August 13, 2025 • 18 mins
Rethinking Diversification: Alex Shahidi on Risk Parity and the 60/40 Problem
In this episode of Lead-Lag Live, I sit down with Alex Shahidi, Managing Partner and Co-CIO at Evoke Advisors, to talk about why most portfolios aren’t nearly as diversified as investors think — and how risk parity aims to fix that.
We dig into why the traditional 60/40 portfolio fails, how to truly diversify against growth and inflation shocks, and why today’s market risks make balance more important than ever.
In this episode:
Why “balanced” portfolios are still stock-heavy
How risk parity works — and why it’s really about true diversification
Building portfolios that avoid “lost decades”
Why inflation risk has returned after decades of stability
How today’s concentration in U.S. mega caps could backfire
Lead-Lag Live brings you inside conversations with top financial minds shaping markets in real time.
Subscribe for more interviews, insights, and raw takes that cut deeper than the headlines.
#LeadLagLive #Investing #PortfolioStrategy #RiskParity #StockMarket #AlexShahidi #AssetAllocation
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
So if you ask somebody how's the market doing,
they know or they assume you'retalking about the stock market.
When somebody asks me how's themarket doing, or clients ask me
, my response is always well,what market are you talking
about?
A balanced portfolio is justnot hard.
It's very hard to implementbecause it requires patience.
It requires your ability tozoom out and see the picture
(00:20):
from further away.
Speaker 2 (00:33):
I'm your host, melanie Schaefer.
Welcome to LeadLive Live Now.
Right now, the S&P 500 istrading just inches below its
all-time high, powered by gainsin mega cap tech, and while rate
cut hoax are keeping bulls inthe game.
It's exactly the kind of marketwhere portfolio design,
especially market strategieslike risk parity, really matter.
My guest today is Alex Shahidi,managing Partner and Co-CIO at
(00:58):
Evoke Advisors.
Alex is one of the mostwell-known advocates for risk
parity and has spent decadeshelping institutional and
high-end net worth investorsrethink how portfolios are built
.
Alex, thanks so much forjoining me today.
Thanks for having me Now.
Let's start with sort of a bitof a background how did you get
(01:20):
into this space and what led youto co-found Evoke?
Speaker 1 (01:24):
Well, I go back a couple of decades.
I started my career as afinancial advisor at Merrill
Lynch back in the late 90s, andwhen I started, I always thought
of it as I work for my clients.
I didn't work for my firm, Idon't work for anybody else, I
work for my clients, and so Iapproached it from an
independent thinking standpointof what's best for the client,
(01:45):
and I've always felt that way.
So I set out to talk to thesmartest investors I could find.
I now have a weekly podcastthat I host called Insightful
Investor, where I'm interviewinga lot of these people, and so I
collect this insight,synthesize it and come up with
what I think is the mostappropriate investment framework
for investors, and that'sbasically what I've built my
(02:08):
career on so far.
Speaker 2 (02:09):
Yeah, so what does your overall investment
framework look like and how doyou approach the markets at a
high level?
Speaker 1 (02:16):
Yeah, I start with what's the goal and I think most
people would have a similargoal which is to earn attractive
returns through time and do itwith as little risk as possible.
And the way I think about riskis in three dimensions it's
volatility, standard deviation.
But I think even more importantpossibly is you want a
(02:38):
portfolio that is resilientthrough time.
You want it to hold up duringthose terrible bear markets that
occasionally occur and arealways a surprise.
And then the part that I thinka lot of people miss is you got
to really be thoughtful aboutavoiding the lost decade.
If you just look at the stockmarket in the last five decades,
two of them were lost decadesthe 70s and the 2000s where cash
(03:03):
outperformed stocks.
So if you can build a portfoliothat achieves attractive
returns call them equity-likereturns over time and avoids the
lost decades, minimizes thedrawdowns and tries to reduce
the volatility, to me that's thegoal of a well-constructed
portfolio, and the way to thinkabout how you build that is just
(03:24):
conceptually is you want abunch of return streams that are
individually attractive butdiverse to one another.
