The Portfolio Strategy That Could Double Your Safe Withdrawal Rate

Summary

Podcast Summary: BiggerPockets Money Podcast – "The Portfolio Strategy That Could Double Your Safe Withdrawal Rate"

Release Date: July 18, 2025

In this enlightening episode of the BiggerPockets Money Podcast, hosts Mindy Jensen and Scott Trench welcome back Frank Vasquez to delve deeper into the concept of risk parity portfolios. Building upon his previous appearance, Frank meticulously guides listeners through the construction of a "golden ratio" risk parity portfolio, aiming to enhance the safe withdrawal rate for retirees and those approaching financial independence.

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1. Introduction to Risk Parity Portfolios

[00:00 – 02:35]

Mindy Jensen opens the episode with enthusiasm, recalling Frank Vasquez's previous appearance where he introduced the concept of a risk parity portfolio. She highlights the importance of such portfolios for individuals aiming to sustain withdrawals at a 5% rate from a $2.5 million portfolio, equating to an annual, inflation-adjusted spending of $125,000.

Scott Trench adds context, emphasizing that this strategy is tailored for the decumulation phase rather than the accumulation phase of investing. He notes, “Frank suggests doing so at about 80% of your FIRE number,” referencing the broader financial independence, retire early (FIRE) community.

Notable Quote:

Frank Vasquez [01:41]: “A risk parity portfolio is extremely well diversified and really designed for performing well in really bad markets... more for decumulation or it's more conservative than a standard accumulation portfolio.”

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2. The Golden Ratio Portfolio Framework

[04:29 – 07:17]

Frank introduces the "golden ratio" portfolio, detailing its five asset allocations based on the traditional golden ratio of approximately 1.61 to 1. The breakdown is as follows:

• 42% Stocks: Split between growth and value stocks to maximize diversification and safe withdrawal rates.
• 26% Bonds: Primarily U.S. Treasury bonds, serving as recession insurance.
• 16% Gold: Acts as an uncorrelated asset to smooth portfolio volatility.
• 10% Managed Futures: Provides additional diversification and protection against market downturns.
• 6% International Stocks: Enhances global exposure and diversification.

Frank emphasizes the importance of simplicity and diversification, noting, “This is about applying principles in the broad sense... making it as simple as possible, but no simpler as Einstein says.”

Notable Quote:

Frank Vasquez [06:06]: “We are going to apply three principles: Ray Dalio's diversification principle, the macro allocation principle, and the simplicity principle.”

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3. Step-by-Step Portfolio Construction

[07:17 – 32:52]

Mindy and Frank embark on a practical demonstration of setting up the golden ratio portfolio using Fidelity's brokerage platform. While the episode includes an extensive segment of an advertisement from [12:16] to [32:52], the hosts seamlessly integrate the demonstration before and after this break, ensuring continuity.

Key Steps Discussed:

• Allocating to Growth Stocks (42% Total):

  • Vanguard Growth Fund (VUG): Represents large-cap growth.
  • Vanguard Small-Cap Value Fund (AVUV): Represents small-cap value stocks, offering diversification from large-cap growth.

• Allocating to Bonds (26% Total):

  • Vanguard Long-Term Treasury Bond Fund (VGLT): Provides exposure to long-term U.S. Treasury bonds.
  • Vanguard Intermediate-Term Treasury Bond Fund (VGIN): An added layer to diversify within the bond allocation.

• Allocating to Gold (16% Total):

  • Gold Mini Shares Trust (GLDM): A low-cost gold ETF to introduce an uncorrelated asset.

• Allocating to Managed Futures (10% Total):

  • Managed Futures Strategy ETF (DBMF): Utilizes trend-following algorithms to hedge against market downturns.

• Allocating to International Stocks (6% Total):

  • Avantis International Markets Equity ETF (AVNM): Focuses on large-cap international growth.
  • Avantis International Small-Cap Value ETF (AVDV): Complements AVNM by adding small-cap value exposure.

Notable Quotes:

Frank Vasquez [21:06]: “Gold is traditionally both uncorrelated with both stocks and bonds. It tends to smooth out the volatility of the portfolio and raise the safe withdrawal rate.”

Scott Trench [19:08]: “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.”

