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July 12, 2025 42 mins

The investment world is filled with overconfidence. We obsessively track our wins while conveniently forgetting our losses, leading most investors—even professionals—to achieve prediction accuracy barely above 50%. This sobering reality forms the foundation of a fascinating conversation about why predicting markets is so difficult and how diversification offers protection against our behavioral biases.

When we zoom in too closely on market movements, every fluctuation appears significant, triggering emotional responses that frequently sabotage our long-term success. The natural instincts that serve us well in everyday life often lead to counterproductive investment behaviors—buying high and selling low in response to fear and greed. A risk parity framework offers an antidote to these tendencies by emphasizing balanced exposure across assets that respond differently to various economic conditions.

True diversification extends far beyond traditional 60/40 portfolios, which typically show 98% correlation with equity markets. Instead, it requires thoughtful allocation across stocks, bonds, commodities, and inflation-protected securities, weighted according to their volatility characteristics. Historical data supports this approach: equities have experienced "lost decades" in two of the past five decades, while alternative assets like gold have delivered comparable long-term returns but performed best during equity's worst periods. This complementary performance pattern demonstrates why diversification across uncorrelated assets provides the only "free lunch" in investing.

Today's environment of heightened uncertainty and inflation volatility makes diversified approaches more valuable than ever. While many portfolios have become increasingly concentrated in U.S. equities after years of outperformance, the coming decade may reward those who embrace a more balanced approach to navigating the unknowable future. Remember: investing isn't about predicting tomorrow perfectly—it's about building resilient portfolios that can thrive across diverse economic scenarios.

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Transcript

Episode Transcript

Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Well, predicting the future is inherently difficult,
right?
So we know that, and I think mysense and my experience is a
lot of investors are probablyoverconfident relative to what
the hard data would show thattheir track record is of
predicting the future.
Because there's somethingcalled selective memory, right,
we remember our wins and weconveniently forget our losses,

(00:23):
and so if you objectivelymeasure everything you thought
that would happen and whatactually happened and you took a
track record of that, my guessis most people would be
somewhere in the 50 to 55% rangein terms of their hit rate, of
how often they're right.
I think the smartest investorsmight be 55 or 60% at best.
The average investor isprobably 50 or lower, because

(00:45):
emotions might drive you to doworse than if you were just
looking at it completely blindly, without any insight.

Speaker 2 (01:01):
My name is Michael Guy.
I'm publisher of the Lead LagReport.
Joining me here is Al Chahidiof Evoke Advisors.
Evoke is a client of Lead LagMedia, so this is a sponsored
conversation, but I always lovetalking to Al and I named this
podcast on the live stream KeepCalm and Risk Parody On and I
wanted to do that because Ithink there's a lot of angst and
anxiety given everything we'reseeing from the geopolitical

(01:23):
side Iran, Israel, Trump, allkinds of things that are going
on, and I teased this out to youa little bit earlier.
I view risk parity as aframework, as a hedge against
behavior, so I want to spend thefirst part of this conversation
talking about behavioralresponses to headlines, to

(01:43):
geopolitical risk, how thatactually hurts the very long
term.

Speaker 1 (01:47):
It's a very good point.
Behaviorally, people respond tothe news that they hear and
what they see, and it's anatural response.
Outside of the investment world, it makes sense to react to
what is in front of you.
Investing is very different andcounterintuitive in that way

(02:07):
where oftentimes what you seeand the information that you're
taking in is already reflectedin the price.
So reacting to that may be verycounterproductive, but that's
just human nature.
We've heard about fear andgreed driving investment
decisions.
It drives many decisions,particularly investing, that's

(02:28):
emotionally driven.
Fear and greed play asignificant role, and oftentimes
fear and greed drive you to dothe exact opposite.
You want to buy when thingshave gone up and so high and you

(02:51):
want to sell after things havegone down.
You know so sell low, and sothat's one of the challenges of
letting emotions drive yourinvestment decisions.

Speaker 2 (03:00):
Do you think that people have become more
emotional or less emotional inrecent years?

Speaker 1 (03:08):
My guess is that the emotions have probably been
constant through time.
But there's environments whereyou may react more to your
emotions.
I think people are hardwired tobe emotional and they respond
to those impulses.
But there are environmentswhere there's greater fear and

(03:29):
greater greed.
And if you just look at marketsover time just focus on the US
stock market, for example itgoes through long stretches
where it does really well andthen it goes through long
stretches where it does verypoorly, does very poorly.
These long, long-term cycles, ifyou zoom out and you just look
at the S&P 500, for example,goes through very long stretches

(03:51):
of great and terrible resultsand I think a lot of that is
fueled by emotion.
The longer the bull market, themore people jump in and they're
influenced by that.
And the longer the bear market,the more people jump out.
And now we're in a 16-year bullmarket and maybe it's turned.
It's hard to know, but in termsof emotions I think part of it
is influencing that.

