May 1, 2025 • 50 mins
Are you prepared for a financial landscape unlike anything we've seen in decades? The investing playbook that worked for the past ten years might be obsolete as we navigate unprecedented uncertainty in markets.
"It's very possible there's a sea change and the next decade looks very different from the last decade," warns Alex Shahidi of Evoke Advisors. After years of low interest rates, stable volatility, and US stock dominance, today's environment features sticky inflation, political uncertainty, and a significantly constrained policy response toolkit. The potential range of outcomes is wider than at any point in recent memory, with greater risk of extreme scenarios.
Most investors remain dangerously positioned for yesterday's market conditions. While many believe their 60/40 portfolios provide adequate diversification, Shahidi reveals that such allocations are 98% correlated with the stock market because stocks contribute disproportionately to volatility and returns. True diversification requires balancing risk contributions across multiple asset classes – what's known as risk parity.
The conversation challenges conventional wisdom about gold, revealing it has returned approximately 8% annually since 1971, just behind equities' 9%, with near-zero correlation. The 1970s and 2000s were excellent for gold but poor for stocks, while the 1980s and 1990s saw the reverse pattern. This makes gold an exceptionally valuable diversifier that remains underrepresented in most portfolios.
Perhaps most importantly, Shahidi offers a powerful framework for navigating today's uncertainty: "Diversification always trumps conviction." While it's natural to want to predict the future and position accordingly, the odds of consistent success in market timing are slim. A truly diversified portfolio removes much of the emotional pressure from investing decisions, allowing investors to follow a "slow and steady" path that historically delivers superior long-term results.
Ready to rethink your investment approach for the decade ahead? Listen now to discover how true diversification might be your best protection against whatever the markets throw at us next.
Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
It's very possible there's a sea change and the
next decade looks very differentfrom the last decade.
Again, we won't know for awhile, but you're starting to
see that at least this year,that's what's happened.
And then you look at portfoliosand they look like they're
positioned for the last decadeand that could be a terrible
result, and so there'ssignificant risk that you end up
(00:21):
in a really bad outcome interms of your performance for
the next decade, because yourposition for the last decade and
then you look at all theuncertainty and the odds that
the next decade looks like thelast decade are increasingly
becoming very slim.
Speaker 2 (00:36):
This will be a good conversation with Al Shahidi,
who's going to give us some goodperspective on cycles, where we
are in the current environmentin terms of policy uncertainty
how to think about investingduring a period of policy
uncertainty and my name isMichael Guy, a publisher of the
Lead Lag Report.
Joining me here is Mr AlexShahidi of Evoke Advisors.
Alex, I'm going to skip thewhole.
Tell us about yourself, becauseI know you people have been
watching this now repeatedly.
I want to get right into yourtake on things.
(00:58):
We were just talking before theshow.
You said you were busy.
I said is that because ofvolatility?
You said no, uh, rats on beingbusy because of reasons outside
of volatility, but, as you know,typically volatility gets
people, uh, very excitable.
Um, so any thoughts on the waythat this last three weeks have
played out in terms of you thinkit's noise?
(01:19):
Do you think it's a cycle shift?
Do you think it's somethingthat people should worry about?
And, granted, it's all abouttimeframes, but I want to just
get your initial thoughts.
Speaker 1 (01:27):
Thanks for having me again.
I appreciate it.
I certainly don't think it'snoise.
It seems like we're goingthrough a pretty significant
change and it's a change inpolicy.
It's a change in direction andif you just look backwards you
know these inflection points aremore obvious years after the
fact.
It's hard to understand itwhile you're going through it.
(01:48):
But if you just look backwardsand you look at the environment
that we've lived in for 10, 15years and you look forwards and
they look pretty different.
You had a period of low andeither zero or very low interest
rates.
We had a big jump in 22 and itstayed high.
We've had a long period of lowand stable volatility.
(02:09):
Volatility hasn't been volatilefor a long period of time.
Covid hit.
You got a big spike and then itcame down and it felt like,
okay, volatility is going back.
Put the genie back in thebottle.
Volatility is going to bestable for a while.
It's not stable.
There's a lot of uncertainty,and then you add on top of that
all the policy uncertainty thatwe've seen recently.
So when you look forward, thepotential range of outcomes is
(02:32):
probably extremely wide probablythe widest in my investing
career and that's not just interms of.
Do we have a recession?
Is the economy okay?
But where does inflation land?
Where does policy go?
Geopolitically, all thesethings are who knows?
You can try to guess, butthere's a good chance you're
(02:52):
going to miss it, and you couldmiss it by a lot.
So you have a wide range ofpotential outcomes and probably
greater risk of extreme outcomes.
I don't think too many peoplewould disagree with that
assessment.
So, given all that, what do youdo?
And to me it's always goes backto you got to be diversified.
And then what does that mean?
Speaker 2 (03:10):
We'll definitely get into that.
Um, I've seen a lot of studiesthat show that volatility tends
to persist at the two extremesof valuation.
I have all told me is very highwhen you're very overvalued,
and then volatility is very highAlso when you're very
undervalued, which makes sensebecause those are pots and
bottles and the market's tryingto figure out the right level to
have an inflection point.
To your using your words,valuations play into this.
(03:33):
I made the argument myself on Xthat everyone should stop
blaming Trump for volatility.
I mean, he inherited a veryexpensive starting point for his
administration on the stockmarket.
He inherited at a veryexpensive starting point for his
administration on the stockmarket and all you really needed
was just a trigger for suddenlythe valuations to maybe start
to get volatile.
Speaker 1 (03:56):
Yeah, yeah, I think valuations drive long-term
returns across markets, butsometimes you need a catalyst
for the market to wake up to.
Oh, you know, things are reallyexpensive and given this
pricing which effectivelyreflects very optimistic
outcomes for that asset class,when you have a lot of
uncertainty, then the range ofoutcomes is wider, as I
described, and there's lesscertainty as to that optimistic
(04:18):
result.
So you start to questionwhether you're willing to pay
that high of a price given thatheightened level of uncertainty.
The other point that I think isimportant is when people say
the market's expensive, and whenpeople talk about the market,
they're generally talking aboutthe US stock market.
I think part of appreciatingwhat it means to be diversified
(04:39):
is you got to look at a lot ofdifferent markets.
You know international stocksaren't that expensive.
Emerging market stocks arecertainly not expensive.
Bonds are a lot cheaper thanthey've been for a long time.
Gold is harder to value, butthere's a lot of tailwinds there
.
So I think you're right that USstocks are expensive, but a lot
of other markets are not.
(04:59):
And now you're seeing what Idescribed earlier, the opposite
of what you've seen the last 10or 15 years, where US stocks
significantly outperformed justabout everything else, and this
year US stocks are in dead lastand international is ahead,
emerging is ahead, bonds areahead, inflation-linked bonds
are ahead, gold commoditieseverything is ahead of US stocks
(05:20):
, and so maybe that's just thebeginning of a long-term cycle.
Again, we won't know for a fewyears, but the backdrop
certainly seems to support that.
Speaker 2 (05:30):
I think the challenge there is that, let's say,
somebody buys a total worldmarket index or bung on that
it's so dominated by US rightBecause of the massive
outperformance that, while allthat may be true, people would
have to actively tilt in thatdirection.
Speaker 1 (05:48):
Yeah, yeah, and you don't have to do that.
But my sense is a lot of peopleare not even market weight.
They're overweight relative tomarket, and so there's a couple
of levels of diversification.
So within equities, you canlook at where we are today
versus where we were 10 yearsago, and the equity market is
(06:09):
significantly overweight USrelative to where it was.
And then even within the US,it's significantly concentrated
within just a handful of stocks,so the index itself is not that
well diversified.
And then many marketparticipants, from what I've
seen, are even more concentratedthan the index, which is
already concentrated.
And then, if you take a stepback, there is a significant
(06:31):
overweight to equities, whetherit's US, non-us, emerging, et
cetera, and so there isn't greatdiversification across assets.
And so when you kind of I thinkthe punchline for today's
conversation is, you look ahead,it's very possible there's a
sea change and the next decadelooks very different from the
last decade.
And again, we won't know for awhile, but you're starting to
(06:54):
see that at least this year,that's what's happened.
And then you look at portfoliosand they look like they're
positioned for the last decadeand that could be a terrible
result, and so there'ssignificant risk that you end up
in a really bad outcome interms of your performance for
the next decade because yourposition for the last decade and
(07:14):
then you look at all theuncertainty and the odds that
the next decade looks like thelast decade are increasingly
becoming very slim.
I want to bring a comment fromChristoph Robka.
Speaker 2 (07:25):
I apologize if I'm not pronouncing that correctly
there from X.
Cash is also a position.
Many investors seem to missthat as an option.
Let's talk about cash as aposition.
Speaker 1 (07:35):
So cash is.
It is a position.
The yield was zero for over 10years and now you're getting 4%
or so.
So that's good.
But you got to keep in mind allthese asset classes should
outperform cash over time.
They have outperformed cashover time and there's going to
be periods where cash is king.
Those periods don't happen veryoften.
They typically don't last verylong.
(07:58):
You need capitalism.
For capitalism to work, youneed assets to beat cash, and so
I think of cash not as along-term position, because if
you took whatever your portfoliois, add cash to it, your return
will probably go down over thevery long term because cash
should underperform assets.
So I think of it as a tacticalposition.
So you can call it dry powder.
(08:19):
You can say I want to buy low,so I want to hold the cash, but
it's tactical.
So you have to time when to getinto cash and when to get out of
cash, and I found that it'svery difficult to do that
effectively.
Over time You'll be rightsometimes.
You'll be wrong sometimes.
On average, you're probablyclose to 50-50.
And in my experience maybeyou're a little bit better than
that, but it's really hard.
(08:40):
You have to add value in orderto get in and out of cash
because the odds are stackedagainst you, because cash should
underperform assets.
Now you could argue today,because of all the uncertainty,
you should own a little bit morecash, and I think that's fine.
I tend to minimize cash, andthe reason is the other way to
minimize losses is to be superdiversified.
(09:01):
So we'll talk about this.
The risk parity portfolio is upthis year and it's not an
unusual year.
You have a wider range ofreturns across assets, but the
average is doing just fine, andso that's the other way to
reduce the risk of big swings isto not be concentrated, be
diversified, and thatdiversified portfolio should be
(09:22):
cash over time, and there'speriods again when it won't, but
timing that is, in myexperience, really hard to do.
Speaker 2 (09:30):
Yeah, it's always the whipsaw risk, right, it's this.
Old studies from market timingshow that market timing doesn't
work, no matter what asset class, because it's not really timing
the asset class, it's timingthe cash point.
And if the problem with cash isthat there's no real momentum
obviously, so you don't evenhave a chance really to sort of
outperform in those fleetingmoments.
Speaker 1 (09:47):
Yeah, and there's one other, I think, important point
which is, as humans we have,our hands are a little bit tied
in terms of timing, becauseoftentimes those decisions are
made based on emotion, andemotion is often backwards
looking, meaning you feel betterwhen prices are rising and you
feel worse when prices arefalling, and it's easy to
extrapolate the recent past intothe distant future.
