Episode 425: More Margin, SCHD, Safe Withdrawal Rate Realities And International Fund Considerations
May 21, 2025
Explore the nuanced world of margin accounts and the risks involved in leveraging investments. Discover insights about the SCHD fund as a staple in value investing and its implications for safe withdrawal rates. Dive into the obsession with international funds and learn about diversification strategies. With a touch of humor and engaging anecdotes, the discussion sheds light on common misconceptions and offers valuable investment wisdom for both novice and seasoned investors.
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insights INSIGHT
Margin Loan Mechanics Explained
Margin loans work differently when withdrawing cash versus buying assets due to different denominators for leverage calculation.
Brokers limit cash withdrawal leverage more strictly because it poses higher risk compared to leveraged asset purchases.
insights INSIGHT
SCHD and Safe Withdrawal Insights
SCHD is effectively a conservative large-cap value fund despite its dividend label.
Safe withdrawal rates are worst-case scenarios; following them typically preserves or grows portfolio value over decades.
insights INSIGHT
International Stocks and Diversification
International stock fervor is driven by media hype and currency effects rather than predictable mean reversion.
Diversify using growth/value and small/large factors across U.S. and international funds, not merely by geography.
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In this episode we answer emails from Andy, El Yama and Paulo. We discuss a follow up to the question on margin accounts at Interactive Brokers in Episode 424, the use of SCHD fund as a large cap value fund in a risk parity style portfolio, the meaning of "safe" in "safe withdrawal rates" and the current popular obsession with international funds, as well as diversification considerations for using them. And an upcoming appearance on the "Afford Anything" podcast. And the famous SCTV parody "The Queen Haters."
Dive into the murky waters of investment strategy as Frank tackles listener questions with his signature blend of expertise and irreverent humor. This episode peels back the layers on three critical investing topics that frequently trip up even experienced investors.
Frank first dissects the mechanics of margin accounts at Interactive Brokers, clarifying how leverage percentages work differently when withdrawing cash versus purchasing additional assets. With characteristic frankness, he explains why brokers might offer leverage limits up to five times an account's value while emphasizing that such levels represent "way more margin than anyone really needs or would want, unless they truly have a gambling problem."
The conversation shifts to dividend ETFs, specifically SCHD, which Frank analyzes not by its label but by its actual characteristics. He reveals how this fund functions effectively as a conservative value play that "sits right on the border between mid-cap and large-cap" with "an even lower average PE ratio than most value funds." This practical approach to fund classification—looking beyond marketing labels to actual investment behavior—exemplifies the podcast's commitment to clear-eyed analysis.
Perhaps most valuable is Frank's demolition of several sacred cows in retirement planning. He explains how safe withdrawal rates already incorporate worst-case scenarios, making additional conservative assumptions not just unnecessary but potentially harmful. "When people are talking about 3% or less withdrawal rates, they are really just doing bad forecasting," he argues, characterizing such excessive conservatism as "essentially leaving life on the table by not spending the money when you're alive."
The episode culminates in a masterful takedown of the current "fervor" for international stocks. Frank explains how currency fluctuations—not magical mean reversion—drive performance differences between markets, and why holding total market US and international funds provides minimal true diversification. "That is pretty much the least diversified way of using international funds against US funds," he notes, before offering practical alternatives for constructing a genuinely diversified portfolio across meaningful factors.
Want to support the show? Consider donating to the Father McKenna Center, which helps homeless people in Washington DC. Email your questions to frank@riskparityradio.com or visit riskparityradio.com.
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