(04:11):
And then obviously, the biggerthe news and the bigger the
headlines the link betweenemotions and timeframe People
will be to zoom in and look atthe problem very closely and one

(04:48):
of my jobs as an advisor is tohelp people zoom out.
And oftentimes the further outyou're zoomed, the more clear
headed you can be and the moreperspective you have on the
direction that you're headed onand your path.
And when you look at thingsclosely, I think you'll
experience and see morevolatility.
And when you look at thingsclosely, I think you'll
experience and see morevolatility.
Then, when you look at thingsfurther back, those big wiggles

(05:11):
up close are actually smallwiggles when you look further
back and then the trend linebecomes more apparent and when
you look at it closely, it's youknow there is no trend line.
It's like up and down, up anddown, up and down.
So I think a lot of it is justthe angle through which you view
the problem and the markets.
And the closer you are, themore volatility you experience

(05:32):
and you see, and that can beemotionally charging as well.
So I think a lot of it ishaving the perspective to zoom
out and it's hard to do becauseeverything you see forces you in
and I think part of the processis like push yourself out and
you have to do it intentionally,otherwise you'll get pulled in

(05:53):
and you know we're guilty of thesame thing as well.

Speaker 2 (05:56):
So you mentioned the sort of squiggles because I
often tease that on X when Irefer to technical analysis.
Right, the squiggles on a chartand I think related to the
point about emotion isconfidence that one can predict
the future based on squiggles.
I suspect that it's never beenas easy as it is today to be a

(06:19):
in quote technician, because youhave all the software that
enables you to very quicklyoverlay things on charts and do
things like that and give afalse sense of confidence.
Talk us through why that's nota good way to approach investing
.

Speaker 1 (06:29):
Well, predicting the future is inherently difficult,
right?
So we know that, and I think mysense and my experience is a
lot of investors are probablyoverconfident relative to what
the hard data would show thattheir track record is of
predicting the future.
Because there's somethingcalled selective memory, right,
we remember our wins and we,relative to what the hard data
would show, that their trackrecord is of predicting the
future, because there'ssomething called selective

(06:50):
memory, right, we remember ourwins and we conveniently forget
our losses.
And so if you objectivelymeasure everything you thought
that would happen and whatactually happened and you took a
track record of that, my guessis most people would be
somewhere in the 50 to 55% rangein terms of their hit rate, of
how often they're right.
I think the smartest investorsmight be 55% or 60%.

(07:11):
At best.
The average investor isprobably 50% or lower, because
emotions might drive you to doworse than if you were just
looking at it completely blindly, without any insight, without
any insight.
So I think it's just hard to do.
And the part that I thinkpeople have a really hard time
appreciating is it's okay tohave a view of what you think

(07:31):
the future holds, but you haveto compare that to what
consensus view of that is.
And because you not only haveto be right about what happens,
your view has to be differentfrom the consensus, the average,
and so you have to be differentand correct.
And that is really hard to dobecause, on average, the market
is all.
The investors are reasonablysmart, they're well-informed,

(07:53):
there's a lot of data that feedsinto that.
So to guess correctly, it has tobe different and correct and it
has to be the right time.
So imagine a scenario where youhave some prediction over the
next year and you think themarket's going to go up 20% over
the next year and it loses 40%before it goes up, ends up going

(08:15):
up 20%, and so you could bewrong for 10 or 11 months and be
right for one month and youstill look like a native, even
though you were actually correct.
So getting all of this right isjust really hard, and the data
would support that.
You could just look at all theactive managers out there and
the percentage of them that beatthe index.
It's not as high as you wouldthink, given how smart and
experienced these investors are.

(08:36):
So I think trying to predictthe future is hard.
You can try, but you should beaware and honest about how
difficult it is and then,obviously, if you're letting
emotions drive a lot of thosedecisions, maybe your odds might
be even lower.

Speaker 2 (08:52):
And stocks are kind of a unique asset class in that
I feel like of all the differentasset classes, that's the one
people feel the most confidentthey can predict in the short
term and apply technicalanalysis to.
You often don't see that, andreally in the bond market you
see it somewhat with gold, butwhat is it about stocks that
makes people think theyunderstand what's coming

(09:14):
tomorrow?