In other words, they all go upover time but they go up and
down at different times.
And if you can do that, if youcan do that well, then you can
achieve that objective that Idescribed, and so the way I
categorize all these returnstreams that we face is in three
(03:47):
buckets.
There are public markets,private markets and a category I
call hedge funds.
That hedge, and so publicmarkets, which is where I think
we'll focus on today.
There's a, I think, a veryreasonable approach to building
a diversified allocation withinpublic markets.
In private markets privatecredit, private real estate,
(04:08):
private equity there's a lot ofalpha potential there, a lot of
potential to add value on top ofwhatever the market provides,
because that space is much lessefficient than public market
space.
And then hedge funds.
There's a lot of hedge fundsout there.
Most of them, in my opinion,are not worthwhile because they
give you market returns withhigh fees.
(04:30):
So there I focus on managersthat generate returns that are,
by and large, uncorrelated towhat you can get cheaply and
efficiently in public markets.
Speaker 2 (04:38):
Yeah, so risk parity is something you've become
deeply associated with.
For people who aren't familiar,how would you explain what risk
parity is and how it'sdifferent from sort of the
traditional 60-40 portfolio?
Speaker 1 (04:49):
Yeah.
So if we zoom in on that publicmarket allocation in terms of
the total portfolio there, ifyou think about it, you don't
even have to think of it as riskparity.
I just think of it as abalanced, diversified portfolio
and my experience is a lot ofpeople don't fully appreciate
what it means to be diversified.
So a very simple example youtalked about that traditional
(05:12):
60-40 portfolio.
60-40 is about 98% correlatedto the stock market and it's
because you have 60% insomething that's very volatile,
40% in an asset that's not veryvolatile.
So the 60% that's overweightedand much more volatile drives
directionally the outcomes ofthe portfolio.
So if you go through a lostdecade I mentioned stock market,
(05:33):
two out of the last fivedecades were lost decades and
all your eggs are in that stockmarket basket then you'll
probably have a bad decade.
That's not a diversifiedportfolio.
If you're 98% correlated toanything, that can't by
definition be a diversifiedportfolio.
So my experience is manyinvestors, even that
conventional framework is justflawed because it violates one
(05:57):
of the core principles ofinvesting is be diversified.
They'll put all your eggs inone basket and we know that
diversification is a one freelunch in investing.
In other words, you can get thesame return with less risk by
being properly diversified, ormore return for the same risk.
So you should do that.
And 60-40 doesn't solve thatproblem.
And so the way you canconstruct a more diversified
(06:19):
portfolio, which is termed riskparity I just think of it as
being more diversified, morebalanced is think about what
drives the returns of theseassets.
Why did the stock market do sopoorly in the 2000s and why did
it do so poorly in the 1970s andthe 2000s was because growth
disappointed.
The market was discounting.
(06:39):
Economic growth would look likethe 80s and 90s and instead it
was the slowest rate of growthsince the 1930s.
So that downside surprise ingrowth is terrible for stocks.
Stocks underperformed the 1970s.
It was less about growth andmore about inflation.
That's a topic today.
But inflation surprised to theupside, not for a quarter or for
(06:59):
a year, but for a decade orlonger.
So stocks underperformed cash.
So growth and inflation are keydrivers of asset class returns.
I described the impact on stocks, but it's the same thing with
bonds, with inflation linkedsecurities, with commodities,
with gold, other asset classes.
Now those asset classes have adifferent bias to growth and
inflation surprises.
(07:20):
So if you diversify across allthose, rather than just putting
all your eggs in one basket.
Now you're diversifying thatbig risk that can impact asset
classes over a long period oftime.
So, rather than just focusingon stocks, own stocks,
commodities, gold,inflation-linked bonds or TIPS,
and then core bonds or eventreasuries and that portfolio is
(07:44):
much more diversified.
Now the challenge there is.
Most people will say well, youget returns from stocks, but all
the other assets?
