Risk Parity Radio

Episode 398: Tax Location Decisions, Dealing With Limited Fund Choices And Brokerage Requirements

• Frank Vasquez • Season 5 • Episode 398

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In this episode we answer emails from George, Kyle and Andy.  We discuss whether to prioritize DBMF or VGLT (for tax location purposes) in a traditional retirement account, weighing limited choices for small cap funds in a 457, Vanguard's new short-term bond funds and dealing with brokerages' cya requirements for investing in particular funds.

Links:

Father McKenna Center Donation Page:  Donate - Father McKenna Center

Vanguard Fund Announcement:  Vanguard Expands Fixed Income Lineup with New Actively Managed Bond ETF | Vanguard

Amusing Unedited AI-Bot Summary:

Unlock the secrets to optimizing your investment portfolio and navigate the complex world of power dynamics in our latest podcast episode. Have you ever wondered whether choosing a higher dividend yield or balancing fund fees could impact your financial future? Join us as we guide George through the decision-making process between VGLT and DBMF, ultimately landing on DBMF for its tax-efficient benefits. Meanwhile, Kyle finds himself at a crossroads between a high-fee small-cap value fund and a more budget-friendly Vanguard option. Our advice? Balance is key to managing costs and maintaining a diverse portfolio. And don’t miss our take on Vanguard's new actively managed short-term bond fund—could it be the missing piece in your investment strategy?

Transitioning from the tangible to the philosophical, we embark on a thought-provoking exploration of submission and power through our metaphorical dialogue with "the daughters." Here, we challenge the conventional wisdom of power structures and the humility required to navigate them. Using vivid metaphors and evocative imagery, we invite listeners to question their own roles within these paradigms and consider how such dynamics manifest in financial and legal realms. This episode promises a blend of practical investment insights with deeper musings on the human condition, leaving you with plenty to ponder as we draw parallels between finance and life’s broader themes.

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Voices:

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer.

Mary and Voices:

A different drummer and now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor, Broadcasting to you now from the comfort of his easy chair. Here is your host, Frank Vasquez.

Mostly Uncle Frank:

Thank you, Mary, and welcome to Risk Parity Radio. If you have just stumbled in here, you will find that this podcast is kind of like a dive bar of personal finance and do-it-yourself investing.

Voices:

Expect the unexpected.

Mostly Uncle Frank:

It's a relatively small place. It's just me and Mary in here and we only have a few mismatched bar stools and some easy chairs we have no sponsors, we have no guests and we have no expansion plans. I don't think I'd like another job.

Voices:

What we do have is a little free library of updated and unconflicted information for do-it-yourself investors.

Mostly Uncle Frank:

Now who's up for a trip to the library tomorrow? So please enjoy our mostly cold beer served in cans and our coffee served in old chipped and cracked mugs, along with what our little free library has to offer.

Voices:

Welcome Welcome.

Mostly Uncle Frank:

But now onward, episode 398. Today, on Risk Parity Radio, we're just going to do what we do best here, which is attend to your emails, and so, without further ado, here I go once again with the email. And first off. First off, we have an email from George.

Voices:

You can't go. Who's going to do the feats of strength? How about George Good thinking Cougar?

Mary and Voices:

And George writes Hi Frank, short and sweet, If I have limited room in my tax-deferred account, should I prioritize locating VGLT or DBMF in the tax-deferred account to maximize tax efficiency? Longtime supporter of the Father McKenna Center via Patreon George.

Mostly Uncle Frank:

Until you pin me, George, festivus is not over well, first off, thank you for being a supporter on patreon of the father mckenna center. As most of you know, we do not have any sponsors here, but we do have a charity we support. It's called the father mckenna center and it supports hungry and homeless people in washington dc full. I am on the board of the charity and am the current treasurer. But if you give to the charity you get to go to the front of the email line and, believe it or not, all three of our emailers today are at the front of the line because they're all givers to the Father McKenna Center.

Voices:

Yeah, baby, yeah.

Mostly Uncle Frank:

You can do that in two ways. You can do it like George does on Patreon, through our support page at wwwriskparityradiocom, or you can go directly to the Father McKenna website and go to the donation page and give there. Either way, please remember to mention that in your email so I can duly move you to the front of the line with the other donors. Duly move you to the front of the line with the other donors. But now, getting to your short and sweet email, I do have a short and sweet answer, and the answer is you should probably prioritize DBMF over VGLT in the tax-deferred account.

Mostly Uncle Frank:

The traditional IRA is typically what we're talking about, or a 401k. The traditional IRA is typically what we're talking about, or a 401k, and the reason for that is because DBMF currently has a dividend yield of about 5% or a little more than 5%. It usually comes sometime near the end of the year whereas VGLT has a yield of less than 5%. It's closer to about 4.5%, and so, as long as that's true and they're both paying ordinary income, you should go with the one that's paying more ordinary income, which is DBMF, and that will maximize your tax efficiency.