Speaker 1 (09:15):
I think part of it is stocks lend themselves well to
narratives and you think about astock and it's a company and
you can create a narrative aboutwhy being an investor in that
company is really attractive andyou can tell a very good story.
So I think it just lends itselfwell to that and people respond

(09:35):
to stories and narratives andthen when you have a strong
narrative with strong historicalperformance, it adds fuel to
that narrative going forward.
So I think part of it is thatstocks are just more interesting
than bonds or gold orcommodities.
It's just easier to get excitedabout the value that a company
is creating.
And again, the challenge thatmost investors miss is a lot of

(10:00):
that expectations in the priceand so you have to be able to
distinguish what your views areabout the future of that company
relative to what the market'sdiscounting, and that's just a
really hard thing to get yourarms around and so it's very
easy to miss.

Speaker 2 (10:14):
Let's talk about the risk parity framework as a way
of approaching investing,approaching uncertainty, and why
it might be the hedge to theemotional part and the
conviction part.

Speaker 1 (10:26):
Yeah, the part that I think is maybe most challenging
for people to get right isthink of it as an investor.
There's basically one bigdecision, assuming you want to
take risk, the big decision isdo you want to do it in a
diversified way or do you wantto not be that diversified?

(10:46):
And my experience is mostpeople are not that diversified
because they put all their eggsin the stock market basket and
over time that works, butthere's long stretches when it
doesn't work and I think of therisk parity framework as just a
way of thinking about how youbuild a diversified portfolio.
And, in a nutshell, it's ownassets that do well in different

(11:08):
environments and balance thoseassets so that no single asset
drives the return.
So it's a very simple concept,but that in practice, going back
to the emotional side, isreally hard to do and it's
because you're going to ownthings that individually you may
not think look that attractive.
And it kind of goes back to thestarting point of our

(11:29):
conversation, which is beingoverly confident in what you
think the future holds and whatassets are going to do well, and
my experience is you don'treally know.
So that involves owning stockswhich a lot of people may be
comfortable owning, but itincludes owning things like
inflation-linked bonds, tips,gold commodities, treasuries

(11:52):
Everybody hates treasuries thesedays because they've lost money
the last five years, but theyield is the highest it's been
in 15 years and it's alwaysbackward looking, as we know.
So being well-diversified meansowning all these assets all the
time, and so to do that, youhave to set aside your
individual conviction of whatyou think, what assets are going

(12:12):
to do best, because you're, bydefinition, owning all of them,
and what's going to end uphappening is some of those
assets will do poorly and somewill do well, and you don't
really know which is going to bewhich.
And then the things that dopoorly, you have to buy more of
to do well, and you don't reallyknow which is going to be which
.
And then the things that dopoorly, you have to buy more of
to rebalance.
And the things that have donewell, you have to sell some to
rebalance, and that becomes evenvery difficult to do.

(12:34):
So the whole thing on paper issimple.
It makes sense to bediversified.
If we were to zoom out and justlook at a chart of a balanced
portfolio, through time, theline would be a lot straighter
than an imbalanced portfoliothat is stock concentrated.
It'll be much more volatile andgo through lost decades.

(12:55):
A well-balanced portfolioshouldn't go through lost
decades and be more resilientthrough time.
So when you zoom out, it'sobvious Most people would pick
the straighter line.
But when you're zoomed in, asmost people tend to do, and
probably more zoomed in todaythan 20 years ago because
information's in front of youall the time then it's hard to

(13:16):
hold on to that straighter lineBecause you have to own assets
that you may not be as convictedin.
You have to hold them and buymore when they underperform.
Those things are justemotionally very challenging.

Speaker 2 (13:26):
And that's always where the opportunity is, it's
where people are unable to holdon Right.
I always go back to the coreidea of being contrarian is to
not bet with the crowd, becauseyou're splitting the pot among
all the bettors, right, whereasif you're betting on a pot that
might be smaller but there'sless other players, you know the

(13:48):
expected value is higher.