Yes, they're diversifying, butit lowers your return.
And I would challenge thatbecause you can structure these
other asset classes in a waywhere you're actually not giving
up returns over the long run.
So with equities, you can justbuy the index and get equity
(08:06):
return and risk.
With commodities, you can owncommodity producer stocks the
companies pulling thecommodities out of the ground.
Complemented with gold, which isa different type of asset, does
well when growth is weak.
That basket has a similarexpected return on risk as
equities, but it's a much betterinflation hedge.
So in 2022, that basket was upwhen stocks were down.
In the 1970s, that basket didreally well when stocks
(08:33):
underperformed cash.
So that's one step towardsbeing more diversified without
giving up returns.
And then tips and treasuries.
All you need is longer duration, a little bit of leverage, you
can get the same return out ofthose over the long run as
equities and that basket canbasically get you a more
diversified allocation with lessrisk than equities and achieve
an equity-like return over thelong run.
Speaker 2 (08:51):
Yeah, so it sounds like something that would be
much more difficult to explainto people or to get people to
understand when the markets aregoing in a massive bull cycle,
like they are, and much easierwhen it's in a bear cycle.
But I wanted to ask you what'sthe hardest part about
explaining or implementing riskparity, especially with clients
who might be used to a moreconventional allocation?
Speaker 1 (09:12):
Yeah, I think you're exactly right.
I think the way that Idescribed it makes sense,
meaning it makes sense to bemore diversified.
And then what does it mean tobe more diversified?
The challenge is, doing it inpractice is difficult.
And it's difficult because ofour of the typical or
conventional reference point,which is the stock market, and,
(09:34):
and so if you ask somebody how'sthe market doing, they know or
they assume you're talking aboutthe stock market.
Uh, when somebody asked me how'sthe market doing, or clients
asked me I I'm, my response isalways well, what market are you
talking about?
You're talking about the stockmarket, the bond market, the
commodities market, the realestate market.
There's a lot of differentmarkets and we're diversified
across all of them.
And so I think of risk parityas a balanced mix of public
(09:59):
markets.
And to me, if you just thinkabout the index, when somebody
says how is the market doing thepublic markets, I refer to that
index.
That's how the markets aredoing, not just the stock market
.
That's just one component ofthe market.
But I understand that's notconventional.
So most people they have areference point of the stock
(10:19):
market.
They judge success and failurerelative to that.
So, for example, if a balancedportfolio is up 5% and the stock
market's up 20, they'll say youknow that 5% isn't very good.
I could have just bought theS&P.
That's easy to do.
I would have been up 20%.
Now, if the stock market isdown 20 and a balanced portfolio
is up 5, then all of a suddenthat balanced portfolio looks
(10:41):
brilliant and it's the same 5%as it was before.
But the reference point is thestock market and the stock
market is a lot more volatilethan a balanced portfolio.
So about half the time you'llbe thrilled with that steadier
return and half the time you'llbe disappointed.
And I'm not talking about daysor weeks or months.
It could be five years, itcould even be 10 years, but over
(11:02):
the very long run, if you wereto zoom out and look at the
picture of a very volatileportfolio that goes up and down
a lot either all stocks or stockheavy, even 60-40 is basically
betting on the stock marketversus a more diversified
portfolio that will have asteady or ride through time, but
any moment in time you couldcompare the two and feel
disappointed.
So I think therein lies thechallenge with implementing what
(11:27):
I described.
A balanced portfolio is justnot.
It's very hard to implementbecause it requires patience.
It requires your ability tozoom out and see the picture
from further away, andeverything we see in the news,
what people talk about, what ourfriends talk about, what we
read online, is pulling us inand helping us and forcing us to
(11:47):
zoom in, and so you have to bevery intentional about zooming
out so you can see the bigpicture and not get lost in
what's happening most recently.
Speaker 2 (11:54):
Yeah, so that's what I wanted to ask you about next,
that you're sort of yourperspective from a more zoomed
out way and given where thestock market is stock market
specifically is right now, withequity valuations stretched and
macro risks simmering do youthink risk parity is especially
timely?
