Lead-Lag Live
Welcome to the Lead-Lag Live podcast, where we bring you live unscripted conversations with thought leaders in the world of finance, economics, and investing. Hosted through X Spaces by Michael A. Gayed, CFA, Publisher of The Lead-Lag Report (@leadlagreport), each episode dives deep into the minds of industry experts to discuss current market trends, investment strategies, and the global economic landscape.
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Lead-Lag Live
Diversification Trumps Conviction with Alex Shahidi
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.
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It's very possible there's a sea change and the next decade looks very different from the last decade. Again, we won't know for a while, but you're starting to see that at least this year, that's what's happened. And then you look at portfolios and they look like they're positioned for the last decade and that could be a terrible result, and so there's significant risk that you end up in a really bad outcome in terms of your performance for the next decade, because your position for the last decade and then you look at all the uncertainty and the odds that the next decade looks like the last decade are increasingly becoming very slim.
Speaker 2:This will be a good conversation with Al Shahidi, who's going to give us some good perspective on cycles, where we are in the current environment in terms of policy uncertainty how to think about investing during a period of policy uncertainty and my name is Michael Guy, a publisher of the Lead Lag Report. Joining me here is Mr Alex Shahidi of Evoke Advisors. Alex, I'm going to skip the whole. Tell us about yourself, because I know you people have been watching this now repeatedly. I want to get right into your take on things. We were just talking before the show. You said you were busy. I said is that because of volatility? You said no, uh, rats on being busy because of reasons outside of volatility, but, as you know, typically volatility gets people, uh, very excitable. Um, so any thoughts on the way that this last three weeks have played out in terms of you think it's noise? Do you think it's a cycle shift? Do you think it's something that people should worry about? And, granted, it's all about timeframes, but I want to just get your initial thoughts.
Speaker 1:Thanks for having me again. I appreciate it. I certainly don't think it's noise. It seems like we're going through a pretty significant change and it's a change in policy. It's a change in direction and if you just look backwards you know these inflection points are more obvious years after the fact. It's hard to understand it while you're going through it. But if you just look backwards and you look at the environment that we've lived in for 10, 15 years and you look forwards and they look pretty different.
Speaker 1:You had a period of low and either zero or very low interest rates. We had a big jump in 22 and it stayed high. We've had a long period of low and stable volatility. Volatility hasn't been volatile for a long period of time. Covid hit. You got a big spike and then it came down and it felt like, okay, volatility is going back. Put the genie back in the bottle. Volatility is going to be stable for a while. It's not stable.
Speaker 1:There's a lot of uncertainty, and then you add on top of that all the policy uncertainty that we've seen recently. So when you look forward, the potential range of outcomes is probably extremely wide probably the widest in my investing career and that's not just in terms of. Do we have a recession? Is the economy okay? But where does inflation land? Where does policy go? Geopolitically, all these things are who knows? You can try to guess, but there's a good chance you're going to miss it, and you could miss it by a lot. So you have a wide range of potential outcomes and probably greater risk of extreme outcomes. I don't think too many people would disagree with that assessment. So, given all that, what do you do? And to me it's always goes back to you got to be diversified. And then what does that mean?
Speaker 2:We'll definitely get into that. Um, I've seen a lot of studies that show that volatility tends to persist at the two extremes of valuation. I have all told me is very high when you're very overvalued, and then volatility is very high Also when you're very undervalued, which makes sense because those are pots and bottles and the market's trying to figure out the right level to have an inflection point. To your using your words, valuations play into this. I made the argument myself on X that everyone should stop blaming Trump for volatility. I mean, he inherited a very expensive starting point for his administration on the stock market. He inherited at a very expensive starting point for his administration on the stock market and all you really needed was just a trigger for suddenly the valuations to maybe start to get volatile.
Speaker 1:Yeah, yeah, I think valuations drive long-term returns across markets, but sometimes you need a catalyst for the market to wake up to. Oh, you know, things are really expensive and given this pricing which effectively reflects very optimistic outcomes for that asset class, when you have a lot of uncertainty, then the range of outcomes is wider, as I described, and there's less certainty as to that optimistic result. So you start to question whether you're willing to pay that high of a price given that heightened level of uncertainty. The other point that I think is important is when people say the market's expensive, and when people talk about the market, they're generally talking about the US stock market.
Speaker 1:I think part of appreciating what it means to be diversified is you got to look at a lot of different markets. You know international stocks aren't that expensive. Emerging market stocks are certainly not expensive. Bonds are a lot cheaper than they've been for a long time. Gold is harder to value, but there's a lot of tailwinds there. So I think you're right that US stocks are expensive, but a lot of other markets are not. And now you're seeing what I described earlier, the opposite of what you've seen the last 10 or 15 years, where US stocks significantly outperformed just about everything else, and this year US stocks are in dead last and international is ahead, emerging is ahead, bonds are ahead, inflation-linked bonds are ahead, gold commodities everything is ahead of US stocks, and so maybe that's just the beginning of a long-term cycle. Again, we won't know for a few years, but the backdrop certainly seems to support that.