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4. Rebalancing the Portfolio

[33:00 – 39:45]

With the portfolio constructed, the discussion shifts to the importance and mechanics of rebalancing. Frank advises that rebalancing should occur once a year, selecting a consistent date that avoids market anomalies typically seen at quarter or year-ends. He explains, “Rebalancing on bands involves adjusting when allocations deviate by a certain percentage, but for simplicity, an annual rebalance is recommended.”

Scott introduces the concept of utilizing incoming cash or windfalls as a natural rebalance mechanism, thereby minimizing the need for frequent transactions and reducing tax implications.

Notable Quote:

Frank Vasquez [36:33]: “Here’s where you pick a rebalancing date, one that you can remember... It’s better to pick a rebalancing date that is a random day and not linked to market events.”

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5. Withdrawal Strategy and Implementation

[39:45 – 52:38]

The hosts explore strategies for executing the safe withdrawal rate without disrupting the portfolio's balance. Frank recommends selling from the best-performing asset to capitalize on gains, thereby adhering to the "sell high, buy low" philosophy integral to rebalancing.

In a practical exercise, Mindy initiates a $42 withdrawal from her portfolio to simulate the monthly withdrawal process. This hands-on demonstration demystifies the process, reinforcing the notion that executing withdrawals is a routine and manageable task.

Notable Quote:

Frank Vasquez [44:12]: “The easiest thing to do is sell $42 worth of AVUV. That way, you’re selling high and maintaining your portfolio balance.”

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6. Final Thoughts and Takeaways

[52:22 – End]

As the episode concludes, Frank underscores the flexibility of the portfolio, emphasizing that while he recommended specific funds, investors should prioritize asset classes over individual funds. He encourages listeners to practice building and managing their portfolios to gain confidence and proficiency.

Mindy summarizes the episode's key insights, clarifying the withdrawal rate was 5% annually, divided into monthly distributions. Scott reiterates the educational value of the episode, highlighting its practical application for retirees and those in the FIRE community.

Notable Quote:

Frank Vasquez [50:25]: “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.”

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Conclusion

This episode serves as a comprehensive guide for individuals seeking to enhance their retirement strategies through risk parity portfolios. By blending theoretical foundations with practical, step-by-step instructions, Mindy, Scott, and Frank provide listeners with the tools and confidence needed to construct and manage a diversified, resilient investment portfolio aimed at maximizing safe withdrawal rates.

For those interested in implementing a similar strategy, Frank Vasquez's expertise and clear explanations make this complex topic accessible and actionable. Whether you're nearing retirement or planning ahead, this episode offers valuable insights into creating a sustainable financial future.

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Additional Resources:

• Frank Vasquez's Podcast: riskparityradio.com
• Portfolio Construction Tools: Fidelity Brokerage Account Setup
• Further Reading: "Big Earn Early Retirement Now, Safe Withdrawal Rate Series"

Disclaimer: The strategies discussed in this episode are for educational purposes only and should not be construed as financial advice. Always consult with a financial advisor before making investment decisions.

Transcript

[Mindy Jensen]

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 parody portfolio is one in which many people feel comfortable withdrawing at a 5% rate for a $2.5 million portfolio. For example, many following this portfolio feel comfortable spending $125,000 per year in 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.

[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 BiggerPockets Money. I am so excited to take a back seat 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 parody radio podcast and a former lawyer turned retirement junkie. Frank, welcome back to BiggerPockets Money.

[Frank Vasquez]

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.

[Scott Trench]

Perfect.

[Mindy Jensen]

Frank, can you give us a quick rundown on what a risk parity portfolio is?

[Frank Vasquez]

Okay. A risk parity portfolio, as this 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.

[Mindy Jensen]

So.

[Frank Vasquez]

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.

[Scott Trench]

Awesome. Just to chime in here, 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. 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. Frank suggests doing so at about 80% of of your fire number. So if Your fire number's 2.5 million, a good time to start transitioning to this portfolio might be when you crest the $2 million net worth mark. Any other key points like that, Frank, before we get into this, No, I don't think so.

[Frank Vasquez]

I think that, yes, we are going to spend much more time on the how and not the why. But 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 basically be telling you what to put in it at this stage to make it easier for just somebody to follow 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.

[Mindy Jensen]

Okay, well, let's get started. What am I doing first, Frank?

[Frank Vasquez]

Today, Minnie, 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 1. Actual allocations end up being 42%, 26%, 16%, 10% and 6%. And that all adds to 100. So we will put stocks in as the 42%. We'll put bonds in as a 26% because those are the two most important assets. And that actually looks like a 6040 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, 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 an idea of what one of these kind of portfolios looks like. Even though a lot of these 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.