Speaker 1 (12:12):
I do.
I think it's always timely tobe well diversified.
Obviously, with hindsight wecan look back and say oh, that
was a bull market for stocks.
You would have been better offbeing less diversified.
But you just don't know that inadvance.
You don't even know it whenyou're in the middle of it,
because yesterday could havebeen the peak or today could be
the peak.
You just don't know.
It's only that those inflectionpoints are only obvious in
(12:33):
hindsight and years later.
So when we look at the worldlooking forward, just think
about how many risks are outthere.
For decades, until most recently, inflation wasn't even a
concern.
It was relatively stable.
We had high inflation in the70s, early 80s and then it came
down and inflation volatilitywas relatively benign.
(12:56):
And then in 2022 or 21, 22, 23,inflation all of a sudden
became part of the conversation.
But for decades we didn't evenhave to worry about inflation.
Growth swung around and you'dhave the Fed reaction function
to growth and try to manage that.
But all of a sudden, inflationis now a concern.
We have tariffs, we haveinflation that's persistently
(13:18):
above the Fed target.
There's structural reasons whyinflation may be higher long
term.
There's other reasons inflationmay be lower productivity and
AI and so on, but there's a lotof uncertainty with inflation,
and so that is something that'snew, that we haven't had to
worry about for some time.
So we have we probably have abigger risks with inflation.
(13:40):
Um, growth is at risk.
Uh, tariffs are a tax on on theconsumer.
Depending on how, uh, thoseprices are pushed through, it
could be inflationary, it couldbe stagflationary.
Uh, we've had a long uh uhmarket, uh economic cycle, uh,
where, where we haven't had arecession for some time, and we
(14:00):
know markets are cyclical andeconomies are cyclical.
So there is certainly growthrisk, there's inflation risk.
There's growth risk, there'sgeopolitical risk.
There's a lot of uncertaintythere.
And the Federal Reserve theirhands are a little bit tied
because there's fiscalconstraints.
So on the fiscal side, there'schallenges.
On the Federal Reserve side,there's challenges.
(14:21):
There's just a lot ofuncertainty.
And the way I would summarizethat is if you just look at what
the next few years, five years,even 10 years, looks like, I'd
say there's a wide range ofpotential outcomes.
The world could look verydifferent.
It's hard to guess which ofthose outcomes is most likely,
and the risk of extreme outcomesis probably greater than it's
(14:42):
been for some time.
So, given that world and giventhat perspective, which my guess
is a lot of people would share,it makes sense to be more
diversified than lessdiversified.
In a world like that,particularly as it relates to
growth surprises, inflationsurprises, geopolitical
surprises, it's hard to predictwhere they're going to go.
So you should be diversified tothose risks.
(15:03):
And if you look at mostportfolios today, relative to
where they were a decade ago,they're probably less
diversified today, and it's forgood reason.
It's because US stocks havedone exceptionally well and most
other assets haven't done well.
So if you just held on to yourUS stocks, you would be
overweighted US stocks relativeto probably where you started
five or 10 years ago.
(15:23):
The US stocks themselves areconcentrated in just a handful
of names.
So if you look at mostportfolios, they're heavily
concentrated in stocks, in USstocks and a handful of names
within US stocks.
And again, if you look forward,the next 10 years could look
very different from the last 10years.
They could be almost theopposite.
(15:44):
And in that world, does it makesense to be more diversified or
less?
And then, what does it mean tobe diversified?
That's, I think that's what Ialways go back to.
Speaker 2 (15:52):
Yeah, Alex, and before we wrap up, where can
people follow your work andlearn more about what you're
doing at?
Speaker 1 (15:57):
Evoke.
So we have an ETF called RPARRisk Parity ETF.
That basically is an index fundthat represents risk parity in
the structure that I described.
So the website for that isrparetfcom.
So that has information on thefund fact sheets.
We do a quarterly webcastthat's on there, and so the ETF
(16:21):
information is there.