(10:09):
So many and I'm not sayingeverybody does this, but many
people will try to time based onwhat's happened backwards
because their emotions drivethem in that direction.
And so if you try to time, myguess is, over the long run
you'll tend to want to sell highand buy low.
I'm sorry, you want to sell lowand buy high.
Um, because you'll want to.
(10:30):
You'll feel like, oh, there'smore risk after prices have
fallen and and and what's youknow obviously very
counterintuitive is when pricesfall, the forward returns are
higher and when prices rise, theforward returns are lower and
your emotions drive you in theopposite direction.
So you kind of have this almostlike a handicap in trying to
time, because you have to dealwith your emotions as well.
Speaker 2 (10:53):
And there were definitely a lot of emotions.
Yes, for sure, for trading days, for sure.
I love that point you madeabout most people are not even
market weight and mostindividuals are probably
massively concentrated in acertain number of positions
because of the stories around ai, for example.
We've seen the last severalyears and that's been a great
place to be for a while and itclearly works right.
(11:14):
Although I am blown away, I'msure you see some of these these
uh data points to the, theamount of retail inflow that uh
has coming.
So I'll tell you a quick.
For those watching, this ishonestly true.
On that Sunday when futures weredown like 1500 points, I had a
number of financial advisorsgive me a ring and one advisor,
who had been in business for 30years, said to me you know, I'm
(11:36):
actually very nervous.
And I said what makes younervous?
You've seen all kinds of cycles.
Why does this make you nervous?
He said said this is the firsttime in his career.
He was getting his own clientscalling him up asking when they
were going to buy stocks,whereas typically, when you have
markets acting volatile, as afinancial advisor I'm sure many
(11:59):
of you that are watching thisare financial advisors can
relate to this your client callyou up telling you to get out.
Instead, he was saying that hisclients were asking him to get
in and the data on the retailside and it's like the way that
retail just comes right inbecause the buy the dip mantra
has worked.
It's actually pretty remarkableand I think it makes them to
your point about recency biasand emotions, and all this makes
(12:21):
them even more concentratedwith every single happens.
Speaker 1 (12:24):
Yeah, yeah, I mean, and that's the other thing that
you really have to be carefulabout is, you know, if you look
back the last almost 40 years,so if you've been investing for
40 years, you've seen it allright.
But and and by the dip hasworked.
Uh, you know, since the earlyeighties, if you just bought the
dip and that was your strategyfor the last four decades,
you've done great.
(12:44):
There is a chance that thatdoesn't work for a long time,
and the reason is buy the diphas worked because inflation
hasn't been volatile and anytimethere was an economic downturn,
you'd have stimulus.
You have monetary stimulus,they cut rates, you've had
(13:05):
fiscal stimulus and if you lookforward, there is obviously a
risk of a recession.
Right, there's also a risk thatyou don't get the same policy
response you've had in the past,and it's because we have
massive deficits.
Politically, it's becoming morechallenging.
Inflation is sticky and thatchanges the game.
(13:26):
It almost flips it on its head.
So if there's this assumptionthat buy the dip works all the
time, that's not a fairassumption over the very long
run and this environment couldbe very different.
So it is a very dangerousstrategy, particularly if you're
not diversified to begin withand your strategy is I'm just
going to ride the market and I'mgoing to time the market and
(13:48):
when it falls, I buy.
And because it's worked for along time, it's become ingrained
as part of a successfulinvestment strategy.
You should be cognizant thatthere is a risk that doesn't
work for a long period of timeand buying the dip could
actually hurt you, particularlyif stocks don't really go
anywhere for a long time and youcan just look at valuations.
You can look at policy, thereaction function.
(14:10):
There's a lot of things outthere that could change how
things work in the future.
So it would be very I highlyrecommend looking at all the
assumptions you're making inyour strategy and just to make
sure that those still hold.
Speaker 2 (14:24):
Why do you think buy the dip seems to only be a
mantra when it comes to stocks.
I don't see that when it comesto bonds.
Maybe you see it with gold.
Speaker 1 (14:39):
But why is it only stocks that you tend to hear?
I think it's because it's likewe live in a stock culture in
some ways, where there is thisassumption.
Again, we go back to theseassumptions.
The assumption is that stocksget returns and all the other
things are nice to have becausethey reduce the risk, but they
don't give you returns.
So there's this view thatthere's a trade-off.
You get returns with stocks,the other things are
diversifying, but they loweryour long-term returns.
I want high returns.
(14:59):
I'm going to focus on stocks.
We know stocks are risky.
I got a time when I get in andout.
I think that's just the generalphilosophy and I don't think
that's true.
If you look at all these assetclasses and I'm talking about
not just US stocks butinternational emerging markets,
I'm talking about even bonds Ithink the return is higher than
(15:20):
many realize, especially longdated bonds.
Gold is only 1% a year behindstocks since 1970, when we came
off the gold standard in 1971.
Since then, when gold has beenfree floating, it's only, it's
less than 1% a year for 50 plusyears behind equities.
Hardly anybody owns gold andit's, you know, destroyed
(15:42):
equities.
The last several years,including this year, commodity
equities have actuallyoutperformed equities by a
couple percent over 50 years.
So there are diversifyingassets that don't give up
returns, that help reduce therisk in your portfolio, and so I
think the reason that peoplejust focus on buying the dip on
equities is because that's beenthe focus Everybody's thinking
(16:03):
about.
That's where the returns comefrom.
I think you have to reorient theway you think about building a
portfolio.
Be diversified, but that isreliably beneficial over time.
Timing markets not as reliablybeneficial.
You could get it completelywrong, especially if you have a
buy to dip mentality.
So if you're diversified, youdon't really give up returns.
You can own a lot of differentassets way to.
(16:38):
How are all these assets doing?
Then the buy to dip becomesless of a focus and you can look
at all these assets and justrebalance and effectively you
can buy the dip when they'redoing poorly.
You buy more when they're doingwell, you sell a little bit
rather than just trying to timeone asset.
Speaker 2 (16:48):
The funny thing about rebalancing is that people
think that's not how you getwealthy.
I wake up at 4 a 4am every dayand I go to the gym Right and I
have on YouTube.
The algo always sends memotivational videos to watch
right before I go to the gym andone of the videos I was
listening to earlier today.
Somebody said the fastest wayto your get to your destination
(17:09):
is to go slowly.
Speaker 1 (17:11):
Yeah.
Speaker 2 (17:12):
Exactly, very well articulated.
Yeah, I think it's very wellarticulated.
Yeah, let's talk aboutrebalancing and the role of
rebalancing, because I think andwe'll talk about this in the
context of risk parity yeah, butwhy is it that rebalancing is
such a big driver of longer-termoutperformance?
Speaker 1 (17:27):
So I think rebalancing gets a bad rap
because again it goes back tothe framework most people use.
They have high return, highrisk stocks and low return, low
risk bonds.
So if you're rebalancing,you're typically selling stocks
and buying bonds when stockshave done well Over time.
That helps a little bit becauseyou're doing some rebalancing
(17:49):
and buying low and selling highwith some assets.
But over time, the less stocksyou own, the worse you do,
because stocks have a higherreturn than bonds do, and so I
think that's part of therationale why people have stayed
away from rebalancing.
And you've seen it the lastdecade, particularly when you
have a big divergence betweenthe US stock market and bonds.
(18:11):
I think bond markets areearning like 1% a year for a
decade and US stock market andbonds I think bond markets are
like 1% a year for a decade andUS stocks are double digits.
And so you can see why you lookbackwards and rebalancing
didn't feel great, because everytime you sold stocks they
outperformed.
You bought bonds, they didn'tdo much, and then even in 22,
bonds are down a lot, almost asmuch as stocks and you look at
(18:31):
it and say what's the point ofrebalancing?
So that's a backward looking,but you have to have a wider
perspective.
You got to zoom out andrecognize that all these markets
go through cycles.
They go through good and badperiods.
You can't look at the past goodperiod and say the next period
is going to be good as well.
They're cyclical.
They get expensive, theyunderperform, they get cheap,
(18:51):
they outperform.
And if you diversify across alot of different markets and, as
I mentioned earlier, a lot ofthem have competitive returns
with equities and you rebalancethat now you can see that
there's a benefit to it.
Because if you have let's justsimplify it If you have two
assets that have the same returnover a long period of time and
(19:11):
they go through differentperiods where they do well and
do poorly, and whenever one ofthose assets is outperforming,
you sell a little bit and youbuy a little bit of the
underperformer.
If you kept doing that overtime, you could see why you
would have a return that'sgreater than just the average of
those two assets, becauseyou're programmatically buying
low, selling high, and so thekey is is find those other
(19:32):
assets rebalance, because itactually adds returns and it
reduces risk because you'regetting more diversified.
So I think it's the reason it'snot that well appreciated is
because the framework is just Iget returns from stocks, nothing
else.
As opposed to how do I build awell-diversified portfolio?
Speaker 2 (19:51):
Do you get the sense that most of the financial
advisor community hasdiversification?
Speaker 1 (19:59):
I do, yeah, and it's based on just my experience
talking to advisors.
It's based on what people focuson.
You know you turn on CNBCthey're talking about the stock
market.
You look at the Wall StreetJournal it's about the stock
market.
You ask somebody how's themarket doing and they're going
to tell you how the US stockmarket is doing.
That's just the focus and Ithink it's misplaced.
(20:24):
I feel like you really need tobe diversified and I think in a
period like this it's even morerelevant.
Wide range of outcomes, extremeoutcomes more likely be
diversified.
That's how you protect yourself.
You can try to time it.
If you miss it, you could takea huge hit.
So I do think that mostportfolios are not that well
(20:46):
diversified and the simplestmeasure of that is a 60-40
portfolio, which is widelyassumed to be a moderate risk
portfolio.
That 60-40 portfolio is 98%correlated to the stock market
because you have two assets youhave high risk, high return
stocks the 60, and you have lowrisk, low return bonds the 40.
(21:08):
So the total return isdominated by how the more
volatile component of thatportfolio does the 60.
It's overweighted and it's waymore volatile.
So if the 60 does well, youhave a good year.
If the 60 does poorly, you havea bad year.
You don't go up and down asmuch as the stock market, but
directionally it's almost 100%dependent on how the stock
market does.
So if you go through a longperiod where stocks do poorly,
(21:30):
60-40 does poorly and that's thestarting point for many
investors and they view that asa balanced portfolio.
I think if you just look at a60-40 fund, most of them have
the title balanced portfolio,xyz firm balanced portfolio.
It's not balanced.
It can't be balanced.
If it's 98% correlated to asingle asset, how is that
balanced?
8% correlated to a single asset, how is that balanced?
(21:52):
So I think you know, and manypeople don't work off of that
framework- so I think it'spretty clear that they're not
that diversified.
Speaker 2 (22:01):
I love this comment from Amin, watching this on
LinkedIn.
Going back to the point aboutbuying the dip Buying the dip is
a slogan, not a strategy.
I think that's spot on.
Let's talk about gold for a bithere.