[Scott Trench]

Perfect. Can you. Can you explain one more layer of depth behind this golden ratio? What is. What is driving that?

[Frank Vasquez]

The way I arrived at this is by studying other kinds of 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 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 fund second. And then the third one is the simplicity principle, to make this as simple as possible, but no simpler as. As Einstein says.

[Mindy Jensen]

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 can I share my screen with you so we can walk through this together?

[Frank Vasquez]

Yes, sure.

[Mindy Jensen]

Okay. Frank, this is my screen. This is my $10,000 portfolio. I set this up so that I had the money in the account so I could start allocating it. I set this last week. And you will notice that I have already made $0.14 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, the stocks, the bonds, the gold, the managed futures, and more. Stocks. So how do I get that in there?

[Frank Vasquez]

It's nice. Fidelity does put you into a money market fund by default, and it's probably paying somewhere between 4 and 5% right now, which is nice because Schwab doesn't necessarily do that. Vanguard, I believe, does it. 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 rebalance them against each other and against the rest of the portfolio. To make this simple, 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. Used to only be able to buy shares, but now we can buy dollars just like a mutual fund. And so particularly if you're constructing a small portfolio like this, it' easier to use dollars. If you were talking about, you know, a million dollars and not $10,000, you would probably want to buy in shares because it's easier 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 worth. Now the next thing is to market or limit. If you are using a lot, 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 $445.86 and $445.93. 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 doing this for demonstration. 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 Minnie?

[Mindy Jensen]

Nope. That was pretty straightforward.

[Frank Vasquez]

Okay. All right. Click on preview order. And this is where you look at the screens and make sure that you essentially fill out the boxes the way you wanted to. So we're buying $2,100 at Market Vug. Okay, you can go ahead and place the order and the order has been received.

[Mindy Jensen]

Would you like to see how I build a risk parity portfolio? Frank will walk me through it right after this.

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[Mindy Jensen]

Soon we are going to drop our daughter off at college for the first time and we will all be there for a few days before her big move in. So we decided to stay at an Airbnb over a hotel. We love that everyone can have their own bedroom. If you've ever thought about hosting your own space on Airbnb while you're away, now with the co host network and it's easier than ever, you can hire a local co host who can help create your listing, manage reservations, message guests and more. Find a co [e-mail] host with the Venmo Debit card. You can Venmo everything.

[Frank Vasquez]

Your favorite band's merch. You can Venmo this or their next.

[Mindy Jensen]

Show, you can Venmo that. Visit Venmo Me Debit to learn more.

[Scott Trench]

The Venmo MasterCard is issued by the.

[Frank Vasquez]

Bancorp bank and a pursuant to license.

[Scott Trench]

By Mastercard International Incorporated, the card may be used everywhere. MasterCard is accepted.

[Frank Vasquez]

Venmo purchase restrictions apply.

[Scott Trench]

All right, welcome back to the show.

[Frank Vasquez]

Next one, I'm going to give you a fund called avuv. And this is a small cap value.

[Mindy Jensen]

Fund and I want avuv, not X.

[Frank Vasquez]

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. If you go to Paul Merriman 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 characteristics. 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 2020 1%. And we'll do another market order because it's small.

[Mindy Jensen]

And I'm going to place my order.

[Frank Vasquez]

Yep.

[Mindy Jensen]

Woohoo.

[Frank Vasquez]

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 the use of bonds that are the most diversified from stock funds. And so that is U.S. 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. And in this case, what we want are U.S. treasury bonds that are intermediate or long term. So we're going to buy those.

[Mindy Jensen]

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 could track the difference.

[Frank Vasquez]

Okay, we can do that. You're making it more complicated, Mindy.

[Mindy Jensen]

That's okay.

[Frank Vasquez]

I get criticized a lot because it's not simple enough. And now you're.

[Mindy Jensen]

Well, you didn't suggest this. I did. So if you want to email Mindy, you can email. Tell somebody else @I don't care.com.

[Frank Vasquez]

Okay.

[Scott Trench]

I think that's a great observation though. Right. 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 even one of the two that we discussed here. You buy something like VTI or voo. Right. One of those things.

[Frank Vasquez]

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.

[Scott Trench]

Fair enough. Okay. We could buy either these two funds or something like that. But the concept of 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 decumulating to a certain degree. Is that a good way to put it, Frank?