Speaker 1 (13:50):
Yes, although you could look like an idiot for an
extended period of time.
That introduces that challengeof you know.
So if you're just a contrarian,there's no simple strategy, so
it's not like you can say I'm acontrarian, then I win all the
time.
Maybe you win over time, butyou lose over shorter times, and

(14:15):
shorter times in the marketcould be a year, three years,
five years, even 10 years.
Just look at the last 10 years.
The less diversified you weremeaning the more US stocks you
own, which is the asset you knowclass most favored the more of
that you owned, the better youwere.
Meaning the more US stocks youown, which is the asset class
most favored the more of thatyou owned, the better you did.
And the more diversified youwere, the worse you did.
And so you could look backwardsand say diversification lost
the last 10 years, even 15 years, and the more concentrated you

(14:38):
were, the better you did.
And so maybe that teaches youthe wrong lessons long-term.
But that's a long enough timewhere even those who are highly
convicted and being morediversified and trying to be on
that straighter line could startquestioning whether that's the
right approach.
Maybe times have changed.
Maybe these asset classes arenot going to have the returns

(14:59):
they've had historically.
Maybe there's new informationthat they didn't consider before
.
So you start questioning thevalidity of that approach, and
so that's another reason.
It's just difficult, becauseyou can go through long periods
where you just don't it doesn'twork.
You know quote unquote workeven though if you're zoomed out
it's doing exactly what youwould expect.

(15:20):
But that just introduces thatchallenge of actually
implementing some of these inpractice.

Speaker 2 (15:26):
So at your ETF RPAR you came out with it.
I believe it was the end of2019.
Been kind of a crazy cycle forthis to be live in, right before
COVID, right before COVID, andthen you know, fastest rate hike
cycle in history and all kindsof insanity in between.
Talk me through sort of thegenesis of the fund, the history
, the idea behind it, how it'sdone, everything around it.

Speaker 1 (15:48):
Yeah, the idea is to build a balanced portfolio and
it's an approach that I've beenusing with my clients for 20
years and, in summary, it's justown diverse asset classes.
So own gold, own commodities,tips, treasuries, global
equities, and be globallydiversified on the equity side.

(16:11):
So I've been doing that with myclients for decades and about
six years ago we figured outit'd be a lot more efficient if
we took those asset classes andput them inside of an ETF
wrapper, which is what our partis.
And the reason that I thinkit's interesting is twofold.
One is it's a lot moreefficient to manage a single
vehicle than to do it on aseparate account basis.
But the second, which goes toour conversation today, is it

(16:35):
helps minimize some of thoseemotional biases.
And the way to think about itis you have to own gold all the
time.
Today, people are very fineowning gold because it's up a
lot, but there were stretcheswhere it did very poorly, and
especially when you compare itto the favorite asset class, US
stocks, and that becomes areference point for a lot of
people.
When these diversifying assetclasses are doing poorly

(16:59):
relative to that, it's reallyhard to own it and it's really
hard to rebalance and buy more,and that's how you actually
maintain a diversified portfoliothrough time.
So we put all those assetclasses inside of a single ETF
wrapper, the ETF as a whole.
The package is easier to holdover time because those

(17:19):
individual asset classes areembedded within it.
It allows you to manage it moreefficiently.
There's a little bit ofleverage, which you can.
You know the cost of financingis cash, so that becomes very
efficient.
It becomes very tax efficientwhen you put an ETF wrapper
around all these asset classes.
And one of the challenges withrebalancing which we all know is
a good thing to do and we knowit's emotionally difficult to do

(17:40):
but the other challenge is whenyou sell the winners, you
typically have cap gains.
So not only do you have to sellthe winners by the losers, you
have to pay taxes on selling thewinners, which makes it really
hard to do in practice.
When you put those assetclasses inside of an ETF wrapper
, you can effectively defer thecap gains until you sell the ETF
.
So there's all these advantagesthat come along with that ETF

(18:03):
wrapper and it's obviouslyliquid and you can price it
every second.
So that's why we created it andI view it as a tool to build a
more diversified portfolio.

Speaker 2 (18:13):
Diversification has been a bit of a dirty word in
this environment.
Let's set the record straighton what true diversification is.

Speaker 1 (18:23):
Yeah, it's a good point, and diversification this
year is quote-unquote working.
When you look across assetclasses, us stocks are one of
the worst performing assetclasses in 2025, after being one
of the best in the last 15 plusyears.
So you're starting to see thebenefits of diversification.
I think they're always there.
They're more obvious when thefavorite asset class is doing

(18:46):
poorly, as it is currently.
But you asked what isdiversification and I think it's
a very important questiondifferent environments, so that
your returns aren't dominated bya single risk factor.
So think of growth andinflation as being the main risk

(19:10):
factors that drive asset classreturns.
Most portfolios are heavilyconcentrated to stocks, and so
when stocks are doing well,those portfolios do well.
When stocks are doing poorly,portfolios do poorly, and it's
not the volatility that mattersor even the drawdowns.
You see, stocks can drop inhalf.
We saw that in the 2000s.