My advisory firm, EvoqueAdvisors we're a $26 billion RIA
in Los Angeles.
Our website isevoqueadvisorscom.
There I post a lot ofinformation.
I write some white papers.
I have this weekly podcast thatI do, so you can find
information about that on thatsite as well.
Speaker 2 (16:40):
Well, thanks again for joining me, alex, and thanks
to everyone for watching.
Be sure to like, share andsubscribe for more episodes of
Lead Leg Live.
I'm Melanie Schaefer.
See you next time.
Bye.
So if you ask somebody how's the market doing,
they know or they assume you'retalking about the stock market.
When somebody asks me how's themarket doing, or clients ask me
, my response is always well,what market are you talking
about?
A balanced portfolio is justnot hard.
It's very hard to implementbecause it requires patience.
It requires your ability tozoom out and see the picture
(00:20):
from further away.
Speaker 2 (00:33):
I'm your host, melanie Schaefer.
Welcome to LeadLive Live Now.
Right now, the S&P 500 istrading just inches below its
all-time high, powered by gainsin mega cap tech, and while rate
cut hoax are keeping bulls inthe game.
It's exactly the kind of marketwhere portfolio design,
especially market strategieslike risk parity, really matter.
My guest today is Alex Shahidi,managing Partner and Co-CIO at
(00:58):
Evoke Advisors.
Alex is one of the mostwell-known advocates for risk
parity and has spent decadeshelping institutional and
high-end net worth investorsrethink how portfolios are built
.
Alex, thanks so much forjoining me today.
Thanks for having me Now.
Let's start with sort of a bitof a background how did you get
(01:20):
into this space and what led youto co-found Evoke?
Speaker 1 (01:24):
Well, I go back a couple of decades.
I started my career as afinancial advisor at Merrill
Lynch back in the late 90s, andwhen I started, I always thought
of it as I work for my clients.
I didn't work for my firm, Idon't work for anybody else, I
work for my clients, and so Iapproached it from an
independent thinking standpointof what's best for the client,
(01:45):
and I've always felt that way.
So I set out to talk to thesmartest investors I could find.
I now have a weekly podcastthat I host called Insightful
Investor, where I'm interviewinga lot of these people, and so I
collect this insight,synthesize it and come up with
what I think is the mostappropriate investment framework
for investors, and that'sbasically what I've built my
(02:08):
career on so far.
Speaker 2 (02:09):
Yeah, so what does your overall investment
framework look like and how doyou approach the markets at a
high level?
Speaker 1 (02:16):
Yeah, I start with what's the goal and I think most
people would have a similargoal which is to earn attractive
returns through time and do itwith as little risk as possible.
And the way I think about riskis in three dimensions it's
volatility, standard deviation.
But I think even more importantpossibly is you want a
(02:38):
portfolio that is resilientthrough time.
You want it to hold up duringthose terrible bear markets that
occasionally occur and arealways a surprise.
And then the part that I thinka lot of people miss is you got
to really be thoughtful aboutavoiding the lost decade.
If you just look at the stockmarket in the last five decades,
two of them were lost decadesthe 70s and the 2000s where cash
(03:03):
outperformed stocks.
So if you can build a portfoliothat achieves attractive
returns call them equity-likereturns over time and avoids the
lost decades, minimizes thedrawdowns and tries to reduce
the volatility, to me that's thegoal of a well-constructed
portfolio, and the way to thinkabout how you build that is just
(03:24):
conceptually is you want abunch of return streams that are
individually attractive butdiverse to one another.
In other words, they all go upover time but they go up and
down at different times.
And if you can do that, if youcan do that well, then you can
achieve that objective that Idescribed, and so the way I
categorize all these returnstreams that we face is in three
(03:47):
buckets.
There are public markets,private markets and a category I
call hedge funds.
That hedge, and so publicmarkets, which is where I think
we'll focus on today.
There's a, I think, a veryreasonable approach to building
a diversified allocation withinpublic markets.