I've seen a lot of interestingcharts that now show that gold
has outperformed stocks, the S&Pat least, since 2000.
That was not the case for agood decade, somewhere between I
(22:24):
think it was 2012 up until nottoo long ago.
What's the role of gold in aportfolio?
I know we're talking aboutdiversification.
Obviously it's diversifier, butwhat makes gold unique relative
to other asset classes?
Speaker 1 (22:41):
I think gold in this environment is interesting
because it's a storeholderwealth and it doesn't even act
like the other commodities.
So in 2008, gold was up.
All the other commodities aredown a lot.
2022, commodities are down alot.
Gold was about flat Um and, andI think it's because it's it's
more like a currency and astoreholder wealth.
(23:02):
It's the oldest currency in theworld, um, and so it has
different behavior, which whichis what makes it a uh, valuable
diversifier.
The part about it havingreturns is really interesting.
I think if you ask an academicwhat is the return of gold,
they'd say it has no return.
It's like cash.
But when you look at the dataand we came off the gold
(23:23):
standard in 1971, it became freefloating.
Since that point I alluded tothat earlier Gold is it's earned
like 8% a year since 1971.
And I think equities are about9% a year.
That is, I think, thatsurprises a lot of people.
The other thing that I think isinteresting about it is that, if
you so remove the labels, youhave asset A, asset B.
(23:43):
Asset A is global equities,asset B is gold, but remove the
labels Two assets One has earned9% a year.
One has earned 8% a year for 50plus years.
The correlation between thosetwo is close to zero.
The best decades for asset Awere the worst decades for asset
B, and vice versa.
And so the 1970s and the 2000sthe best two decades for gold,
(24:06):
the 80s and 90s the best twodecades for equities, and vice
versa.
70s and 2000s stocksunderperformed cash for a decade
, and the 80s and 90s stockswere great and gold was negative
.
So you have two assets,comparable returns over time.
Average correlation is zero.
The best periods and the worstperiods coincide.
That is a great diversifier.
(24:27):
Very few people that I'vetalked to even look at that the
way that I just described, whichis a very simple framework, and
there's a lot of other assetclasses that you can throw in
there, and I think the challengepeople have and part of it, I
think, is the media and part ofit is just our own orientation
is we zoom in?
We look at how are marketsdoing today, how are markets
(24:48):
doing this week, how are marketsdoing this month?
You have to look at it overdecades.
How our market's doing thismonth, you have to look at it
over decades.
And I know you can't act ondecades, but the decades
perspective gives you, I think,a better framework for investing
for long-term success.
You may feel like you know yousaid something earlier that I
think is really powerful and youknow the quickest, you know
(25:10):
path from A to B is to moveslowly.
I always say slow and steadywins the race, and it's because
when you look at it too closely,you're focused on getting high
returns over a short period oftime.
That invariably means you'regoing to have bad returns for
short periods of time.
When you add up all those goodreturns and bad returns, they
(25:31):
don't amount to much over a longperiod of time.
There's many investors thatI've seen that have been
investing for a long period oftime.
They feel like they've donegreat because they remember the
wins, they forget the losses.
They underappreciate how themath is cruel Meaning when you
underperform, it takes so muchoutperformance to make up for
that because the you know yougain 50% versus losing 40,
(25:52):
losing 50%.
The math is not the same, andso I think you underappreciate
the pain that losses cause.
So that's why I think slow andsteady wins the race, and I
don't think you really see thatunless you zoom out, and we're
always forced to zoom in.
I try to get people to zoom outso you can see where things are
headed and you can get a bettersense of the right framework.
(26:14):
And I think you put all thattogether and I think those are
part of the reasons why manyinvestors are just so focused on
one asset.
I love that.
Speaker 2 (26:26):
The math is cruel it is.
Very well articulated.
You have an ETF RPAR riskparity ETF.
I want you to talk about whyyou launched that fund, how it's
done, what's the theorythinking behind it.
Just kind of go off on that fora bit.
Speaker 1 (26:45):
Yeah, yeah, the idea is well.
First off, the reason to launchit is we want investors to have
the opportunity to click abutton and become well
diversified, because I just feellike it's not that well
appreciated.
So what it includes is equities, commodities, which commodity
(27:05):
equities, gold treasuries andtips, and it's risk balanced
across all those assets.
It's passive and you get awell-balanced portfolio with
just buying the ETF and I thinkof it as a tool to take your
total portfolio and take it onestep towards being more
diversified.
And we keep it intentionallyvery simple so that you know
what you own and why you own itand how it should perform.
(27:26):
So that's the framework and sothis year it's up a percent or
so.
Stocks are down a lot, but a lotof other assets are up,
including gold, and over time.
You could go back and look atall these assets over the last
50 plus years and just thatbalanced mix of assets should
(27:49):
get you an equity-like returnwith a lot less risk.
But it won't zig and zag withequities, which is what actually
makes it difficult to hold overtime, because most people's
reference point is the stockmarket.
So if our par is up three andthe stock market's up 10 or 20,
you can look at it and say, oh,it's underperforming, but it's
on a slow and steady path, notthe volatile path.
(28:09):
And if your reference point isthe volatile path, you'll be
disappointed about half the timebecause the volatile path will
be way above, it'll be way below.
This year it's way below andpeople are more satisfied that,
oh, this is doing well, but it'sdoing what it's always been
doing.
It's slow and steady, wins therace.
So it's basically diversifyingto growth and inflation
(28:30):
surprises, and it's doing thatby owning assets to do well in
different growth and inflationenvironments.
And, as I mentioned earlier,growth is volatile, inflation is
volatile.
Both are highly unpredictable.
They're influenced by policy,they're influenced by
geopolitics, they're influencedby consumer behavior.
There's a lot of unknowns, andso to me, it just makes sense to
(28:55):
be diversified across thosethings, and that's what RPAR
offers in a simple package.
Speaker 2 (29:00):
Those things and that's what RPAR offers in a
simple package.
It's hard for people to to yourpoint think in terms of decades
, right.
Speaker 1 (29:09):
You don't have to act in terms of decades, but I
think it is important to thinkin terms of decades.
Speaker 2 (29:16):
Especially if you have a family.
You're thinking aboutgenerational wealth and building
on your lifespan, which is muchmore of an institutional
mindset.
How has risk parity done inthis, in this most recent
volatile you mentioned?
It's still.
It's up for the year, right.
Speaker 1 (29:28):
On the ARP side.
Speaker 2 (29:29):
but take us through the different asset classes.
Gold really actually did, Ithink, fairly well throughout
this.
Equity is obviously not so much.
Treasury is mixed right, buttalk about just kind of more
recent, Not so much.
Speaker 1 (29:41):
Treasury is mixed right, but talk about just kind
of more recent.
Yeah, I mean when you sayequities, so US stocks are down
about 8%.
International is up about 5%.
You know.
So you know.
I think that statistic actuallysurprises a lot of people.
So developed non-US is up about5%, the index year to date.
And you just think abouteverything that's happening in
(30:02):
the world.
And if I polled most people whodon't pay attention to, who
don't actually look at thenumbers all the time, and I said
what do you think is doingbetter, us stocks or
international, I think mostpeople would say I know US is
down, but it's probably gotta bedoing better, because if US is
down, international will be downmore.
And you got a 13% spread yearto date.
(30:23):
Emerging markets is down abouta percent.
Developed non-US is up five.
So when we say the stockmarket's doing poorly, I think
we should be specific.
The US stock market is doingpoorly.
Other stock markets are doingfine.
Up 5% in four months is aboveaverage.
It's actually better thanaverage.
Gold is up 22%.
(30:44):
Treasuries are up.
Tips are about flat for theyear.
Commodity equities are up acouple percent.
So when somebody asks me how'sthe market doing, I don't talk
about the US stock market.
My answer is if you want toknow how the market is doing
meaning a balanced mix ofmarkets, not just one specific
(31:08):
US stock market I'd say themarket is doing fine.
This year.
It's up a little bit and,considering everything that's
happening up a little bit isabout right.
So it is really interestingwhen you have that orientation
and that's what I with myclients.
I always try to shift theirfocus from US stocks to all
(31:29):
other markets because as aninvestor, you're investing in
many markets, not just one, andit's become more difficult the
last decade to change people'sperspective from one market to
all these other markets.
And it's because you've had abear market in diversification.
Just about every market hasunderperformed, us stocks have
done great and now it's theopposite.
(31:50):
So you asked earlier is this adifficult time for you?
This is way easier than thelast decade because
diversification is working andthat's the challenge, with slow
and steady wins the race.
When you have that approach andbeing concentrated in the thing
that's done the best, that is aharder conversation than
(32:12):
periods like this.
This is a much easierconversation.
I get very few calls todaybecause this is what we've been
talking about for a long periodof time.
Speaker 2 (32:21):
You get a bull market in diversification, the wider
your outcomes are using yourterm earlier, right and wide
outcomes, I think, are directlycorrelated to uncertainty, yeah,
and it seems like nobody evenhas a clue what's going to
happen under the the Trumpadministration.
So it is kind of a curiousthing to make the case that, um,
trump may have ushered in abull market in diversity.
Speaker 1 (32:41):
Yeah, it is interesting, you know, I think
it's easy to get caught up inwhat's happened recently.
So uncertainty is typical.
If you study market history,uncertainty is normal and we got
so used to things being onautopilot.
You know you had lowgeopolitical risk.
(33:02):
Anytime there was a recession,we knew what was going to happen
.
The Fed is going to step in.
Oftentimes they stepped inbefore the recession and with
increasing strength.
So just go back to the last 25years.
You had 2000 to 02.
It took the Fed a couple ofyears to step in and, fiscally,
to step in and stimulate.
(33:23):
Then you had 07 or 08, 09.
It took about half the time tostep in and stimulate and so the
time to respond has gottenshorter and the amount of force
in responding has gotten greater.
Then you go to, so you got 08,09.
Then COVID hit and it tookthree months.
So you go three years, 18months, three months and we
(33:47):
threw the kitchen sink at theproblem and so ultimately that
led to high inflation.
And then we started to realize,okay, we're hitting our policy
limits.
We can't just keep shorteningthe response time and increasing
the amount of stimulus, becausenow we've got the highest
inflation in 40 years.
Okay, now we've reached thatline, we got to step back and at
(34:08):
the same time we're at massivedeficits, so you're kind of
running out of your bullets.
That is very differentenvironment where we're in a
completely different environment, not because of the policy of
insurgency that's just part ofit, not because of the policy
uncertainty that's just part ofit but because of the reaction
function of providing stimulusanytime there's a downturn.
So it's easy to look backwardsand say this is the playbook,
(34:29):
this is how it works.
You got to recognize that thatis very different today for a
whole host of reasons, and therecent uncertainty introduced by
the policy is just anotherelement in that.
And so all of that again goesback to is this a world?
You want to be more diversifiedor less diversified?
Most people are less diversifiedthan they were 10 years ago,
(34:50):
and I'm arguing that you shouldbe way more diversified than
even 10 years ago.
You should have this decadesperspective, understand that you
can go through long periodswhere US stocks do poorly.