(19:30):
They fell in half twice.
So it's not really that whichis obviously a concern.
But the bigger concern isstocks can go through 10, 15, 20
years of doing poorly, andthose are hard to come back from
.
You can live through the dipsas long as you don't sell, but
living through a lost decade ishard.
We had a lost decade in the2000s Stocks underperformed cash

(19:51):
.
We had a lost decade in the1970s Stocks underperformed cash
.
That's two out of the last fivedecades stocks had a lost
decade.
So that's important.
So basically, don't put allyour eggs in the stock market
basket.
Diversify across multiple assets.
So that includes things likegold I mentioned.
Many people underappreciate thebenefits of gold through time.

(20:12):
I think there's a general viewthat gold doesn't have high
returns.
Since we came off the goldstandard in 1971, gold is within
1% a year of equities globalequities in terms of its returns
.
Gold is within 1% a year ofequities global equities in
terms of its returns.
Its best decades were duringthe worst decades for equities
the 70s and the 2000s and itsworst decades were during the

(20:33):
best decades for stocks.
So it's a really gooddiversifier.
Tips long data tips started in1998.
They're only about a percent ayear behind global equities
since 98.
That surprises a lot of peopleand it's a great diversifier.
Commodity producer stocks haveoutperformed global equities by
2% a year over the last 50 plusyears Great diversifier.

(20:54):
Those stocks were up in 22 whenequities were down.
So there's a lot of reallyinteresting diversifiers you can
own that actually havereasonable returns through time,
so you don't have to give upreturns to be diversified.
But that balanced portfoliowill travel a very different
path from a US stock focusedportfolio, but that's a more

(21:15):
resilient path.
So to me that's whatdiversification means is just be
more diversified across assetclasses, don't bet it all on one
segment and the odds of a lostdecade go down dramatically.

Speaker 2 (21:29):
What would you say to those people that would counter
and say equities are the onlyplace to be because, aside from
the fact that over the long runthey tend to go up, you have
this structural bid from flowsthat go from the 401k side into
large cap S&P, like productsthat other asset classes don't

(21:52):
have the benefit of right, Justin terms of that kind of default
flow and buying.

Speaker 1 (21:56):
Yeah, I think that's fair.
Now that's in the data.
So when you just look athistorical returns, that's
already in the data.
Now there's also valuations, soat some point valuations get so
rich that you can't really goup anymore.
The markets collapse undertheir own weight.
So we saw that in the 2000s.

(22:17):
You had money going to 401ksall through the 2000s and stocks
underperformed cash for adecade.
So maybe they have thatadvantage and again times change
.
A lot of money goes into USstocks because they've done well
.
But what happens if they don'tdo well for five years or 10
years?
Maybe those trends reverse.
In the 1970s people lovedcommodities because that's the

(22:40):
thing that did really well.
In the 70s, stocks and bondsunderperformed cash.
I don't think there was a 60-40at that time because the 60 and
the 40 did worse than a moneymarket fund for a decade.
60-40 was born out of the 80sand 90s bull market in stocks
and bonds, and so I don't thinkit's a great assumption that

(23:00):
those flows will always go intoUS stocks.
That can change as well.

Speaker 2 (23:04):
So you've got RPAR, you've raised quite a few assets
, quite a few assets, obviously,in the fund.
Talk to me about the idea ofleveraging RPAR with UPAR.

Speaker 1 (23:14):
So the way I think about it is there's two
different decisions.
The first decision is do youwant to be diversified or not?
And I believe a well-balancedallocation will own those asset
classes global stocks,commodities, gold tips and
treasuries.
They're diverse to differenteconomic environments, which is
the main driver of asset classreturns.
So the first question is do youwant to be diversified across

(23:37):
all those assets?
And then the way you have toweight them.
It doesn't do you much good toput 90% in US stocks, 10% in
those other assets, and sayyou're diversified.
So the weighting matters.
And conceptually you have tothink about the volatility of
those assets when you'reweighting them.
So the assets that are morevolatile you have to own less of
and the assets that are lessvolatile you have to own more of

(23:58):
, so that you have equal riskcontribution across these assets
.
That's what it really means tobe diversified.
So 60-40, as an example, it'snot diversified because you have
60% in something very volatile,40% in something that's not
very volatile.
So the 60, not only is it morevolatile, it's overweighted
relative to the less volatileasset, so it drives a return.
So 60-40 is 98% correlated tothe stock market.