In private markets privatecredit, private real estate,
(04:08):
private equity there's a lot ofalpha potential there, a lot of
potential to add value on top ofwhatever the market provides,
because that space is much lessefficient than public market
space.
And then hedge funds.
There's a lot of hedge fundsout there.
Most of them, in my opinion,are not worthwhile because they
give you market returns withhigh fees.
(04:30):
So there I focus on managersthat generate returns that are,
by and large, uncorrelated towhat you can get cheaply and
efficiently in public markets.
Speaker 2 (04:38):
Yeah, so risk parity is something you've become
deeply associated with.
For people who aren't familiar,how would you explain what risk
parity is and how it'sdifferent from sort of the
traditional 60-40 portfolio?
Speaker 1 (04:49):
Yeah.
So if we zoom in on that publicmarket allocation in terms of
the total portfolio there, ifyou think about it, you don't
even have to think of it as riskparity.
I just think of it as abalanced, diversified portfolio
and my experience is a lot ofpeople don't fully appreciate
what it means to be diversified.
So a very simple example youtalked about that traditional
(05:12):
60-40 portfolio.
60-40 is about 98% correlatedto the stock market and it's
because you have 60% insomething that's very volatile,
40% in an asset that's not veryvolatile.
So the 60% that's overweightedand much more volatile drives
directionally the outcomes ofthe portfolio.
So if you go through a lostdecade I mentioned stock market,
(05:33):
two out of the last fivedecades were lost decades and
all your eggs are in that stockmarket basket then you'll
probably have a bad decade.
That's not a diversifiedportfolio.
If you're 98% correlated toanything, that can't by
definition be a diversifiedportfolio.
So my experience is manyinvestors, even that
conventional framework is justflawed because it violates one
(05:57):
of the core principles ofinvesting is be diversified.
They'll put all your eggs inone basket and we know that
diversification is a one freelunch in investing.
In other words, you can get thesame return with less risk by
being properly diversified, ormore return for the same risk.
So you should do that.
And 60-40 doesn't solve thatproblem.
And so the way you canconstruct a more diversified
(06:19):
portfolio, which is termed riskparity I just think of it as
being more diversified, morebalanced is think about what
drives the returns of theseassets.
Why did the stock market do sopoorly in the 2000s and why did
it do so poorly in the 1970s andthe 2000s was because growth
disappointed.
The market was discounting.
(06:39):
Economic growth would look likethe 80s and 90s and instead it
was the slowest rate of growthsince the 1930s.
So that downside surprise ingrowth is terrible for stocks.
Stocks underperformed the 1970s.
It was less about growth andmore about inflation.
That's a topic today.
But inflation surprised to theupside, not for a quarter or for
(06:59):
a year, but for a decade orlonger.
So stocks underperformed cash.
So growth and inflation are keydrivers of asset class returns.
I described the impact on stocks, but it's the same thing with
bonds, with inflation linkedsecurities, with commodities,
with gold, other asset classes.
Now those asset classes have adifferent bias to growth and
inflation surprises.
(07:20):
So if you diversify across allthose, rather than just putting
all your eggs in one basket.
Now you're diversifying thatbig risk that can impact asset
classes over a long period oftime.
So, rather than just focusingon stocks, own stocks,
commodities, gold,inflation-linked bonds or TIPS,
and then core bonds or eventreasuries and that portfolio is
(07:44):
much more diversified.
Now the challenge there is.
Most people will say well, youget returns from stocks, but all
the other assets?
Yes, they're diversifying, butit lowers your return.
And I would challenge thatbecause you can structure these
other asset classes in a waywhere you're actually not giving
up returns over the long run.
So with equities, you can justbuy the index and get equity
(08:06):
return and risk.
With commodities, you can owncommodity producer stocks the
companies pulling thecommodities out of the ground.
Complemented with gold, which isa different type of asset, does
well when growth is weak.
That basket has a similarexpected return on risk as
equities, but it's a much betterinflation hedge.
So in 2022, that basket was upwhen stocks were down.