Speaker 2:I think the challenge there is that, let's say, somebody buys a total world market index or bung on that it's so dominated by US right Because of the massive outperformance that, while all that may be true, people would have to actively tilt in that direction.
Speaker 1:Yeah, yeah, and you don't have to do that. But my sense is a lot of people are not even market weight. They're overweight relative to market, and so there's a couple of levels of diversification. So within equities, you can look at where we are today versus where we were 10 years ago, and the equity market is significantly overweight US relative 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 market participants, from what I've seen, are even more concentrated than the index, which is already concentrated.
Speaker 1:And then, if you take a step back, there is a significant overweight to equities, whether it's US, non-us, emerging, et cetera, and so there isn't great diversification across assets. And so when you kind of I think the punchline for today's conversation is, you look ahead, it's very possible there's a sea change and the next decade looks very different from the last decade. And again, we won't know for a while, but you're starting to see that at least this year, that's what's happened. And then you look at portfolios and they look like they're positioned for the last decade and that could be a terrible result, and so there's significant risk that you end up in a really bad outcome in terms of your performance for the next decade because your position for the last decade and then you look at all the uncertainty and the odds that the next decade looks like the last decade are increasingly becoming very slim. I want to bring a comment from Christoph Robka.
Speaker 2:I apologize if I'm not pronouncing that correctly there from X. Cash is also a position. Many investors seem to miss that as an option. Let's talk about cash as a position.
Speaker 1:So cash is. It is a position. The yield was zero for over 10 years and now you're getting 4% or so. So that's good. But you got to keep in mind all these asset classes should outperform cash over time. They have outperformed cash over time and there's going to be periods where cash is king. Those periods don't happen very often. They typically don't last very long.
Speaker 1:You need capitalism. For capitalism to work, you need assets to beat cash, and so I think of cash not as a long-term position, because if you took whatever your portfolio is, add cash to it, your return will probably go down over the very long term because cash should underperform assets. So I think of it as a tactical position. So you can call it dry powder. You can say I want to buy low, so I want to hold the cash, but it's tactical.
Speaker 1:So you have to time when to get into cash and when to get out of cash, and I found that it's very difficult to do that effectively. Over time You'll be right sometimes. You'll be wrong sometimes. On average, you're probably close to 50-50. And in my experience maybe you're a little bit better than that, but it's really hard.
Speaker 1:You have to add value in order to get in and out of cash because the odds are stacked against you, because cash should underperform assets. Now you could argue today, because of all the uncertainty, you should own a little bit more cash, and I think that's fine. I tend to minimize cash, and the reason is the other way to minimize losses is to be super diversified. So we'll talk about this. The risk parity portfolio is up this year and it's not an unusual year. You have a wider range of returns across assets, but the average is doing just fine, and so that's the other way to reduce the risk of big swings is to not be concentrated, be diversified, and that diversified portfolio should be cash over time, and there's periods again when it won't, but timing that is, in my experience, really hard to do.
Speaker 2:Yeah, it's always the whipsaw risk, right, it's this. Old studies from market timing show that market timing doesn't work, no matter what asset class, because it's not really timing the asset class, it's timing the cash point. And if the problem with cash is that there's no real momentum obviously, so you don't even have a chance really to sort of outperform in those fleeting moments.
Speaker 1: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, because oftentimes those decisions are made based on emotion, and emotion is often backwards looking, meaning you feel better when prices are rising and you feel worse when prices are falling, and it's easy to extrapolate the recent past into the distant future.
Speaker 1:So many and I'm not saying everybody does this, but many people will try to time based on what's happened backwards because their emotions drive them in that direction. And so if you try to time, my guess is, over the long run you'll tend to want to sell high and buy low. I'm sorry, you want to sell low and buy high. Um, because you'll want to. You'll feel like, oh, there's more risk after prices have fallen and and and what's you know obviously very counterintuitive is when prices fall, the forward returns are higher and when prices rise, the forward returns are lower and your emotions drive you in the opposite direction. So you kind of have this almost like a handicap in trying to time, because you have to deal with your emotions as well.
Speaker 2:And there were definitely a lot of emotions. Yes, for sure, for trading days, for sure. I love that point you made about most people are not even market weight and most individuals are probably massively concentrated in a certain number of positions because of the stories around ai, for example.
Speaker 2:We've seen the last several years and that's been a great place to be for a while and it clearly works right. Although I am blown away, I'm sure you see some of these these uh data points to the, the amount of retail inflow that uh has coming. So I'll tell you a quick. For those watching, this is honestly true.
Speaker 2:On that Sunday when futures were down like 1500 points, I had a number of financial advisors give me a ring and one advisor, who had been in business for 30 years, said to me you know, I'm actually very nervous. And I said what makes you nervous? You've seen all kinds of cycles. Why does this make you nervous? He said said this is the first time in his career. He was getting his own clients calling him up asking when they were going to buy stocks, whereas typically, when you have markets acting volatile, as a financial advisor I'm sure many of you that are watching this are financial advisors can relate to this your client call you up telling you to get out. Instead, he was saying that his clients were asking him to get in and the data on the retail side and it's like the way that retail just comes right in because the buy the dip mantra has worked. It's actually pretty remarkable and I think it makes them to your point about recency bias and emotions, and all this makes them even more concentrated with every single happens.