(24:21):
By definition, mathematicallyit can't be diversified.
So the first step is bediversified.
Then the second step is you canlever that diversified
portfolio so you could have an.
I think most people concluderisk parity means you're
levering bonds.
I don't think of it that way.
I think of it as you don't haveto have any leverage in a risk

(24:43):
parity portfolio.
You're just matching the riskof diverse asset classes.
So think of it as an unleveredrisk parity portfolio as your
starting point.
That's a balanced allocation,so that portfolio should have an
expected return like 60, 40,but have less risk because it's
more diversified.
Then you could lever thatportfolio a little bit and
that's what RPAR is.
So RPAR has about 20% ofleverage and that portfolio has

(25:05):
an expect to return that'sequity-like and the risk is like
a 60-40 portfolio.
And then you can lever thateven further and it's the same
allocation, same exposure, justmore leverage, and you could
have an equity-like risk butthen expect a return that's a
little bit better than equities.
And that's what UPAR isultra-risk parity.

(25:27):
And if you look at a pie chartof the unlevered risk parity,
rpar and UPAR, the pie chartlooks exactly the same.
The only difference is there'sleverage applied to RPAR and
UPAR and, importantly, the costof leverage is cash.
That's the financing cost.
We use futures to get theleverage and the implied
financing cost of futures iscash.
So if you have an unleveredrisk parity portfolio, that's a

(25:49):
starting point.
If you can lever that a littlebit and your cost of financing
is cash, then as long as abalanced, poor mix of assets
beats cash, then RPAR will beatan unlevered RPAR and if that's
true, then UPAR will beat RPARover time because your cost of
financing is cash and, as weknow, asset classes should beat
cash over time, otherwisecapitalism would stop.

(26:09):
But there's shorter periodswhere cash beats asset classes.
That happened in 2022.
And in those periods it'schallenging.
Same thing happened in theearly 80s.
It's a challenging environment,but those don't persist and
over time, assets beat cash andso more leverage.
You should have a higher return, more risk as well, and you'll

(26:29):
go through those occasionalperiods where cash is king, it's
designed to be, you know,steady-ish, right.

Speaker 2 (26:45):
I say ish because obviously things happen in the
short term, but you know it'snot going to appeal to sort of
like you know, the hot actionthat you see with some of these.
You know true X, 2x, 3x leveredfunds or individual stock
positions.
What would you say to somebodythat's like you know what?
I just want more action in myportfolio.
I like RPR, but I want some ofthat stuff that gives me some
extra juice.

Speaker 1 (27:05):
I think of it as a spectrum.
On one end you have get richquick strategies and on the
other end you have get rich slowstrategies.
And the get rich slowstrategies have higher
probability of success becausethey're more diversified.
And it goes back to the conceptof the one free lunch in
investing is diversification.
So we've heard that since thebeginning of investing times and

(27:29):
what that really means is youget more return for the same
amount of risk.
That's the free lunch, and sothe more diversified you are,
the more free lunch you have.
So let's get rich slow, and theless diversified you are, the
more upside you have, but muchgreater risk and the ratio is

(27:49):
less attractive than a morediversified portfolio the return
to risk ratio.
So if you're in the get richquick game, then you probably
own less of RPAR or none of it.
And if you're in the get richslow game, then you probably own
more of it.
And I think of it as a spectrum,not as all or none.
And so if you're 100% in getrich slow, you could

(28:12):
theoretically have 100% RPAR andbe done.
If you're 100% in get richquick, maybe you put it all in
one stock and roll the dice andhope it hits.
But you could also go to zero,and most people are not a
hundred percent or eitherextreme, they're somewhere in
the middle and depending on howmuch of one or the other you
want, you can navigate alongthat spectrum.

(28:33):
And I think of RPAR as a toolto build a diversified portfolio
in a very efficient package.
And so let's say you're 90%, Iwant to bet 90% on that single
stock, or a few stocks, or themax seven or whatever you want
to do.
Then you do 90% in that and 10%in our part and you've got that
balanced portfolio solved witha single vehicle and most people

(28:55):
are probably somewhere in themiddle of that spectrum.
So that's conceptually how Ithink about it.

Speaker 2 (29:02):
The nice thing about ETFs is that for an investor,
you can see the holdings daily.
So you can argue maybe not anice thing for the issuers
because anybody can replicatetheir holdings right as far as
the day after.
What's the argument for usingan RPAR or a UPAR when somebody
looks at the holdings and says Ican just buy these funds myself

(29:23):
?