Not just they fall a lot, butthey don't bounce.
For a long time the 2000s.
The US stock market wasnegative for the decade, the
1970s and underperformed cash.
(35:11):
I think of that as negative andyou could easily get the next
10 years where stocks do poorly.
So if you're betting it all onthat and your strategy is buy
the dip, you could be in for adifficult period.
I don't know if that's going tobe the case, but I think
there's material risk of that.
It's a lot safer to bediversified.
Speaker 2 (35:29):
Yeah, I think that's also very well articulated.
By the way, folks those thatare watching appreciate those
that are watching this.
If you have any questionsduring this conversation I see
several that have commented Feelfree to type it in whatever
platform you're watching it onand I'll bring it up.
Let's talk about how to thinkabout risk parity as a framework
(35:50):
in terms of weightings overallin a portfolio.
Yeah, I think about RPAR and Ilook at it and I say you know
that could be a whole portfolio.
Sure, I mean, it's ultradiversified, it's got all the
asset classes that you need.
It's rebalancing.
I get the sense a lot offinancial advisors don't do that
because it seems like there'sno purpose then for their job.
That's the case.
But talk to me about what youfind other advisors typically do
(36:11):
and individuals do with RPAR.
Speaker 1 (36:13):
Yeah, so just quickly , rpar's allocation could be
surprising to many people.
So it's a quarter in globalstocks, a quarter in commodities
, which is commodity equitiesand gold, and then it's 35% long
dated tips, 35% long datedtreasuries.
And the reason it's not 25, 25,25, 25 is because the
(36:35):
treasuries and the tips longdated are less volatile than
equities and commodities.
And the key to diversificationis equal risk contribution,
meaning you don't want anysingle asset class driving your
returns.
So you have to own more of theless volatile asset classes and
less of the more volatile assetclasses so that the total
contribution to your risk isroughly equal.
(36:56):
It doesn't have to be perfect.
You just even ballpark is isway better than what most people
do.
So you can see 60-40 not welldiversified, because the 60 is
significantly more volatile thanthe 40 and it's overweighted.
So that's why it's 98%correlated to the stock market.
So that's what it is.
It's just a diversified mix ofassets that do well in different
environments, risk balance, andyou're done.
(37:17):
That's very simple.
So you're done.
That's very simple.
So you're right, it is a totalportfolio.
You could theoretically putyour entire public market
portfolio.
There's other things you canown private markets, hedge funds
, et cetera, but public markets.
It's a very efficient mix and Iwould expect it to have an
equity-like return over the verylong run, with less risk and
much lower risk of thesignificant periods of
(37:39):
underperformance over a longperiod of time.
So I think that's the framework.
Now how do you implement this?
It's very difficult to put allyour public market exposure in
one ETF.
So I get that.
So I think of it as a tool.
It's a tool that gets you morediversified and I think that
conceptually, the way I thinkabout it is there's a spectrum.
(38:00):
On one end of the spectrum is aconventional portfolio 60-40
call it, or you can think of itas a framework.
On the other end of thespectrum it's RPAR, which is a
super diversified portfolio, andsomewhere along the spectrum is
the right point for everyinvestor and the reason there's
a trade-off is more conventional, less diversified, less
(38:23):
conventional, more diversified.
So it makes sense to be morediversified, as I've described,
but in practice it's hard to dobecause the reference point is a
conventional portfolio and soyou could be more diversified,
feel bad about it, sell thatdiversification, go to this and
you go back and forth and it'susually backward looking and
it's influenced by what'shappened in the past.
So people like it now, so theybuy more, but they didn't like
(38:45):
it, you know, six months ago,and so they don't get the
benefit of those past returns.
So the way I think about RPARis a tool to help you get more
diversified, and so you have tofind the right point along the
spectrum of how diversified canI handle my portfolio.
If I get too diversified, I maysell it at the wrong time.
If I'm too conventional, it'snot diversified, I could
(39:07):
significantly underperform.
Somewhere along the spectrum isthe right point.
So maybe a little bit morediversified than conventional,
or maybe a lot more diversified,depending on my comfort level.
So RPAR is a tool to get there.
So you take your existingportfolio, whatever it is, if
you want to take a step towardsbeing more diversified.
You own some RPAR as adiversification tool, and the
(39:27):
more of it you own, the more inthis direction to go.
The less of it you own, themore in this direction to go.
And the reason I think it's auseful tool is it's very
efficiently structured, whereyou get all these asset classes
with one click, and it is verytax efficient because all the
asset classes have an ETFwrapper around them.
So even if you went and boughtall those underlying exposures,
(39:50):
you can buy ETFs for all thosethat would be less tax efficient
than if you just bought thewrapped vehicle.
And also there's thisrebalancing that happens inside
that, I think, adds returns overtime.
So I think of it as a tool.
The more you want to bediversified, own a little bit
more, the less you own a littlebit less.
But it's just a way to getthere.
Speaker 2 (40:09):
And so it's very much kind of a core satellite type
of mentality, right Core on ourpart, for example, satellite if
you want to play around withdifferent overweights or
underweights.
It is interesting, right?
A lot of people that arewatching this on the comments
are saying or asking questionsabout views on gold and views on
tariffs and views on things.
Yeah, which is what you wouldexpect, because that's what
(40:30):
people are used to doing.
The nice thing about yourviewpoint on things is that
you're very Zen.
Speaker 1 (40:36):
None of this really matters to you In the context of
risk parity at least one ofthose asset classes will
probably benefit, no matter whathappens.
Yeah, Let me, let me talk aboutthat a little bit.
So I think it's just a naturalbehavior to to try to predict
the future.
Um, because we feel like that'show we add value is by I think
this is going to do well, Ithink that's going to do poorly,
(40:57):
and then you position based onthat, and then this is what I
was saying earlier, which is youcan act near term, but you
should have a longer termperspective.
I think if you do that, you'llrecognize that timing these
things is really hard to do.
Public markets are relativelyefficient.
There are a lot of really smartpeople that are more resourced
and experienced than any one ofus who are trying to time things
(41:20):
, and you're competing with allthose people and you have to
throw in on top of that that thefuture is inherently unknowable
, and it's probably moreunknowable today than it's been
for a long time because there'sall these highly uncertain
inputs that are trulyunpredictable.
So trying to time markets is adifficult game to play.
(41:41):
You're going to be rightsometimes, wrong sometimes, and
on average, you might be right alittle bit more than 50%, I
think the best traders might beright 60% of the time.
That's not great.
If you know nothing, you'reright 50% of the time.
If you're one of the best,you're right 60% of the time.
That is not a big spread.
So I think if that's the gamethat you're playing, which is
(42:06):
the game most people play,you're not going to do great
because the odds aresignificantly stacked against
you.
If the game you're going toplay is I'm going to be
diversified, that wins over timewith high probability.
Now, it may not win over shortperiods of time, but to me
that's still winning becauseyou're just on a smoother path,
and that's what I was saying.
You got to zoom out and thinkin terms of decades.
You can act in shorter term.
(42:27):
So I have views.
I think gold is good, I thinktips are attractive.
I'm concerned about US stocks,but I place much less weight on
those views and acting on thoseviews than I do on
diversification working, and sothe Trump phrase that I use is
(42:47):
diversification always trumpsconviction.
So it has nothing to do withthe president, it's just this
concept that diversificationtrumps conviction.
You could be highly convictedin what's going to happen in the
future Diversification.
You should always have moreconfidence that diversification
works over time, that you'll winwith diversification than
winning with picking things thatare going to outperform, and so
(43:10):
I try to stay away from it.
I still fall into that trapbecause I think that's just a
natural human tendency.
That's what we.
You know.
You turn on CNBC.
People are talking about whatthe future holds.
You know, I've always feltthere should be a rule, a
regulation, that anybody upthere predicting the future
below them should be theiractual track record.
That is, it's not.
(43:30):
It's the actual data and youknow.
So you have somebody up theresaying you know, I think you
know, in the next three months,this is what's going to happen.
It should say odds of successare 52% 52% chance that this guy
talking is right.
Cnbc will go out of businessovernight if that happened.
But that's the reality.
(43:52):
I think it's always good toexamine what truth is.
That's the reality.
You could study anybody'spredicting abilities If you
actually had the data.
The success rate is probablylow.
Most people probably think it'shigher because they remember
the wins.
They conveniently forget thelosses.
But that's the reality, anddiversification has a much
higher odds of success.
Speaker 2 (44:13):
Alex dropping some bombs on people on this.
I like this.
This is good.
Anything that we should hit onas far as how, behaviorally,
people should be thinking aboutmarket.
Again, we talked a lot aboutdiversification, obviously, but
you know, loss aversion is oftenwhat causes people to do the
wrong things.
They feel the pain of losing adollar more than the happiness
(44:36):
of gaining a dollar.
Diversification should be ananswer to that, but any sort of
words of wisdom or advice forthose that tend to find
themselves much more emotionalthan they maybe should.
Speaker 1 (44:45):
Yeah, I think you know it's interesting.
I feel like the morediversified you are, the less
emotional you are.
That's just been my experienceBecause I think, if you buy into
what I said earlier,diversification trumps
conviction.
If you buy into that earlier,diversification trumps
conviction.
If you buy into that, yourportfolio is less emphasizing a
single asset class.
(45:06):
So I think if you're in the gameof I got to pick when to go
into stocks, when to go out ofstocks, you're going to be more
emotional because there's somuch riding on that making that
decision correct, correctlymaking that decision as opposed
to if you're diversified, youdon't have to predict the future
.
You just diversify and you knowthat wins over time.
(45:27):
You don't have to be asemotional.
You could be actually be morefront footed.
It's like you get a bigdownturn.
You're like you know, maybe Ineed to rebalance a little bit.
Um, you, you're, by and large,taking emotions out of the
equation because your frameworkis diversified.
I know I can't predict thefuture with high consistency and
therefore I'm just removingthat as opposed to I got to ride
(45:50):
the ups and downs and when themarket is doing well, I'm
winning.
When the market is doing poorly, I'm losing.
That is very emotionallycharged.
So I think, if you feel likethere's too much emotion and
you're not happy with how thingsare going, this is a really
important opportunity to be morediversified and to really think
(46:13):
and understand what that meansand to assess is that the right
framework for me?
And if you think about it from atiming standpoint, so let's
fast forward five years from nowand you look back five years
and you say you know, I was lessdiversified for 10 or 15 years.
It really worked out, and thenaround that time, when things
(46:34):
started to turn, I got a lotmore diversified and that really
worked out.
You just you just won the game.
If you, if you ride it all theway up and you hold that
strategy and you ride it all theway back down and you look
backwards and say I had theopportunity, I didn't take it,
and so I view this as one ofthose potential inflection
(46:54):
points.
Again, we won't know for surefor years, but it does feel like
that.
So I feel like, if there's toomuch emotion in your portfolio,
use that to drive you towardsbecoming more diversified.
Speaker 2 (47:07):
I'm going to just show this comment because I
think it's hilarious.
From East Wing 52% rate ofcommentary.
Success for CNBC would be huge,Absolutely yes.