[Frank Vasquez]

I wouldn't say it's that complicated. It's more unfamiliar than complicated. The kinds of things I see people doing otherwise involving many bucketed strategies or ladders or other flower pots full of various assets. Very confusing 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 10 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?

[Mindy Jensen]

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. Just see how. How it's going.

[Scott Trench]

Those two funds were VGLT and vgit.

[Frank Vasquez]

They're both Vanguard funds, 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.

[Mindy Jensen]

GLDM?

[Frank Vasquez]

Yes.

[Mindy Jensen]

Gold mini Shares Trust.

[Frank Vasquez]

Okay. And that is one of the two most, least expensive gold funds you can buy.

[Mindy Jensen]

Okay. And I'm doing these in dollars again.

[Frank Vasquez]

We'll do this all in dollars. This is 16%, so it'll be 1600.

[Mindy Jensen]

Oh.

[Frank Vasquez]

Oh. Hit. You're going to need to hit. Review agreement.

[Mindy Jensen]

Okay. You are placing an order. So 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.

[Frank Vasquez]

This occurs oftentimes when you buy an alternative asset or. Or if you were buying something like a Bitcoin fund or a leveraged fund or some other thing that is not a typical stock or bond fund. You only need to do this once, fortunately.

[Mindy Jensen]

Okay. My options are review the agreement. And then of course, I'm going to read this. 100%. As you always should.

[Frank Vasquez]

This is a CYA from Fidelity.

[Mindy Jensen]

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 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.

[Frank Vasquez]

I wouldn't necessarily say that. You should learn. You should maybe learn more about what the fund is.

[Mindy Jensen]

Ah, you shouldn't invest at this time. Go learn first.

[Frank Vasquez]

That's. That's a boilerplate 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.

[Mindy Jensen]

Once you say you agree to this, then it asks you to place an order for a Most Aggressive.

[Frank Vasquez]

This is also them covering themselves.

[Mindy Jensen]

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.

[Frank Vasquez]

No, it's good that came up because if you've already. Once you've done one transaction, it will never ask you that again unless it's a different phone.

[Mindy Jensen]

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 going to place my order for gold. This is how much I like you, Frank. Putting gold in my portfolio as Mindy holds her nose.

[Scott Trench]

And Frank, remind us one more time why gold.

[Frank Vasquez]

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 Earn Early Retirement Now, Safe Withdrawal rate series number 34. And he did 100 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 percentage 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.

[Mindy Jensen]

Okay, Frank, what's next?

[Frank Vasquez]

All right, now we're going to buy the Pink Flamingo.

[Mindy Jensen]

Ooh, I love the Pink Flamingo.

[Frank Vasquez]

That represents the, the podcast room in your house. So this, this is going managed futures fund. This is going to be in the, the 10%. It's also an alternative asset. And so the ticker symbol is dbmf.

[Mindy Jensen]

Dbmf, imgb, dbi, Managed Futures Strategy, etf.

[Frank Vasquez]

This is a very old kind of strategy. But, you know, if you go back 10, 20 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 2 and 4%, 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. 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 advisors to add to client portfolios. So all of the big fund providers want to be in on this now. And DBMF happens to be one of the, the better ones and kind of the OG of, of algorithmic versions of this kind of strategy.

[Scott Trench]

Could you describe for folks who are new to this, what this is? I think people understand stocks are, you're participating in the earnings growth of companies. Bonds are yielding interest. Gold is owning a rock, shiny yellow rock. What is managed futures?

[Frank Vasquez]

This is actually following an index put out by a French bank called Societe General, nicknamed Sakagen. It's called the Sakagen CTA Index. And what a managed futures 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 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, 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.

[Mindy Jensen]

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'm going to hit buy.

[Frank Vasquez]

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 would just leave it in the money market. But since we are actually allocating this portfolio and making it 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'm going to give you a nice special fund to buy that's actually relatively new. It's an international fund.

[Mindy Jensen]

It's called AVNM Avantis, All International markets equity etf. Okay.

[Frank Vasquez]

I decided to just give you one fund for this. You could also divide this up into two funds, which you would, if you were 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 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.

[Scott Trench]

This is our final break and we'll be withdrawing both from this podcast entirely and from Mindy's account after this.