Speaker 1 (29:23):
Now you're asking the right person, because that's
exactly what I did before.
We created our part and yourpart, and what I learned is it
kind of goes back to thebeginning of our conversation is
on paper, it's easy to ownthese assets.
In practice, it's really hardto implement it, and it's
because you have to buy low andsell high, you have to rebalance

(29:44):
, you have to own the assetclasses, when everything in your
mind and your body tells youthis is not the thing I want to
own.
And so in practice, it's reallyhard to not only be diversified
all the time, it's hard torebalance and sell the winners
and buy the losers, and thenthere's obviously tax advantages
that come with putting it allinside of an ETF wrapper.

(30:07):
So what you're describing iseffectively what I've been doing
with my clients for a couple ofdecades, and through that
experience I learned how hard itis to implement and practice,
and so I wasn't able to be asdiversified as I wanted to be.
I wasn't able to rebalance asfrequently as I hoped to do in
practice because of thosechallenges emotions being part

(30:28):
of it, taxes being another partand so I feel like the ETF
wrapper.
It doesn't eliminate all thosechallenges, but it significantly
mitigates them.
It also makes it a lot easierto just own that piece and focus
your energy and your resourceson the get rich quick
opportunities, so that you don'thave to focus so much on

(30:50):
managing the balance portfolio,and so I think of it as just a
tool to get you a very efficientbalance exposure as part of
that portfolio, and then youjust own that and then you
forget about it and then youfocus on the other strategies
that you want to use as acompliment.

Speaker 2 (31:08):
By the way, I know this may sound silly, but for
those that are listening, Iwould think that a good way to
do that is to have RPAR in atotally different account than a
more speculative tradingaccount, Because there's going
to be a temptation, right?
Oh, I can use RPAR to fund mylosses from buying some insanely
levered position that just wentagainst me.

Speaker 1 (31:28):
Yes, and also a big issue with investing is
everybody has a reference pointon what they compare results to
to judge success or failure.
And one of the challenges ofowning a balanced portfolio
through RPAR is that you have tocompare it to something, and I

(31:51):
view it as that's what youshould be comparing to, not that
to something else, becausethat's a balanced portfolio.
But it's very common for peopleto look at that relative to US
stocks and judge whether it'sdoing well or poorly, and I
don't think it's the rightanalysis because it owns US
stocks.
But whether it's doing well orpoorly and that is I don't think
it's the right analysis becauseit owns US stocks, but it's not
a massive proportion of it bydesign.

(32:12):
So, part of putting in aseparate account, it's almost
like you have to put it thereand forget about it and not
compare.
So, as an example, you couldhave an environment where US
stocks are up 30% and RPR is up10.
And you look at that and say,hey, this isn't doing as well as
I thought.
You could also have anenvironment where the US stock
market's down 30% and RPAR is upthe same 10, and now it looks

(32:34):
brilliant and RPAR doesn't carewhat US stocks are doing.
It's just a small piece of it.
It owns a lot of diverse assetclasses, but emotionally you can
look at that and judge successor failure over that timeframe
based on your reference point,which is a lot more volatile,
and that reference point isgoing to outperform, probably
half the time or more.

(32:55):
So the further you remove itfrom that type of side-by-side
comparison, the less likely youare to react to your emotions of
okay, this is quote unquoteworking or not working.
It's a balanced portfolio.
You just set it aside and youdon't think about it, and so
putting it in a separate accountis probably a very wise

(33:15):
strategy in that regard.
I should.

Speaker 2 (33:18):
So institutions and retail let's separate out the
two.
Think about portfoliopositioning, weighting in risk
parity.
I would assume a lot ofinstitutions would view it more
core-ish.
Maybe individuals, retail,would view core-ish as part of a
separate account, like we justsaid.
But is there any differencebetween sort of the two and how
to think about weighting?

Speaker 1 (33:38):
waiting.
I think there are somedifferences.
Institutions tend to focus moreon diversification.
They tend to have an investmentpolicy where they have targets
and ranges, so they're morelikely to appreciate the
benefits of having a diverseportfolio and then rebalancing
because there's a writtendocument that dictates this is

(34:02):
the strategy, as opposed toindividuals that typically don't
have an investment policy.
So I think that's onedifference.
But, keep in mind, institutionsare made up of people.
There are trustees and I'm infront of them all the time, and
those people have their personalexperiences or personal biases
and they're also emotional.

