, you’re going to find that well, that didn’t that didn’t really matter. I wonder if that’s even like a mental tip people should potentially consider when they start their portfolio is just immediately take the first distribution just to get in the habit of actually selling off a portion of the portfolio. Okay, so you set this up. We got $42. You want to place the order. $42, I’m selling. I’m going to place this order. I Mindy, when we we do our next in-person meeting, we got to do a $80 lunch, $84 lunch. You you spend 42 of this. I’ll I’ll get the other. Okay, we’re done with this. We’re done with this. and now I will have you want to refresh it. Now I don’t have 9999 in the current value or pending activity. I have less because I sold that. And I’m down to 20.61% in AVUV. You can actually transfer that to your bank. I think it’ll let you do that. In some circumstances, you might have to wait a day. And I don’t know whether you want to do that on screen because this will bring up your bank account. Yeah, it does it does bring up my bank account. So I will just you go into transfer, you do to the bank. you transfer it back to the bank the way you got put it in the account. I will do that and I will spend it. And then my next withdrawal is going to be on August 29th and I will withdraw another $42 because Frank said that this portfolio will sustain a 5% withdrawal rate. And that’s 5% every month that I’m taking out. Yeah, and then we can come back and look at it in however many months you’d like to and we’ll we’ll see where we are. That’s basically the process. This, I think this is a good exercise for somebody, if you want to kind of test drive your retirement, um because we have no fee trading now, you can create a little account like this and put a few thousand dollars in it, create a portfolio like you think you’re going to hold and just get the experience of selling something and then taking it out. You ride the bike with training wheels and you get used to how the process works. The unfamiliarity with the process makes it seem more daunting than it is. Awesome. Well, Frank, thank you for walking me through my risk parity portfolio. I’m excited to check in every month in the newsletter to see where my portfolio has gone, talk about what I’m spending my riches on because I am now withdrawing funds. So Scott, I guess uh now I am starting to withdraw from my retirement portfolio. You can safely say you have sold stocks for personal consumption after today. After today, I have sold stocks for personal consumption. Okay, Frank, where can people find you online? Mostly at uh my uh website and podcast, riskparityradio.com. I I do not have a big social media um presence because I’m I’m retired. I don’t really want to have another job so there’s no Instagram, there’s no Twitter or X. I will publish it there but you can find my podcast wherever finer podcasts are sold. The website is there. one of my listeners is helping me revamp it thankfully because it gets a lot of complaints. Um but uh, you know, other than that, you’ll find me in places like the ChooseFI boards on Facebook is often a standard place to find me, but most people just listen to the podcast and then send me emails to Frank at riskparityradio.com because most of the podcast these days is is answering listener emails. The podcast is non-commercial but we do support a charity. It is called the Father McKenna Center and it is it supports hungry and homeless people in Washington, DC. I am on the board of the charity and the current treasurer. But what it does is essentially as you can imagine, it’s a soup kitchen. We serve many, many meals every day. We have a very small staff and a very small budget. It’s a $1.5 million budget. But our space is is provided by the school that is it’s in the basement of the old church for the school, uh which is Gonzaga High School. and so we only have about six people on staff but we have about a thousand volunteers that work at the center every year including a lot of the high school students and a lot of college students who will like send people for a week at a time to help with it. We have some interns in social work who are at the local universities that are also uh working with us. But it’s a very efficient charity. It’s a very nice charity. I invite you to follow them on Instagram, which is a nice thing just to see every day of people helping people and that is the Father McKenna Center is the Instagram label. It’s easy to find and they also have a website where you can see all the wonderful things that that we are doing down there. This was an amazing, amazing deep dive into this. Thank you so much for sharing your wisdom, doing a direct how-to on this. I learned a tremendous amount today and I think that the the mechanics, not not just the theory of what portfolio to build, but the mechanics of actually doing it will stump a lot of people and that’s been solved for I think today for hopefully a good number of folks who are looking for an answer to what is the end state or retirement portfolio. Really appreciate it. This was this was really illuminating for me and very personally helpful. I think it’s going to help a lot of people. I know it seems confusing or complicated the first time you do these things, but once you’ve done done them a few times, it it does become like riding a bicycle or any kind of a other activity that requires a little practice. Um we also have uh portfolios like this at our website and we talk about them um every week on the podcast. It is confusing and until you actually walk through it and you were really helpful explaining why I’m choosing this fund, I’m choosing that fund. Uh not just do this, now do that, now do that. It was it was really helpful. I appreciate this and uh thank you for making me more wealthy. Honestly, those funds are not the only funds you could use and if you already have funds in those categories, you should probably just stick with them if you like them because the fundamental idea of portfolio construction is it’s not the funds that matter, it’s really the asset classes and how you’re balancing them. So don’t get too uh hung up on particular funds. I get a lot of questions about particular funds on the podcast, so if you want to hear about those, you can listen to that too. That’s awesome. Frank, I really, really appreciate your time today. I am looking forward to uh checking in on this experiment and seeing exactly how this portfolio is going to shake out. Okay, great. This is Frank Vazquez. You can check him out on risk parity radio, the podcast and riskparityradio.com. All right Frank, we will talk to you soon. Thank you. Thank you. All right Scott, that was Frank Vazquez walking me through creating his version of a risk parity portfolio. Uh I want to just share again really quick. This is not an advertisement for Fidelity, this is not an advertisement for this specific portfolio. If you have different growth funds or different bond funds that you want to use, feel free to, you know, mix and match as you do. I went with Frank’s advice just because I know Frank, I trust Frank and I am doing this to show other people A, how to set up your Fidelity account and also how to make the allocations. I’m going to be really excited to check in on this portfolio every month and see what’s going on and see how much I’m up or down. But I am going to be withdrawing 5% every month. Yeah, and I I will chime in. I intend to create a portfolio similar to this with uh a portion of my wealth. But neither me nor Mindy are making this portfolio specifically or even some similar version of it, the core of our personal portfolios. This is for illustrative, entertainment and educational purposes only. This entire episode, hopefully it was helpful though. Yes. And I just said I’m withdrawing 5% per month. I meant I am withdrawing 5% per year, but I am dividing that over 12 months and I am going to withdraw every month for an equivalent of 5% per year and we’ll see what happens. I’m super excited for this, Scott. Mindy, that guy’s a master. What a privilege to have him on the show. Absolutely. Twice now. We’re he’ll be back, I’m sure. as often as we as as he will accept her invitation. Wow. Yes. All right. So Scott, I think we have spent enough time on this portfolio. I am excited to go find a way to spend my forty two dollars. Should we get out of here? All right. That wraps up this episode of the Bigger Pockets Money podcast. 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