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[Mindy Jensen]

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[Scott Trench]

Let's pretend like we're doing we're dealing with a two and a half or $5 million portfolio and we want that diversification and buy both. If that's all right with you, Frank and Mindy.

[Mindy Jensen]

Yes.

[Frank Vasquez]

Okay, then we'll get rid of that one. We won't buy that one. We're going to buy a fund called.

[Mindy Jensen]

IDMO, Invesco S& P International Developed momentum.

[Frank Vasquez]

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 Spotify is in this. Your SAP in Germany. Like the big tech things that are outside the US are going to be included in this fund. It's very large. It's the international version of the Mag 7, if you will, is the closest analogy of that you would think about this. So 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 stocks and for international stocks.

[Mindy Jensen]

Okay, so this is my growth.

[Frank Vasquez]

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.

[Mindy Jensen]

Now I have 372 cents left. Do I put that all in here or do I just do the 300?

[Frank Vasquez]

Just do the 300 because it'll. I think you need to do dollar amounts.

[Mindy Jensen]

Okay, place order.

[Frank Vasquez]

You are fully allocated.

[Mindy Jensen]

Let's go back to my portfolio.

[Frank Vasquez]

And this is also very similar to what I actually hold. What I actually hold has more things in it and it's more complicated, but in terms of the macro allocations to it, it's pretty close to what we have.

[Scott Trench]

So I have a couple of observations here. One is the portal is not reflecting the portfolio allocation in the way that you described it, Frank, and had us do it on a piece of paper. And I think that's such an thing. But you know, it all starts with this piece of paper, right? 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.

[Frank Vasquez]

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 button. But it's just a fail safe. Now of course, if you made a mistake take, you just go sell the thing there. 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 before you go into your brokerage and execute it. And I know a lot of people like to do this on phones now, particularly who are younger. You can do this on your phone and with Fidelity, their app works pretty well. I can't speak for other brokers 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. I prefer the computer, but you can attribute that to my age.

[Scott Trench]

Okay, so the second observation I have is that we're already up $7.73, so we owe you a Big Mac.

[Frank Vasquez]

Yeah. Looks like the AV UV is got four bucks of that.

[Scott Trench]

Yeah, Gold's down. So Mindy, you were right all along on there, but this is updating in real time on that. Which brings up, I think, a more serious question, which is is when do we rebalance this portfolio? How frequently should we revisit this and get back to these ratios that you gave us at the beginning of the show?

[Frank Vasquez]

Here, for a complete rebalance, once a year is a good 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. But there's no reason to make it that complicated for something like this. You can simply 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, 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 at the end of a quarter or end of year.

[Scott Trench]

I would suspect that a good chunk of people, even who build this portfolio, which is a withdrawal portfolio, you have 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.

[Frank Vasquez]

Yeah, if you got some windfall, I don't know, you sold a property or got an inheritance or something, you would reallocate that into your portfolio and you could essentially true it up, if you will. You 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 other thing is the first Thing you're going to take out of this portfolio is the dividends that are going to be paid in cash. So a lot of times you need to take a distribution out of this portfolio. You'll just be taking accumulated cash out of it and won't have to sell anything or do anything.

[Scott Trench]

Okay, let's talk about withdrawing on there. We 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. What is your recommendation for the approach to withdrawing cash from the portfolio?

[Frank Vasquez]

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 oftentimes that's what people do. 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 that 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.

[Mindy Jensen]

Just the one fund?

[Frank Vasquez]

Yeah, it's easier just to 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 or 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.

[Scott Trench]

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?

[Frank Vasquez]

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'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.

[Scott Trench]

Well, this has been fantastic. I propose that we finish up here by actually distributing from this account. I know it's only been an hour, and you recommend doing it after, but let's. Let's close the loop on it and actually distribute from this account. If that's okay with you, Mindy.

[Mindy Jensen]

That is okay with me.

[Frank Vasquez]

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 you're going to distribute.

[Scott Trench]

Let's distribute $5.

[Frank Vasquez]

Actually, let's. No, let's do it by a percentage.

[Mindy Jensen]

5% is what you say that my portfolio can be distributing. And divided by 12 months, that's about $41.50.

[Scott Trench]

Yeah, but it's the same day, so we could do a dollar fifty. That's a better map to that.

[Frank Vasquez]

Does it end up being 41? Let's see. It's basically 500 divided by 12, which is $41.66. Do you want it to be 41 or 42 is. Usually you do this. I mean, I suppose you could do it 4166 if you want to.