In the 1970s, that basket didreally well when stocks
(08:33):
underperformed cash.
So that's one step towardsbeing more diversified without
giving up returns.
And then tips and treasuries.
All you need is longer duration, a little bit of leverage, you
can get the same return out ofthose over the long run as
equities and that basket canbasically get you a more
diversified allocation with lessrisk than equities and achieve
an equity-like return over thelong run.
Speaker 2 (08:51):
Yeah, so it sounds like something that would be
much more difficult to explainto people or to get people to
understand when the markets aregoing in a massive bull cycle,
like they are, and much easierwhen it's in a bear cycle.
But I wanted to ask you what'sthe hardest part about
explaining or implementing riskparity, especially with clients
who might be used to a moreconventional allocation?
Speaker 1 (09:12):
Yeah, I think you're exactly right.
I think the way that Idescribed it makes sense,
meaning it makes sense to bemore diversified.
And then what does it mean tobe more diversified?
The challenge is, doing it inpractice is difficult.
And it's difficult because ofour of the typical or
conventional reference point,which is the stock market, and,
(09:34):
and so if you ask somebody how'sthe market doing, they know or
they assume you're talking aboutthe stock market.
Uh, when somebody asked me how'sthe market doing, or clients
asked me I I'm, my response isalways well, what market are you
talking about?
You're talking about the stockmarket, the bond market, the
commodities market, the realestate market.
There's a lot of differentmarkets and we're diversified
across all of them.
And so I think of risk parityas a balanced mix of public
(09:59):
markets.
And to me, if you just thinkabout the index, when somebody
says how is the market doing thepublic markets, I refer to that
index.
That's how the markets aredoing, not just the stock market
.
That's just one component ofthe market.
But I understand that's notconventional.
So most people they have areference point of the stock
(10:19):
market.
They judge success and failurerelative to that.
So, for example, if a balancedportfolio is up 5% and the stock
market's up 20, they'll say youknow that 5% isn't very good.
I could have just bought theS&P.
That's easy to do.
I would have been up 20%.
Now, if the stock market isdown 20 and a balanced portfolio
is up 5, then all of a suddenthat balanced portfolio looks
(10:41):
brilliant and it's the same 5%as it was before.
But the reference point is thestock market and the stock
market is a lot more volatilethan a balanced portfolio.
So about half the time you'llbe thrilled with that steadier
return and half the time you'llbe disappointed.
And I'm not talking about daysor weeks or months.
It could be five years, itcould even be 10 years, but over
(11:02):
the very long run, if you wereto zoom out and look at the
picture of a very volatileportfolio that goes up and down
a lot either all stocks or stockheavy, even 60-40 is basically
betting on the stock marketversus a more diversified
portfolio that will have asteady or ride through time, but
any moment in time you couldcompare the two and feel
disappointed.
So I think therein lies thechallenge with implementing what
(11:27):
I described.
A balanced portfolio is justnot.
It's very hard to implementbecause it requires patience.
It requires your ability tozoom out and see the picture
from further away, andeverything we see in the news,
what people talk about, what ourfriends talk about, what we
read online, is pulling us inand helping us and forcing us to
(11:47):
zoom in, and so you have to bevery intentional about zooming
out so you can see the bigpicture and not get lost in
what's happening most recently.
Speaker 2 (11:54):
Yeah, so that's what I wanted to ask you about next,
that you're sort of yourperspective from a more zoomed
out way and given where thestock market is stock market
specifically is right now, withequity valuations stretched and
macro risks simmering do youthink risk parity is especially
timely?
Speaker 1 (12:12):
I do.
I think it's always timely tobe well diversified.
Obviously, with hindsight wecan look back and say oh, that
was a bull market for stocks.
You would have been better offbeing less diversified.
But you just don't know that inadvance.
You don't even know it whenyou're in the middle of it,
because yesterday could havebeen the peak or today could be
the peak.
You just don't know.
It's only that those inflectionpoints are only obvious in
(12:33):
hindsight and years later.