Obviously a lot of people agreewith you, Alex.
For those who want to learnmore about RPAR and just in
general, maybe just learn aboutrisk parity, you've got your
book.
Let's talk about where peoplecan find it.
Speaker 1 (47:45):
Or two where we talk about the strategy.
We answer investor questions.
I love talking about this stuff.
I'm passionate about it.
I've written a couple of booksand I'm always beating the drum
of be diversified, bediversified.
And it feels like there's atleast more interest in that
today than there has been forsome time, so I'm excited about
that.
Speaker 2 (48:02):
Again, folks, this was a sponsored conversation by
Evoke Advisors.
Al Chihides for Amir.
Learn more about RPAR.
Appreciate those that gave thecomments, especially the funny
ones.
It's always nice to see those,and I will see you all in the
next episode of Lead Lag Live.
Thank you, alex, appreciate it.
Thank you, cheers.
It's very possible there's a sea change and the
next decade looks very differentfrom the last decade.
Again, we won't know for awhile, but you're starting to
see that at least this year,that's what's happened.
And then you look at portfoliosand they look like they're
positioned for the last decadeand that could be a terrible
result, and so there'ssignificant risk that you end up
(00:21):
in a really bad outcome interms of your performance for
the next decade, because yourposition for the last decade and
then you look at all theuncertainty and the odds that
the next decade looks like thelast decade are increasingly
becoming very slim.
Speaker 2 (00:36):
This will be a good conversation with Al Shahidi,
who's going to give us some goodperspective on cycles, where we
are in the current environmentin terms of policy uncertainty
how to think about investingduring a period of policy
uncertainty and my name isMichael Guy, a publisher of the
Lead Lag Report.
Joining me here is Mr AlexShahidi of Evoke Advisors.
Alex, I'm going to skip thewhole.
Tell us about yourself, becauseI know you people have been
watching this now repeatedly.
I want to get right into yourtake on things.
(00:58):
We were just talking before theshow.
You said you were busy.
I said is that because ofvolatility?
You said no, uh, rats on beingbusy because of reasons outside
of volatility, but, as you know,typically volatility gets
people, uh, very excitable.
Um, so any thoughts on the waythat this last three weeks have
played out in terms of you thinkit's noise?
(01:19):
Do you think it's a cycle shift?
Do you think it's somethingthat people should worry about?
And, granted, it's all abouttimeframes, but I want to just
get your initial thoughts.
Speaker 1 (01:27):
Thanks for having me again.
I appreciate it.
I certainly don't think it'snoise.
It seems like we're goingthrough a pretty significant
change and it's a change inpolicy.
It's a change in direction andif you just look backwards you
know these inflection points aremore obvious years after the
fact.
It's hard to understand itwhile you're going through it.
(01:48):
But if you just look backwardsand you look at the environment
that we've lived in for 10, 15years and you look forwards and
they look pretty different.
You had a period of low andeither zero or very low interest
rates.
We had a big jump in 22 and itstayed high.
We've had a long period of lowand stable volatility.
(02:09):
Volatility hasn't been volatilefor a long period of time.
Covid hit.
You got a big spike and then itcame down and it felt like,
okay, volatility is going back.
Put the genie back in thebottle.
Volatility is going to bestable for a while.
It's not stable.
There's a lot of uncertainty,and then you add on top of that
all the policy uncertainty thatwe've seen recently.
So when you look forward, thepotential range of outcomes is
(02:32):
probably extremely wide probablythe widest in my investing
career and that's not just interms of.
Do we have a recession?
Is the economy okay?
But where does inflation land?
Where does policy go?
Geopolitically, all thesethings are who knows?
You can try to guess, butthere's a good chance you're
(02:52):
going to miss it, and you couldmiss it by a lot.
So you have a wide range ofpotential outcomes and probably
greater risk of extreme outcomes.
I don't think too many peoplewould disagree with that
assessment.
So, given all that, what do youdo?
And to me it's always goes backto you got to be diversified.
And then what does that mean?
Speaker 2 (03:10):
We'll definitely get into that.
Um, I've seen a lot of studiesthat show that volatility tends
to persist at the two extremesof valuation.
I have all told me is very highwhen you're very overvalued,
and then volatility is very highAlso when you're very
undervalued, which makes sensebecause those are pots and
bottles and the market's tryingto figure out the right level to
have an inflection point.
To your using your words,valuations play into this.
(03:33):
I made the argument myself on Xthat everyone should stop
blaming Trump for volatility.
I mean, he inherited a veryexpensive starting point for his
administration on the stockmarket.
He inherited at a veryexpensive starting point for his
administration on the stockmarket and all you really needed
was just a trigger for suddenlythe valuations to maybe start
to get volatile.
Speaker 1 (03:56):
Yeah, yeah, I think valuations drive long-term
returns across markets, butsometimes you need a catalyst
for the market to wake up to.
Oh, you know, things are reallyexpensive and given this
pricing which effectivelyreflects very optimistic
outcomes for that asset class,when you have a lot of
uncertainty, then the range ofoutcomes is wider, as I
described, and there's lesscertainty as to that optimistic
(04:18):
result.
So you start to questionwhether you're willing to pay
that high of a price given thatheightened level of uncertainty.
The other point that I think isimportant is when people say
the market's expensive, and whenpeople talk about the market,
they're generally talking aboutthe US stock market.
I think part of appreciatingwhat it means to be diversified
(04:39):
is you got to look at a lot ofdifferent markets.
You know international stocksaren't that expensive.
Emerging market stocks arecertainly not expensive.
Bonds are a lot cheaper thanthey've been for a long time.
Gold is harder to value, butthere's a lot of tailwinds there
.
So I think you're right that USstocks are expensive, but a lot
of other markets are not.
(04:59):
And now you're seeing what Idescribed earlier, the opposite
of what you've seen the last 10or 15 years, where US stocks
significantly outperformed justabout everything else, and this
year US stocks are in dead lastand international is ahead,
emerging is ahead, bonds areahead, inflation-linked bonds
are ahead, gold commoditieseverything is ahead of US stocks
(05:20):
, and so maybe that's just thebeginning of a long-term cycle.
Again, we won't know for a fewyears, but the backdrop
certainly seems to support that.
Speaker 2 (05:30):
I think the challenge there is that, let's say,
somebody buys a total worldmarket index or bung on that
it's so dominated by US rightBecause of the massive
outperformance that, while allthat may be true, people would
have to actively tilt in thatdirection.
Speaker 1 (05:48):
Yeah, yeah, and you don't have to do that.
But my sense is a lot of peopleare not even market weight.
They're overweight relative tomarket, and so there's a couple
of levels of diversification.
So within equities, you canlook at where we are today
versus where we were 10 yearsago, and the equity market is
(06:09):
significantly overweight USrelative to where it was.
And then even within the US,it's significantly concentrated
within just a handful of stocks,so the index itself is not that
well diversified.
And then many marketparticipants, from what I've
seen, are even more concentratedthan the index, which is
already concentrated.
And then, if you take a stepback, there is a significant
(06:31):
overweight to equities, whetherit's US, non-us, emerging, et
cetera, and so there isn't greatdiversification across assets.
And so when you kind of I thinkthe punchline for today's
conversation is, you look ahead,it's very possible there's a
sea change and the next decadelooks very different from the
last decade.
And again, we won't know for awhile, but you're starting to
(06:54):
see that at least this year,that's what's happened.
And then you look at portfoliosand they look like they're
positioned for the last decadeand that could be a terrible
result, and so there'ssignificant risk that you end up
in a really bad outcome interms of your performance for
the next decade because yourposition for the last decade and
(07:14):
then you look at all theuncertainty and the odds that
the next decade looks like thelast decade are increasingly
becoming very slim.
I want to bring a comment fromChristoph Robka.
Speaker 2 (07:25):
I apologize if I'm not pronouncing that correctly
there from X.
Cash is also a position.
Many investors seem to missthat as an option.
Let's talk about cash as aposition.
Speaker 1 (07:35):
So cash is.
It is a position.
The yield was zero for over 10years and now you're getting 4%
or so.
So that's good.
But you got to keep in mind allthese asset classes should
outperform cash over time.
They have outperformed cashover time and there's going to
be periods where cash is king.
Those periods don't happen veryoften.
They typically don't last verylong.
(07:58):
You need capitalism.
For capitalism to work, youneed assets to beat cash, and so
I think of cash not as along-term position, because if
you took whatever your portfoliois, add cash to it, your return
will probably go down over thevery long term because cash
should underperform assets.
So I think of it as a tacticalposition.
So you can call it dry powder.
(08:19):
You can say I want to buy low,so I want to hold the cash, but
it's tactical.
So you have to time when to getinto cash and when to get out of
cash, and I found that it'svery difficult to do that
effectively.
Over time You'll be rightsometimes.
You'll be wrong sometimes.
On average, you're probablyclose to 50-50.
And in my experience maybeyou're a little bit better than
that, but it's really hard.
(08:40):
You have to add value in orderto get in and out of cash
because the odds are stackedagainst you, because cash should
underperform assets.
Now you could argue today,because of all the uncertainty,
you should own a little bit morecash, and I think that's fine.
I tend to minimize cash, andthe reason is the other way to
minimize losses is to be superdiversified.
(09:01):
So we'll talk about this.
The risk parity portfolio is upthis year and it's not an
unusual year.
You have a wider range ofreturns across assets, but the
average is doing just fine, andso that's the other way to
reduce the risk of big swings isto not be concentrated, be
diversified, and thatdiversified portfolio should be
(09:22):
cash over time, and there'speriods again when it won't, but
timing that is, in myexperience, really hard to do.
Speaker 2 (09:30):
Yeah, it's always the whipsaw risk, right, it's this.
Old studies from market timingshow that market timing doesn't
work, no matter what asset class, because it's not really timing
the asset class, it's timingthe cash point.
And if the problem with cash isthat there's no real momentum
obviously, so you don't evenhave a chance really to sort of
outperform in those fleetingmoments.
Speaker 1 (09:47):
Yeah, and there's one other, I think, important point
which is, as humans we have,our hands are a little bit tied
in terms of timing, becauseoftentimes those decisions are
made based on emotion, andemotion is often backwards
looking, meaning you feel betterwhen prices are rising and you
feel worse when prices arefalling, and it's easy to
extrapolate the recent past intothe distant future.
(10:09):
So many and I'm not sayingeverybody does this, but many
people will try to time based onwhat's happened backwards
because their emotions drivethem in that direction.
And so if you try to time, myguess is, over the long run
you'll tend to want to sell highand buy low.
I'm sorry, you want to sell lowand buy high.
Um, because you'll want to.
(10:30):
You'll feel like, oh, there'smore risk after prices have
fallen and and and what's youknow obviously very
counterintuitive is when pricesfall, the forward returns are
higher and when prices rise, theforward returns are lower and
your emotions drive you in theopposite direction.
So you kind of have this almostlike a handicap in trying to
time, because you have to dealwith your emotions as well.
Speaker 2 (10:53):
And there were definitely a lot of emotions.
Yes, for sure, for trading days, for sure.