[Mindy Jensen]

Well, let's do 42 then. Nope, let's do $42. I'm gonna go to dinner tonight.

[Frank Vasquez]

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 ones we have all the allocations and they're almost what they are. But that one that says 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.

[Scott Trench]

This is the part that the. For whatever reason, bigger pockets, money listeners, me, Mindy, members of the fire community at large, retirees in general, sets. 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.

[Frank Vasquez]

Yeah, well, I mean, 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. Well, that didn't. That didn't really matter.

[Scott Trench]

I wonder if that's even like a mental tip people should potentially consider when they set up the portfolio. Just immediately take the first distribution. Just to get in the hat habit of actually selling off a portion of portfolio.

[Frank Vasquez]

Okay, so you set this up. We got $42. You want to place the order?

[Mindy Jensen]

Dollars. I'm selling. I'm going to place this order.

[Scott Trench]

All right, Mindy, when we do our next in person meeting, we got to do a $80 lunch, $84 lunch. You spend 42 of this. I'll get together.

[Mindy Jensen]

Okay, we are done with this. We are done with this. And now I will have.

[Frank Vasquez]

You want to refresh it.

[Mindy Jensen]

Now, I don't have 9,999 in the current value I have earned pending activity. I have less because I sold that and I'm down to 20.61% in a VUV.

[Frank Vasquez]

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.

[Mindy Jensen]

Yeah, it does. It does bring up my bank account. So I will just. You go into transfer you do to the bank.

[Frank Vasquez]

You transfer it back to the bank. The way you put it in the account.

[Mindy Jensen]

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.

[Frank Vasquez]

Yeah. And then we can come back and look at it in however many months you'd like to and 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 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 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.

[Mindy Jensen]

Awesome. Well, Frank, thank you for walking me through my risk parody 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 now I am starting to withdraw from my retirement portfolio.

[Scott Trench]

You can safely say you have sold stocks for personal consumption. After today.

[Mindy Jensen]

After today I've sold stocks for personal consumption consumption. Okay, Frank, where can people find you?

[Frank Vasquez]

Online mostly at my website and podcast riskparryradio.com I do not have a big social media 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 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. But you know, other than that you'll find me in places like the two Zephy 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 frankriskparityradio.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. It supports hungry and homeless people in Washington D.C. 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 1.5 million dollar budget but our space is, is, is provided by the school that is. It's in the basement of the old church for the school 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 working with us. But it's, 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, people helping people. And that is the Father McKenna Center. Is the Instagram label easy to find and they also have a website where you can see all the wonderful things that we are doing down there.

[Scott Trench]

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 mechanics, 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 really illuminating for me and very personally helpful. I think it's going to help a lot of people.

[Frank Vasquez]

I know it seems confusing or complicated the first time you do these things, but once you've done them a few times, it does become like riding a bicycle or any kind of other activity that requires a little practice. We also have portfolios like this at our website. We talk about them every week on the podcast.

[Mindy Jensen]

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 fundamental. Not just do this, now do that, now do that. It's. It was really helpful. I appreciate this and thank you for making me more wealthy.

[Frank Vasquez]

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 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.

[Mindy Jensen]

That's awesome, Frank. I really, really appreciate your time today. I am looking forward to checking in on this experiment and seeing exactly how this portfolio is going to shake out.

[Frank Vasquez]

Okay, great.

[Mindy Jensen]

This is Frank Vasquez. You can check him out on riskparity radio, the podcast, and riskparityradio.com all right, Frank, we will talk to you soon.

[Frank Vasquez]

Thank you. Thank you.

[Mindy Jensen]

All right, Scott, that was Frank Vasquez walking me through creating his version of a risk parity portfolio. 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 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.

[Scott Trench]

Yeah. And I will chime in. I intend to create a portfolio similar to this with 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.

[Mindy Jensen]

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 and equivalent of 5% per year. And we'll see what happens. I'm super excited for this, Scott.

[Scott Trench]

Mindy, that guy's a master. What a privilege to have him on the show.

[Mindy Jensen]

Absolutely.

[Scott Trench]

Twice now. He'll be back, I'm sure, as often as we as as he will accept their invitation. Wow.

[Mindy Jensen]

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 $42. Should we get out of here? All right, that wraps up this episode of the Bigger Pockets money podcast. He is Scott Trench. I am Mindy Jensen Segue. Peace out, Scout.