Voices:

Yes.

Mostly Uncle Frank:

Thank you for your clear and easy question and your support and your email.

Mary and Voices:

Please someone stop this.

Voices:

Let's rumble. I think you can take him. Georgie, come on, be sensible, stop crying and fight your father. Ow Ow, I got it. This is the best Festivus ever.

Mostly Uncle Frank:

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

Voices:

Kyle.

Mary and Voices:

And Kyle writes Dear Frank and Mary, a deep philosophical question to ponder, a question of fees versus factor. I have a 457 plan. It's actually fairly reasonable when it comes to fees, which is great, but also has some limitations as far as fund availability. The conundrum Choose a small cap value fund which is actually pretty decent but has a 1% annual fee, or choose a Vanguard small cap blend fund which has the low fee you would expect but the less optimal factor representation. I should mention that I am accumulating, so this is half of a portfolio whose other 50% is a VG large blend similar to an S&P index fund. Also, care to comment on Vanguard's new actively managed short-term bond fund, vsdb. What could possibly be the intended benefit of such a creation? Thanks, kyle.

Voices:

Kyle, I love you. Babe. Don't let it go. Kyle, I want to hold you every morning and love you every night. Kyle, I promise you nothing but love and happiness.

Mostly Uncle Frank:

Well, now you do have a little conundrum there. A small conundrum, I think. My first choice would be none of the above, which means do the small cap value in another account, but you didn't make that option available. So, looking at the options that you have available, I might just split the difference here Do half of it in the small cap value with the 1% fee and half of it in the small cap blend, because neither one of those is an optimal solution and you really do want to stay away from small cap growth, if you can.

Mostly Uncle Frank:

One thing you didn't mention is what index you are using, or what index your fund is using as its basis. It would be preferable if the fund is relying on the S&P 600 index. Second choice would be the CRSP index and last choice would be the Russell small cap indexes, and that's because the first two have a bit of a profitability filter, so they get rid of the very worst companies, whereas the Russell includes them. So I might take a look at that and see if they are, for instance, comparable to other Vanguard funds or other iShares index funds, and that could be a deciding factor. You also didn't mention whether you have any other value options, because, for instance, if you had, like, a mid-cap value option, that might be better, I think, than the small cap blend option, because what you're really trying to do is balance out growth and value in this portfolio and I think growth versus value is a much more important consideration than small versus large, because there's just more diversification in performance, in growth versus value. So sorry, I couldn't be more definitive on that answer, because there's just more diversification in performance and growth versus value. So sorry, I couldn't be more definitive on that answer, but hopefully that gives you some things to look at and think about when you're making your choice there, or choices.

Mostly Uncle Frank:

Now, your second question I find very interesting, which is about what is Vanguard's new actively banded short-term bond fund, vsdb? I will link to their little rollout press release thing in the show notes if you want to take a look at it. It is basically a managed short-term bond fund and this is a representation of the evolution of personal finance. Is what this is? Because since we went to no-fee trading of ETFs, short-term bond funds in ETF form have become very popular and Vanguard has sought to get on the bandwagon to compete with things like JPST, which is a JP Morgan fund, and BIL, which is T-bills, and so they had previously rolled out VUSB, which is a very short or ultra-sh short bond fund, and now they are rolling out some other ones on the very short term.

Mostly Uncle Frank:

And the reason these make a lot more sense now, as they didn't before, is because there aren't any transaction fees anymore. If you had to pay transaction fees to get in and out of a short-term bond fund, it probably wouldn't be worth it. If you don't have to pay fees like that, these things are just much more efficient, and so they do compete with things like money market funds, for instance. And one other thing you should know about Vanguard in particular is that they are a copier. They are a follower but an undercutter. So ever since they got into the ETF game seriously about a decade ago, they tend to look around, see what kinds of ETFs that other fund providers are producing and which ones have become popular, and then they will create one of their own that has a lower fee. And so they did that with VIOV, their second small cap value ETF, to compete with IJS. They did that with their trio of treasury bond ETFs, which are VGLT, vgit and VGSH, which are long, intermediate and short-term treasury bond funds.

Mostly Uncle Frank:

There were products like that that already existed from iShares and others, but what Vanguard tends to do is look at seeing what's popular in the market and go out and produce one of those things. These new short-term bond funds they're producing are an example of that, and they're also an example of what I like to say is that personal finance is an evolving technology and it should be treated that way. There are always going to be new things coming around the bend. Most of them you don't want. A few of them you do want, but overall, the trend is to produce better products, cheaper products, more focused products over time, and as do-it-yourself investors, we should be aware of those things and taking advantage of them when we can. The contrary point of view is what I like to call the Dead Sea Scroll point of view. There's an attitude amongst many DIY investors that everything useful about DIY investing was decided by around 2010, with whatever index funds existed then, and that's what we should continue to do, and not look at anything else ever.