I love that point you madeabout most people are not even
market weight and mostindividuals are probably
massively concentrated in acertain number of positions
because of the stories around ai, for example.
We've seen the last severalyears and that's been a great
place to be for a while and itclearly works right.
(11:14):
Although I am blown away, I'msure you see some of these these
uh data points to the, theamount of retail inflow that uh
has coming.
So I'll tell you a quick.
For those watching, this ishonestly true.
On that Sunday when futures weredown like 1500 points, I had a
number of financial advisorsgive me a ring and one advisor,
who had been in business for 30years, said to me you know, I'm
(11:36):
actually very nervous.
And I said what makes younervous?
You've seen all kinds of cycles.
Why does this make you nervous?
He said said this is the firsttime in his career.
He was getting his own clientscalling him up asking when they
were going to buy stocks,whereas typically, when you have
markets acting volatile, as afinancial advisor I'm sure many
(11:59):
of you that are watching thisare financial advisors can
relate to this your client callyou up telling you to get out.
Instead, he was saying that hisclients were asking him to get
in and the data on the retailside and it's like the way that
retail just comes right inbecause the buy the dip mantra
has worked.
It's actually pretty remarkableand I think it makes them to
your point about recency biasand emotions, and all this makes
(12:21):
them even more concentratedwith every single happens.
Speaker 1 (12:24):
Yeah, yeah, I mean, and that's the other thing that
you really have to be carefulabout is, you know, if you look
back the last almost 40 years,so if you've been investing for
40 years, you've seen it allright.
But and and by the dip hasworked.
Uh, you know, since the earlyeighties, if you just bought the
dip and that was your strategyfor the last four decades,
you've done great.
(12:44):
There is a chance that thatdoesn't work for a long time,
and the reason is buy the diphas worked because inflation
hasn't been volatile and anytimethere was an economic downturn,
you'd have stimulus.
You have monetary stimulus,they cut rates, you've had
(13:05):
fiscal stimulus and if you lookforward, there is obviously a
risk of a recession.
Right, there's also a risk thatyou don't get the same policy
response you've had in the past,and it's because we have
massive deficits.
Politically, it's becoming morechallenging.
Inflation is sticky and thatchanges the game.
(13:26):
It almost flips it on its head.
So if there's this assumptionthat buy the dip works all the
time, that's not a fairassumption over the very long
run and this environment couldbe very different.
So it is a very dangerousstrategy, particularly if you're
not diversified to begin withand your strategy is I'm just
going to ride the market and I'mgoing to time the market and
(13:48):
when it falls, I buy.
And because it's worked for along time, it's become ingrained
as part of a successfulinvestment strategy.
You should be cognizant thatthere is a risk that doesn't
work for a long period of timeand buying the dip could
actually hurt you, particularlyif stocks don't really go
anywhere for a long time and youcan just look at valuations.
You can look at policy, thereaction function.
(14:10):
There's a lot of things outthere that could change how
things work in the future.
So it would be very I highlyrecommend looking at all the
assumptions you're making inyour strategy and just to make
sure that those still hold.
Speaker 2 (14:24):
Why do you think buy the dip seems to only be a
mantra when it comes to stocks.
I don't see that when it comesto bonds.
Maybe you see it with gold.
Speaker 1 (14:39):
But why is it only stocks that you tend to hear?
I think it's because it's likewe live in a stock culture in
some ways, where there is thisassumption.
Again, we go back to theseassumptions.
The assumption is that stocksget returns and all the other
things are nice to have becausethey reduce the risk, but they
don't give you returns.
So there's this view thatthere's a trade-off.
You get returns with stocks,the other things are
diversifying, but they loweryour long-term returns.
I want high returns.
(14:59):
I'm going to focus on stocks.
We know stocks are risky.
I got a time when I get in andout.
I think that's just the generalphilosophy and I don't think
that's true.
If you look at all these assetclasses and I'm talking about
not just US stocks butinternational emerging markets,
I'm talking about even bonds Ithink the return is higher than
(15:20):
many realize, especially longdated bonds.
Gold is only 1% a year behindstocks since 1970, when we came
off the gold standard in 1971.
Since then, when gold has beenfree floating, it's only, it's
less than 1% a year for 50 plusyears behind equities.
Hardly anybody owns gold andit's, you know, destroyed
(15:42):
equities.
The last several years,including this year, commodity
equities have actuallyoutperformed equities by a
couple percent over 50 years.
So there are diversifyingassets that don't give up
returns, that help reduce therisk in your portfolio, and so I
think the reason that peoplejust focus on buying the dip on
equities is because that's beenthe focus Everybody's thinking
(16:03):
about.
That's where the returns comefrom.
I think you have to reorient theway you think about building a
portfolio.
Be diversified, but that isreliably beneficial over time.
Timing markets not as reliablybeneficial.
You could get it completelywrong, especially if you have a
buy to dip mentality.
So if you're diversified, youdon't really give up returns.
You can own a lot of differentassets way to.
(16:38):
How are all these assets doing?
Then the buy to dip becomesless of a focus and you can look
at all these assets and justrebalance and effectively you
can buy the dip when they'redoing poorly.
You buy more when they're doingwell, you sell a little bit
rather than just trying to timeone asset.
Speaker 2 (16:48):
The funny thing about rebalancing is that people
think that's not how you getwealthy.
I wake up at 4 a 4am every dayand I go to the gym Right and I
have on YouTube.
The algo always sends memotivational videos to watch
right before I go to the gym andone of the videos I was
listening to earlier today.
Somebody said the fastest wayto your get to your destination
(17:09):
is to go slowly.
Speaker 1 (17:11):
Yeah.
Speaker 2 (17:12):
Exactly, very well articulated.
Yeah, I think it's very wellarticulated.
Yeah, let's talk aboutrebalancing and the role of
rebalancing, because I think andwe'll talk about this in the
context of risk parity yeah, butwhy is it that rebalancing is
such a big driver of longer-termoutperformance?
Speaker 1 (17:27):
So I think rebalancing gets a bad rap
because again it goes back tothe framework most people use.
They have high return, highrisk stocks and low return, low
risk bonds.
So if you're rebalancing,you're typically selling stocks
and buying bonds when stockshave done well Over time.
That helps a little bit becauseyou're doing some rebalancing
(17:49):
and buying low and selling highwith some assets.
But over time, the less stocksyou own, the worse you do,
because stocks have a higherreturn than bonds do, and so I
think that's part of therationale why people have stayed
away from rebalancing.
And you've seen it the lastdecade, particularly when you
have a big divergence betweenthe US stock market and bonds.
(18:11):
I think bond markets areearning like 1% a year for a
decade and US stock market andbonds I think bond markets are
like 1% a year for a decade andUS stocks are double digits.
And so you can see why you lookbackwards and rebalancing
didn't feel great, because everytime you sold stocks they
outperformed.
You bought bonds, they didn'tdo much, and then even in 22,
bonds are down a lot, almost asmuch as stocks and you look at
(18:31):
it and say what's the point ofrebalancing?
So that's a backward looking,but you have to have a wider
perspective.
You got to zoom out andrecognize that all these markets
go through cycles.
They go through good and badperiods.
You can't look at the past goodperiod and say the next period
is going to be good as well.
They're cyclical.
They get expensive, theyunderperform, they get cheap,
(18:51):
they outperform.
And if you diversify across alot of different markets and, as
I mentioned earlier, a lot ofthem have competitive returns
with equities and you rebalancethat now you can see that
there's a benefit to it.
Because if you have let's justsimplify it If you have two
assets that have the same returnover a long period of time and
(19:11):
they go through differentperiods where they do well and
do poorly, and whenever one ofthose assets is outperforming,
you sell a little bit and youbuy a little bit of the
underperformer.
If you kept doing that overtime, you could see why you
would have a return that'sgreater than just the average of
those two assets, becauseyou're programmatically buying
low, selling high, and so thekey is is find those other
(19:32):
assets rebalance, because itactually adds returns and it
reduces risk because you'regetting more diversified.
So I think it's the reason it'snot that well appreciated is
because the framework is just Iget returns from stocks, nothing
else.
As opposed to how do I build awell-diversified portfolio?
Speaker 2 (19:51):
Do you get the sense that most of the financial
advisor community hasdiversification?
Speaker 1 (19:59):
I do, yeah, and it's based on just my experience
talking to advisors.
It's based on what people focuson.
You know you turn on CNBCthey're talking about the stock
market.
You look at the Wall StreetJournal it's about the stock
market.
You ask somebody how's themarket doing and they're going
to tell you how the US stockmarket is doing.
That's just the focus and Ithink it's misplaced.
(20:24):
I feel like you really need tobe diversified and I think in a
period like this it's even morerelevant.
Wide range of outcomes, extremeoutcomes more likely be
diversified.
That's how you protect yourself.
You can try to time it.
If you miss it, you could takea huge hit.
So I do think that mostportfolios are not that well
(20:46):
diversified and the simplestmeasure of that is a 60-40
portfolio, which is widelyassumed to be a moderate risk
portfolio.
That 60-40 portfolio is 98%correlated to the stock market
because you have two assets youhave high risk, high return
stocks the 60, and you have lowrisk, low return bonds the 40.
(21:08):
So the total return isdominated by how the more
volatile component of thatportfolio does the 60.
It's overweighted and it's waymore volatile.
So if the 60 does well, youhave a good year.
If the 60 does poorly, you havea bad year.
You don't go up and down asmuch as the stock market, but
directionally it's almost 100%dependent on how the stock
market does.
So if you go through a longperiod where stocks do poorly,
(21:30):
60-40 does poorly and that's thestarting point for many
investors and they view that asa balanced portfolio.
I think if you just look at a60-40 fund, most of them have
the title balanced portfolio,xyz firm balanced portfolio.
It's not balanced.
It can't be balanced.
If it's 98% correlated to asingle asset, how is that
balanced?
8% correlated to a single asset, how is that balanced?
(21:52):
So I think you know, and manypeople don't work off of that
framework- so I think it'spretty clear that they're not
that diversified.
Speaker 2 (22:01):
I love this comment from Amin, watching this on
LinkedIn.
Going back to the point aboutbuying the dip Buying the dip is
a slogan, not a strategy.
I think that's spot on.
Let's talk about gold for a bithere.
I've seen a lot of interestingcharts that now show that gold
has outperformed stocks, the S&Pat least, since 2000.
That was not the case for agood decade, somewhere between I
(22:24):
think it was 2012 up until nottoo long ago.
What's the role of gold in aportfolio?
I know we're talking aboutdiversification.
Obviously it's diversifier, butwhat makes gold unique relative
to other asset classes?
Speaker 1 (22:41):
I think gold in this environment is interesting
because it's a storeholderwealth and it doesn't even act
like the other commodities.
So in 2008, gold was up.
All the other commodities aredown a lot.
2022, commodities are down alot.
Gold was about flat Um and, andI think it's because it's it's
more like a currency and astoreholder wealth.
(23:02):
It's the oldest currency in theworld, um, and so it has
different behavior, which whichis what makes it a uh, valuable
diversifier.
The part about it havingreturns is really interesting.