So when we look at the worldlooking forward, just think
about how many risks are outthere.
For decades, until most recently, inflation wasn't even a
concern.
It was relatively stable.
We had high inflation in the70s, early 80s and then it came
down and inflation volatilitywas relatively benign.
(12:56):
And then in 2022 or 21, 22, 23,inflation all of a sudden
became part of the conversation.
But for decades we didn't evenhave to worry about inflation.
Growth swung around and you'dhave the Fed reaction function
to growth and try to manage that.
But all of a sudden, inflationis now a concern.
We have tariffs, we haveinflation that's persistently
(13:18):
above the Fed target.
There's structural reasons whyinflation may be higher long
term.
There's other reasons inflationmay be lower productivity and
AI and so on, but there's a lotof uncertainty with inflation,
and so that is something that'snew, that we haven't had to
worry about for some time.
So we have we probably have abigger risks with inflation.
(13:40):
Um, growth is at risk.
Uh, tariffs are a tax on on theconsumer.
Depending on how, uh, thoseprices are pushed through, it
could be inflationary, it couldbe stagflationary.
Uh, we've had a long uh uhmarket, uh economic cycle, uh,
where, where we haven't had arecession for some time, and we
(14:00):
know markets are cyclical andeconomies are cyclical.
So there is certainly growthrisk, there's inflation risk.
There's growth risk, there'sgeopolitical risk.
There's a lot of uncertaintythere.
And the Federal Reserve theirhands are a little bit tied
because there's fiscalconstraints.
So on the fiscal side, there'schallenges.
On the Federal Reserve side,there's challenges.
(14:21):
There's just a lot ofuncertainty.
And the way I would summarizethat is if you just look at what
the next few years, five years,even 10 years, looks like, I'd
say there's a wide range ofpotential outcomes.
The world could look verydifferent.
It's hard to guess which ofthose outcomes is most likely,
and the risk of extreme outcomesis probably greater than it's
(14:42):
been for some time.
So, given that world and giventhat perspective, which my guess
is a lot of people would share,it makes sense to be more
diversified than lessdiversified.
In a world like that,particularly as it relates to
growth surprises, inflationsurprises, geopolitical
surprises, it's hard to predictwhere they're going to go.
So you should be diversified tothose risks.
(15:03):
And if you look at mostportfolios today, relative to
where they were a decade ago,they're probably less
diversified today, and it's forgood reason.
It's because US stocks havedone exceptionally well and most
other assets haven't done well.
So if you just held on to yourUS stocks, you would be
overweighted US stocks relativeto probably where you started
five or 10 years ago.
(15:23):
The US stocks themselves areconcentrated in just a handful
of names.
So if you look at mostportfolios, they're heavily
concentrated in stocks, in USstocks and a handful of names
within US stocks.
And again, if you look forward,the next 10 years could look
very different from the last 10years.
They could be almost theopposite.
(15:44):
And in that world, does it makesense to be more diversified or
less?
And then, what does it mean tobe diversified?
That's, I think that's what Ialways go back to.
Speaker 2 (15:52):
Yeah, Alex, and before we wrap up, where can
people follow your work andlearn more about what you're
doing at?
Speaker 1 (15:57):
Evoke.
So we have an ETF called RPARRisk Parity ETF.
That basically is an index fundthat represents risk parity in
the structure that I described.
So the website for that isrparetfcom.
So that has information on thefund fact sheets.
We do a quarterly webcastthat's on there, and so the ETF
(16:21):
information is there.
My advisory firm, EvoqueAdvisors we're a $26 billion RIA
in Los Angeles.
Our website isevoqueadvisorscom.
There I post a lot ofinformation.
I write some white papers.
I have this weekly podcast thatI do, so you can find
information about that on thatsite as well.
Speaker 2 (16:40):
Well, thanks again for joining me, alex, and thanks
to everyone for watching.
Be sure to like, share andsubscribe for more episodes of
Lead Leg Live.
I'm Melanie Schaefer.
See you next time.
Bye.
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