Voices:

Are you stupid or something? Ierson is stupid as a stupid does.

Mostly Uncle Frank:

And that is what Emerson called a foolish consistency. That's the hobgoblin of a little mind, because if the only reason we're doing something is because we did it that way before, that's not really a good enough reason. You should periodically reassess whatever you're doing, whether it's investing or something else, to determine whether it's still the best idea going forward, or at least just as good as some other idea going forward, because that's really the only way you can ensure you're making the best choices and that you are a Bayesian thinker who incorporates new information into their decision-making processes.

Voices:

As it appears, that is the straight stuff. Oh funk master.

Mostly Uncle Frank:

Thank you for allowing me to go on that little philosophical detour.

Voices:

And thank you for your email. I swear by the moon and the stars and the sky. I'll be there, cal. I swear Like the shadow that's by your side, cal swear to God, I'll be there.

Mostly Uncle Frank:

Last off, last off. We have an email from Andy and Andy writes Hello, frank Quick.

Mary and Voices:

Psa Frank, I decided to implement the managed futures modification to my golden ratio portfolio. I made room and then, when I came to purchase DBMF, my broker Interactive Broker pushed back on me, indicating that I was not an experienced enough investor for that fund. I think the special sauce which I know you have is telling their system that you have experience trading futures and options. I thought some of your audience might be interested in hearing this, given the amateur, diy nature of the group. All the best for 2025. Andy.

Mostly Uncle Frank:

Well, I find that interesting and kind of amusing that it would be more difficult to buy something like that at interactive brokers than at a place like Fidelity.

Mostly Uncle Frank:

Because I know that if you go to Fidelity and you buy something like that, it will just flash up a little warning screen saying are you sure you want to buy this and are comfortable with it? And then it'll let you go forward At least that's been my experience and of course, they'll let you buy all kinds of cryptocurrencies and their own funds and that sort of thing. They even have their own risk parity fund now. But, yes, these sorts of things are just CYA legal protections that brokers will put in because they don't want to be responsible for somebody else's choices, particularly if they made some kind of mistake, because you can buy all kinds of strange financial products at interactive brokers if you look at their global markets. Anyway, yes, I think the solution is to go and fill out whatever form they want you to fill out, saying you're experienced enough to buy big boy things if you will you're playing with the big boys now.

Voices:

Playing with the big boys now?

Mostly Uncle Frank:

oh, that's pretty and there'll be likely some kind of door you need to walk through at most brokerages actually. But as for the quote, amateur slash, diy, nature of the group unquote I think you may be selling the rest of this group short.

Voices:

Let me put it this way have you ever heard of Plato, Aristotle, Socrates?

Mostly Uncle Frank:

Because, other than the folks that find me entertaining, I think most of the investors here are pretty well experienced and the only reason they stay here is because they are curious to know what else there is besides the typical information that you might get out of 10 to 20 year old books.

Voices:

One trick is to tell them stories that don't go anywhere, like the time I caught the ferry over to Shelbyville. Like the time I caught the ferry over to Shelbyville, I needed a new heel for my shoe, so I decided to go to Morganville, which is what they call Shelbyville in those days.

Mostly Uncle Frank:

So my anecdotal experience of the quote amateur investor here unquote is generally somebody who's been investing for a decade or more, has somewhere between $2 and $15 million and has experience both investing on their own and with working with various financial advisors.

Mary and Voices:

Top drawer, really top drawer.

Mostly Uncle Frank:

So if that sounds like you, you might be in the right place.

Voices:

That's gold, jerry gold.

Mostly Uncle Frank:

But I do greatly appreciate the quality of this audience because you guys ask good questions and bring good topics to the fore. So thank you for being here, thank you for being a donor and thank you for your email, but now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frankatriskparodyradarcom. That email is frankatriskparodyradarcom. Or you can go to the website, wwwriskparodyradarcom. Put your message into the contact form and I'll get it all that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe and give me some stars to follow a review. That would be great. Okay, thank you once again for tuning in.

Voices:

This is Frank Vasquez with Riskitz-Curdy Radio Signing off. You will kneel before us, kneel to us, the daughters. You put up a front, you put up a fight and just to show we feel no spite, you can be our acolyte. But first boy, it's time to bow. Or it's your own way, you'll dig or you'll play with the big boys. Play with the big boys, Play with the big boys. Play with the big boys.

Mary and Voices:

Play with the big words. Play with the big words. Play with the big words. Play with the big words. Play with the big words. Now, financial investment, tax or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.

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