I think if you ask an academicwhat is the return of gold,
they'd say it has no return.
It's like cash.
But when you look at the dataand we came off the gold
(23:23):
standard in 1971, it became freefloating.
Since that point I alluded tothat earlier Gold is it's earned
like 8% a year since 1971.
And I think equities are about9% a year.
That is, I think, thatsurprises a lot of people.
The other thing that I think isinteresting about it is that, if
you so remove the labels, youhave asset A, asset B.
(23:43):
Asset A is global equities,asset B is gold, but remove the
labels Two assets One has earned9% a year.
One has earned 8% a year for 50plus years.
The correlation between thosetwo is close to zero.
The best decades for asset Awere the worst decades for asset
B, and vice versa.
And so the 1970s and the 2000sthe best two decades for gold,
(24:06):
the 80s and 90s the best twodecades for equities, and vice
versa.
70s and 2000s stocksunderperformed cash for a decade
, and the 80s and 90s stockswere great and gold was negative
.
So you have two assets,comparable returns over time.
Average correlation is zero.
The best periods and the worstperiods coincide.
That is a great diversifier.
(24:27):
Very few people that I'vetalked to even look at that the
way that I just described, whichis a very simple framework, and
there's a lot of other assetclasses that you can throw in
there, and I think the challengepeople have and part of it, I
think, is the media and part ofit is just our own orientation
is we zoom in?
We look at how are marketsdoing today, how are markets
(24:48):
doing this week, how are marketsdoing this month?
You have to look at it overdecades.
How our market's doing thismonth, you have to look at it
over decades.
And I know you can't act ondecades, but the decades
perspective gives you, I think,a better framework for investing
for long-term success.
You may feel like you know yousaid something earlier that I
think is really powerful and youknow the quickest, you know
(25:10):
path from A to B is to moveslowly.
I always say slow and steadywins the race, and it's because
when you look at it too closely,you're focused on getting high
returns over a short period oftime.
That invariably means you'regoing to have bad returns for
short periods of time.
When you add up all those goodreturns and bad returns, they
(25:31):
don't amount to much over a longperiod of time.
There's many investors thatI've seen that have been
investing for a long period oftime.
They feel like they've donegreat because they remember the
wins, they forget the losses.
They underappreciate how themath is cruel Meaning when you
underperform, it takes so muchoutperformance to make up for
that because the you know yougain 50% versus losing 40,
(25:52):
losing 50%.
The math is not the same, andso I think you underappreciate
the pain that losses cause.
So that's why I think slow andsteady wins the race, and I
don't think you really see thatunless you zoom out, and we're
always forced to zoom in.
I try to get people to zoom outso you can see where things are
headed and you can get a bettersense of the right framework.
(26:14):
And I think you put all thattogether and I think those are
part of the reasons why manyinvestors are just so focused on
one asset.
I love that.
Speaker 2 (26:26):
The math is cruel it is.
Very well articulated.
You have an ETF RPAR riskparity ETF.
I want you to talk about whyyou launched that fund, how it's
done, what's the theorythinking behind it.
Just kind of go off on that fora bit.
Speaker 1 (26:45):
Yeah, yeah, the idea is well.
First off, the reason to launchit is we want investors to have
the opportunity to click abutton and become well
diversified, because I just feellike it's not that well
appreciated.
So what it includes is equities, commodities, which commodity
(27:05):
equities, gold treasuries andtips, and it's risk balanced
across all those assets.
It's passive and you get awell-balanced portfolio with
just buying the ETF and I thinkof it as a tool to take your
total portfolio and take it onestep towards being more
diversified.
And we keep it intentionallyvery simple so that you know
what you own and why you own itand how it should perform.
(27:26):
So that's the framework and sothis year it's up a percent or
so.
Stocks are down a lot, but a lotof other assets are up,
including gold, and over time.
You could go back and look atall these assets over the last
50 plus years and just thatbalanced mix of assets should
(27:49):
get you an equity-like returnwith a lot less risk.
But it won't zig and zag withequities, which is what actually
makes it difficult to hold overtime, because most people's
reference point is the stockmarket.
So if our par is up three andthe stock market's up 10 or 20,
you can look at it and say, oh,it's underperforming, but it's
on a slow and steady path, notthe volatile path.
(28:09):
And if your reference point isthe volatile path, you'll be
disappointed about half the timebecause the volatile path will
be way above, it'll be way below.
This year it's way below andpeople are more satisfied that,
oh, this is doing well, but it'sdoing what it's always been
doing.
It's slow and steady, wins therace.
So it's basically diversifyingto growth and inflation
(28:30):
surprises, and it's doing thatby owning assets to do well in
different growth and inflationenvironments.
And, as I mentioned earlier,growth is volatile, inflation is
volatile.
Both are highly unpredictable.
They're influenced by policy,they're influenced by
geopolitics, they're influencedby consumer behavior.
There's a lot of unknowns, andso to me, it just makes sense to
(28:55):
be diversified across thosethings, and that's what RPAR
offers in a simple package.
Speaker 2 (29:00):
Those things and that's what RPAR offers in a
simple package.
It's hard for people to to yourpoint think in terms of decades
, right.
Speaker 1 (29:09):
You don't have to act in terms of decades, but I
think it is important to thinkin terms of decades.
Speaker 2 (29:16):
Especially if you have a family.
You're thinking aboutgenerational wealth and building
on your lifespan, which is muchmore of an institutional
mindset.
How has risk parity done inthis, in this most recent
volatile you mentioned?
It's still.
It's up for the year, right.
Speaker 1 (29:28):
On the ARP side.
Speaker 2 (29:29):
but take us through the different asset classes.
Gold really actually did, Ithink, fairly well throughout
this.
Equity is obviously not so much.
Treasury is mixed right, buttalk about just kind of more
recent, Not so much.
Speaker 1 (29:41):
Treasury is mixed right, but talk about just kind
of more recent.
Yeah, I mean when you sayequities, so US stocks are down
about 8%.
International is up about 5%.
You know.
So you know.
I think that statistic actuallysurprises a lot of people.
So developed non-US is up about5%, the index year to date.
And you just think abouteverything that's happening in
(30:02):
the world.
And if I polled most people whodon't pay attention to, who
don't actually look at thenumbers all the time, and I said
what do you think is doingbetter, us stocks or
international, I think mostpeople would say I know US is
down, but it's probably gotta bedoing better, because if US is
down, international will be downmore.
And you got a 13% spread yearto date.
(30:23):
Emerging markets is down abouta percent.
Developed non-US is up five.
So when we say the stockmarket's doing poorly, I think
we should be specific.
The US stock market is doingpoorly.
Other stock markets are doingfine.
Up 5% in four months is aboveaverage.
It's actually better thanaverage.
Gold is up 22%.
(30:44):
Treasuries are up.
Tips are about flat for theyear.
Commodity equities are up acouple percent.
So when somebody asks me how'sthe market doing, I don't talk
about the US stock market.
My answer is if you want toknow how the market is doing
meaning a balanced mix ofmarkets, not just one specific
(31:08):
US stock market I'd say themarket is doing fine.
This year.
It's up a little bit and,considering everything that's
happening up a little bit isabout right.
So it is really interestingwhen you have that orientation
and that's what I with myclients.
I always try to shift theirfocus from US stocks to all
(31:29):
other markets because as aninvestor, you're investing in
many markets, not just one, andit's become more difficult the
last decade to change people'sperspective from one market to
all these other markets.
And it's because you've had abear market in diversification.
Just about every market hasunderperformed, us stocks have
done great and now it's theopposite.
(31:50):
So you asked earlier is this adifficult time for you?
This is way easier than thelast decade because
diversification is working andthat's the challenge, with slow
and steady wins the race.
When you have that approach andbeing concentrated in the thing
that's done the best, that is aharder conversation than
(32:12):
periods like this.
This is a much easierconversation.
I get very few calls todaybecause this is what we've been
talking about for a long periodof time.
Speaker 2 (32:21):
You get a bull market in diversification, the wider
your outcomes are using yourterm earlier, right and wide
outcomes, I think, are directlycorrelated to uncertainty, yeah,
and it seems like nobody evenhas a clue what's going to
happen under the the Trumpadministration.
So it is kind of a curiousthing to make the case that, um,
trump may have ushered in abull market in diversity.
Speaker 1 (32:41):
Yeah, it is interesting, you know, I think
it's easy to get caught up inwhat's happened recently.
So uncertainty is typical.
If you study market history,uncertainty is normal and we got
so used to things being onautopilot.
You know you had lowgeopolitical risk.
(33:02):
Anytime there was a recession,we knew what was going to happen
.
The Fed is going to step in.
Oftentimes they stepped inbefore the recession and with
increasing strength.
So just go back to the last 25years.
You had 2000 to 02.
It took the Fed a couple ofyears to step in and, fiscally,
to step in and stimulate.
(33:23):
Then you had 07 or 08, 09.
It took about half the time tostep in and stimulate and so the
time to respond has gottenshorter and the amount of force
in responding has gotten greater.
Then you go to, so you got 08,09.
Then COVID hit and it tookthree months.
So you go three years, 18months, three months and we
(33:47):
threw the kitchen sink at theproblem and so ultimately that
led to high inflation.
And then we started to realize,okay, we're hitting our policy
limits.
We can't just keep shorteningthe response time and increasing
the amount of stimulus, becausenow we've got the highest
inflation in 40 years.
Okay, now we've reached thatline, we got to step back and at
(34:08):
the same time we're at massivedeficits, so you're kind of
running out of your bullets.
That is very differentenvironment where we're in a
completely different environment, not because of the policy of
insurgency that's just part ofit, not because of the policy
uncertainty that's just part ofit but because of the reaction
function of providing stimulusanytime there's a downturn.
So it's easy to look backwardsand say this is the playbook,
(34:29):
this is how it works.
You got to recognize that thatis very different today for a
whole host of reasons, and therecent uncertainty introduced by
the policy is just anotherelement in that.
And so all of that again goesback to is this a world?
You want to be more diversifiedor less diversified?
Most people are less diversifiedthan they were 10 years ago,
(34:50):
and I'm arguing that you shouldbe way more diversified than
even 10 years ago.
You should have this decadesperspective, understand that you
can go through long periodswhere US stocks do poorly.
Not just they fall a lot, butthey don't bounce.
For a long time the 2000s.
The US stock market wasnegative for the decade, the
1970s and underperformed cash.
(35:11):
I think of that as negative andyou could easily get the next
10 years where stocks do poorly.
So if you're betting it all onthat and your strategy is buy
the dip, you could be in for adifficult period.
I don't know if that's going tobe the case, but I think
there's material risk of that.
It's a lot safer to bediversified.
Speaker 2 (35:29):
Yeah, I think that's also very well articulated.
By the way, folks those thatare watching appreciate those
that are watching this.
If you have any questionsduring this conversation I see
several that have commented Feelfree to type it in whatever
platform you're watching it onand I'll bring it up.
Let's talk about how to thinkabout risk parity as a framework
(35:50):
in terms of weightings overallin a portfolio.
Yeah, I think about RPAR and Ilook at it and I say you know
that could be a whole portfolio.