(34:22):
So it's not that different fromindividual investors, and the
main difference is you have thiswritten document.
Also, the trustees are this isnot their money.
They're fiduciaries forsomebody else's money and they
have people they're reporting to.

(34:42):
So that creates a slightlydifferent dynamic as well, and
so they're probably more on theget rich slow side of that
spectrum that I describedearlier than the get rich quick,
because they don't put as muchemphasis on the get rich quick
side and they put more emphasison I just don't want to
embarrass myself and lose a lotof money.

(35:03):
And then people ask what am Idoing with the foundation or
endowments or pensions assets.
So I think those are the maindifferences between the two.
But in general, investors arenot that different.
They want to do well and theywant to minimize losses, and on
the institutional side it's justa little bit more formality

(35:24):
around that.

Speaker 2 (35:25):
What do we not cover that you think is important when
it comes to thinking aboutmarkets, thinking about risk
parity, thinking about how todeal with the unknowable
tomorrow?

Speaker 1 (35:34):
Yeah, I mean the unknowable tomorrow.
It's a big unknown.
The way I think about the worldin which we live is there's a
wide range of potential outcomesand the risk of extreme
outcomes is probably greatertoday than it's been in many
decades.
There's just a lot of majorfactors at play, a lot of major

(35:57):
forces that it's hard to knowhow that's going to net out.
And the other aspect that'shappening today that we really
haven't had for 40 plus years isinflation.
Volatility is probably greater.
I don't know if we're going tohave high inflation, I don't
know if we're going to have lowinflation, but the volatility of
inflation is greater.

(36:18):
And you can see, even theFederal Reserve is not sure
whether they're going to lowerrates, whether they're going to
raise rates.
There's too many unknowns.
And inflation volatility is abig deal because it impacts the
reaction function of the Fed.
It impacts the reactionfunction of corporations, of
individuals, and that's anadditional risk factor on top of

(36:40):
geopolitical and growthvolatility and uncertainty.
So there's just a lot that wedon't know and if you look at
that world as an investor, it'shard to predict how things are
going to go.
But what you can control isyour allocation and you control
your investment framework.
And I look at that world and Ithink a lot of people probably

(37:02):
agree that there's a lot ofuncertainty.
And I look at that world and Ithink a lot of people probably
agree that there's a lot ofuncertainty.
And I look at that world and theconclusion that I draw is is
this an environment in which youwant to be more diversified or
less diversified?
I think that's like the corequestion, and my guess is is
most people who are looking atthis especially those in the get
rich slow game and maybe stayrich game are thinking this is

(37:26):
probably an environment that itmakes sense to be more
diversified.
Yet when you look at portfolios, they're probably less
diversified today than they werea decade ago.
Most portfolios probably havemore US stocks in them than they
did before.
They probably have moreequities than they did before,
and even those equities are moreconcentrated than they were
before.
So it's a period where youprobably have more concentration

(37:49):
than you've had and also aperiod where you probably want
to be more diversified thannormal, and I think of it as
diversification, as a riskparity framework.
You can diversify even beyondthat with private markets and
other strategies that are lowcorrelated to public markets.
But I think that's one of thekey takeaways is just ask

(38:12):
yourself do you want to be morediversified or less diversified?
And then ask am I diversified?
And remove the emotions.
Just look at the allocation.
If you have a high allocationof stocks and high allocation US
stocks, by definition you'renot that diversified.
Maybe it's the right decisionand you won't know that for
years ahead, but it's a reallydangerous game considering how

(38:34):
uncertain the environment is.

Speaker 2 (38:37):
Alex, for those who want to learn more about RPAR
and UPAR, where would you pointthem?

Speaker 1 (38:40):
to Our website.
Rpar.
R-p-a-r-e-t-fcom has a lot ofinformation about the ETS.
We do a quarterly webcast.
The replays are available onthere.
Our advisory firm, evoqueAdvisors, has a website at
evoqueadvisorscom.
I regularly post articles thatI write on various topics not

(39:01):
just risk parity, but a lot ofdifferent investment topics.
I also host the weekly podcastcalled the Insightful Investor
on Spotify, apple and YouTube,and insightfulinvestororg is the
website for that.
That's a weekly podcast withsmart investment people and
others that I post.
So a lot of different ways tokeep up with us.

Speaker 2 (39:23):
I am a big fan of Alex Shahidi's.
Everybody.
Please learn more about Apar onthat website.
Also get access to his book,which is a good read, and
hopefully I'll see you all onthe next episode of Lead Lag
Live.
Cheers everybody.
Thanks, alex.
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