Sure, I mean, it's ultradiversified, it's got all the
asset classes that you need.
It's rebalancing.
I get the sense a lot offinancial advisors don't do that
because it seems like there'sno purpose then for their job.
That's the case.
But talk to me about what youfind other advisors typically do
(36:11):
and individuals do with RPAR.
Speaker 1 (36:13):
Yeah, so just quickly , rpar's allocation could be
surprising to many people.
So it's a quarter in globalstocks, a quarter in commodities
, which is commodity equitiesand gold, and then it's 35% long
dated tips, 35% long datedtreasuries.
And the reason it's not 25, 25,25, 25 is because the
(36:35):
treasuries and the tips longdated are less volatile than
equities and commodities.
And the key to diversificationis equal risk contribution,
meaning you don't want anysingle asset class driving your
returns.
So you have to own more of theless volatile asset classes and
less of the more volatile assetclasses so that the total
contribution to your risk isroughly equal.
(36:56):
It doesn't have to be perfect.
You just even ballpark is isway better than what most people
do.
So you can see 60-40 not welldiversified, because the 60 is
significantly more volatile thanthe 40 and it's overweighted.
So that's why it's 98%correlated to the stock market.
So that's what it is.
It's just a diversified mix ofassets that do well in different
environments, risk balance, andyou're done.
(37:17):
That's very simple.
So you're done.
That's very simple.
So you're right, it is a totalportfolio.
You could theoretically putyour entire public market
portfolio.
There's other things you canown private markets, hedge funds
, et cetera, but public markets.
It's a very efficient mix and Iwould expect it to have an
equity-like return over the verylong run, with less risk and
much lower risk of thesignificant periods of
(37:39):
underperformance over a longperiod of time.
So I think that's the framework.
Now how do you implement this?
It's very difficult to put allyour public market exposure in
one ETF.
So I get that.
So I think of it as a tool.
It's a tool that gets you morediversified and I think that
conceptually, the way I thinkabout it is there's a spectrum.
(38:00):
On one end of the spectrum is aconventional portfolio 60-40
call it, or you can think of itas a framework.
On the other end of thespectrum it's RPAR, which is a
super diversified portfolio, andsomewhere along the spectrum is
the right point for everyinvestor and the reason there's
a trade-off is more conventional, less diversified, less
(38:23):
conventional, more diversified.
So it makes sense to be morediversified, as I've described,
but in practice it's hard to dobecause the reference point is a
conventional portfolio and soyou could be more diversified,
feel bad about it, sell thatdiversification, go to this and
you go back and forth and it'susually backward looking and
it's influenced by what'shappened in the past.
So people like it now, so theybuy more, but they didn't like
(38:45):
it, you know, six months ago,and so they don't get the
benefit of those past returns.
So the way I think about RPARis a tool to help you get more
diversified, and so you have tofind the right point along the
spectrum of how diversified canI handle my portfolio.
If I get too diversified, I maysell it at the wrong time.
If I'm too conventional, it'snot diversified, I could
(39:07):
significantly underperform.
Somewhere along the spectrum isthe right point.
So maybe a little bit morediversified than conventional,
or maybe a lot more diversified,depending on my comfort level.
So RPAR is a tool to get there.
So you take your existingportfolio, whatever it is, if
you want to take a step towardsbeing more diversified.
You own some RPAR as adiversification tool, and the
(39:27):
more of it you own, the more inthis direction to go.
The less of it you own, themore in this direction to go.
And the reason I think it's auseful tool is it's very
efficiently structured, whereyou get all these asset classes
with one click, and it is verytax efficient because all the
asset classes have an ETFwrapper around them.
So even if you went and boughtall those underlying exposures,
(39:50):
you can buy ETFs for all thosethat would be less tax efficient
than if you just bought thewrapped vehicle.
And also there's thisrebalancing that happens inside
that, I think, adds returns overtime.
So I think of it as a tool.
The more you want to bediversified, own a little bit
more, the less you own a littlebit less.
But it's just a way to getthere.
Speaker 2 (40:09):
And so it's very much kind of a core satellite type
of mentality, right Core on ourpart, for example, satellite if
you want to play around withdifferent overweights or
underweights.
It is interesting, right?
A lot of people that arewatching this on the comments
are saying or asking questionsabout views on gold and views on
tariffs and views on things.
Yeah, which is what you wouldexpect, because that's what
(40:30):
people are used to doing.
The nice thing about yourviewpoint on things is that
you're very Zen.
Speaker 1 (40:36):
None of this really matters to you In the context of
risk parity at least one ofthose asset classes will
probably benefit, no matter whathappens.
Yeah, Let me, let me talk aboutthat a little bit.
So I think it's just a naturalbehavior to to try to predict
the future.
Um, because we feel like that'show we add value is by I think
this is going to do well, Ithink that's going to do poorly,
(40:57):
and then you position based onthat, and then this is what I
was saying earlier, which is youcan act near term, but you
should have a longer termperspective.
I think if you do that, you'llrecognize that timing these
things is really hard to do.
Public markets are relativelyefficient.
There are a lot of really smartpeople that are more resourced
and experienced than any one ofus who are trying to time things
(41:20):
, and you're competing with allthose people and you have to
throw in on top of that that thefuture is inherently unknowable
, and it's probably moreunknowable today than it's been
for a long time because there'sall these highly uncertain
inputs that are trulyunpredictable.
So trying to time markets is adifficult game to play.
(41:41):
You're going to be rightsometimes, wrong sometimes, and
on average, you might be right alittle bit more than 50%, I
think the best traders might beright 60% of the time.
That's not great.
If you know nothing, you'reright 50% of the time.
If you're one of the best,you're right 60% of the time.
That is not a big spread.
So I think if that's the gamethat you're playing, which is
(42:06):
the game most people play,you're not going to do great
because the odds aresignificantly stacked against
you.
If the game you're going toplay is I'm going to be
diversified, that wins over timewith high probability.
Now, it may not win over shortperiods of time, but to me
that's still winning becauseyou're just on a smoother path,
and that's what I was saying.
You got to zoom out and thinkin terms of decades.
You can act in shorter term.
(42:27):
So I have views.
I think gold is good, I thinktips are attractive.
I'm concerned about US stocks,but I place much less weight on
those views and acting on thoseviews than I do on
diversification working, and sothe Trump phrase that I use is
(42:47):
diversification always trumpsconviction.
So it has nothing to do withthe president, it's just this
concept that diversificationtrumps conviction.
You could be highly convictedin what's going to happen in the
future Diversification.
You should always have moreconfidence that diversification
works over time, that you'll winwith diversification than
winning with picking things thatare going to outperform, and so
(43:10):
I try to stay away from it.
I still fall into that trapbecause I think that's just a
natural human tendency.
That's what we.
You know.
You turn on CNBC.
People are talking about whatthe future holds.
You know, I've always feltthere should be a rule, a
regulation, that anybody upthere predicting the future
below them should be theiractual track record.
That is, it's not.
(43:30):
It's the actual data and youknow.
So you have somebody up theresaying you know, I think you
know, in the next three months,this is what's going to happen.
It should say odds of successare 52% 52% chance that this guy
talking is right.
Cnbc will go out of businessovernight if that happened.
But that's the reality.
(43:52):
I think it's always good toexamine what truth is.
That's the reality.
You could study anybody'spredicting abilities If you
actually had the data.
The success rate is probablylow.
Most people probably think it'shigher because they remember
the wins.
They conveniently forget thelosses.
But that's the reality, anddiversification has a much
higher odds of success.
Speaker 2 (44:13):
Alex dropping some bombs on people on this.
I like this.
This is good.
Anything that we should hit onas far as how, behaviorally,
people should be thinking aboutmarket.
Again, we talked a lot aboutdiversification, obviously, but
you know, loss aversion is oftenwhat causes people to do the
wrong things.
They feel the pain of losing adollar more than the happiness
(44:36):
of gaining a dollar.
Diversification should be ananswer to that, but any sort of
words of wisdom or advice forthose that tend to find
themselves much more emotionalthan they maybe should.
Speaker 1 (44:45):
Yeah, I think you know it's interesting.
I feel like the morediversified you are, the less
emotional you are.
That's just been my experienceBecause I think, if you buy into
what I said earlier,diversification trumps
conviction.
If you buy into that earlier,diversification trumps
conviction.
If you buy into that, yourportfolio is less emphasizing a
single asset class.
(45:06):
So I think if you're in the gameof I got to pick when to go
into stocks, when to go out ofstocks, you're going to be more
emotional because there's somuch riding on that making that
decision correct, correctlymaking that decision as opposed
to if you're diversified, youdon't have to predict the future
.
You just diversify and you knowthat wins over time.
(45:27):
You don't have to be asemotional.
You could be actually be morefront footed.
It's like you get a bigdownturn.
You're like you know, maybe Ineed to rebalance a little bit.
Um, you, you're, by and large,taking emotions out of the
equation because your frameworkis diversified.
I know I can't predict thefuture with high consistency and
therefore I'm just removingthat as opposed to I got to ride
(45:50):
the ups and downs and when themarket is doing well, I'm
winning.
When the market is doing poorly, I'm losing.
That is very emotionallycharged.
So I think, if you feel likethere's too much emotion and
you're not happy with how thingsare going, this is a really
important opportunity to be morediversified and to really think
(46:13):
and understand what that meansand to assess is that the right
framework for me?
And if you think about it from atiming standpoint, so let's
fast forward five years from nowand you look back five years
and you say you know, I was lessdiversified for 10 or 15 years.
It really worked out, and thenaround that time, when things
(46:34):
started to turn, I got a lotmore diversified and that really
worked out.
You just you just won the game.
If you, if you ride it all theway up and you hold that
strategy and you ride it all theway back down and you look
backwards and say I had theopportunity, I didn't take it,
and so I view this as one ofthose potential inflection
(46:54):
points.
Again, we won't know for surefor years, but it does feel like
that.
So I feel like, if there's toomuch emotion in your portfolio,
use that to drive you towardsbecoming more diversified.
Speaker 2 (47:07):
I'm going to just show this comment because I
think it's hilarious.
From East Wing 52% rate ofcommentary.
Success for CNBC would be huge,Absolutely yes.
Obviously a lot of people agreewith you, Alex.
For those who want to learnmore about RPAR and just in
general, maybe just learn aboutrisk parity, you've got your
book.
Let's talk about where peoplecan find it.
Speaker 1 (47:45):
Or two where we talk about the strategy.
We answer investor questions.
I love talking about this stuff.
I'm passionate about it.
I've written a couple of booksand I'm always beating the drum
of be diversified, bediversified.
And it feels like there's atleast more interest in that
today than there has been forsome time, so I'm excited about
that.
Speaker 2 (48:02):
Again, folks, this was a sponsored conversation by
Evoke Advisors.
Al Chihides for Amir.
Learn more about RPAR.
Appreciate those that gave thecomments, especially the funny
ones.
It's always nice to see those,and I will see you all in the
next episode of Lead Lag Live.
Thank you, alex, appreciate it.
Thank you, cheers.
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