Speaker 1:Yeah, yeah, I mean, and that's the other thing that you really have to be careful about 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 all right. But and and by the dip has worked. Uh, you know, since the early eighties, if you just bought the dip and that was your strategy for the last four decades, you've done great. There is a chance that that doesn't work for a long time, and the reason is buy the dip has worked because inflation hasn't been volatile and anytime there was an economic downturn, you'd have stimulus. You have monetary stimulus, they cut rates, you've had fiscal stimulus and if you look forward, there is obviously a risk of a recession. Right, there's also a risk that you 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 more challenging. Inflation is sticky and that changes the game. It almost flips it on its head.
Speaker 1:So if there's this assumption that buy the dip works all the time, that's not a fair assumption over the very long run and this environment could be very different. So it is a very dangerous strategy, particularly if you're not diversified to begin with and your strategy is I'm just going to ride the market and I'm going to time the market and when it falls, I buy. And because it's worked for a long time, it's become ingrained as part of a successful investment strategy. You should be cognizant that there is a risk that doesn't work for a long period of time and buying the dip could actually hurt you, particularly if stocks don't really go anywhere for a long time and you can just look at valuations. You can look at policy, the reaction function. There's a lot of things out there that could change how things work in the future. So it would be very I highly recommend looking at all the assumptions you're making in your strategy and just to make sure that those still hold.
Speaker 2: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 comes to bonds. Maybe you see it with gold.
Speaker 1:But why is it only stocks that you tend to hear? I think it's because it's like we live in a stock culture in some ways, where there is this assumption. Again, we go back to these assumptions. The assumption is that stocks get returns and all the other things are nice to have because they reduce the risk, but they don't give you returns. So there's this view that there's a trade-off. You get returns with stocks, the other things are diversifying, but they lower your long-term returns.
Speaker 1:I want high returns. I'm going to focus on stocks. We know stocks are risky. I got a time when I get in and out. I think that's just the general philosophy and I don't think that's true.
Speaker 1:If you look at all these asset classes and I'm talking about not just US stocks but international emerging markets, I'm talking about even bonds I think the return is higher than many realize, especially long dated bonds. Gold is only 1% a year behind stocks since 1970, when we came off the gold standard in 1971. Since then, when gold has been free floating, it's only, it's less than 1% a year for 50 plus years behind equities. Hardly anybody owns gold and it's, you know, destroyed equities. The last several years, including this year, commodity equities have actually outperformed equities by a couple percent over 50 years. So there are diversifying assets that don't give up returns, that help reduce the risk in your portfolio, and so I think the reason that people just focus on buying the dip on equities is because that's been the focus Everybody's thinking about. That's where the returns come from.
Speaker 1:I think you have to reorient the way you think about building a portfolio. Be diversified, but that is reliably beneficial over time. Timing markets not as reliably beneficial. You could get it completely wrong, especially if you have a buy to dip mentality. So if you're diversified, you don't really give up returns. You can own a lot of different assets way to. How are all these assets doing? Then the buy to dip becomes less of a focus and you can look at all these assets and just rebalance and effectively you can buy the dip when they're doing poorly. You buy more when they're doing well, you sell a little bit rather than just trying to time one asset.
Speaker 2:The funny thing about rebalancing is that people think that's not how you get wealthy. I wake up at 4 a 4am every day and I go to the gym Right and I have on YouTube. The algo always sends me motivational videos to watch right before I go to the gym and one of the videos I was listening to earlier today. Somebody said the fastest way to your get to your destination is to go slowly.
Speaker 1:Yeah.
Speaker 2:Exactly, very well articulated. Yeah, I think it's very well articulated. Yeah, let's talk about rebalancing and the role of rebalancing, because I think and we'll talk about this in the context of risk parity yeah, but why is it that rebalancing is such a big driver of longer-term outperformance?
Speaker 1:So I think rebalancing gets a bad rap because again it goes back to the framework most people use. They have high return, high risk stocks and low return, low risk bonds. So if you're rebalancing, you're typically selling stocks and buying bonds when stocks have done well Over time. That helps a little bit because you're doing some rebalancing and buying low and selling high with some assets. But over time, the less stocks you own, the worse you do, because stocks have a higher return than bonds do, and so I think that's part of the rationale why people have stayed away from rebalancing. And you've seen it the last decade, particularly when you have a big divergence between the US stock market and bonds. I think bond markets are earning like 1% a year for a decade and US stock market and bonds I think bond markets are like 1% a year for a decade and US stocks are double digits. And so you can see why you look backwards and rebalancing didn't feel great, because every time you sold stocks they outperformed. You bought bonds, they didn't do much, and then even in 22, bonds are down a lot, almost as much as stocks and you look at it and say what's the point of rebalancing? So that's a backward looking, but you have to have a wider perspective. You got to zoom out and recognize that all these markets go through cycles. They go through good and bad periods. You can't look at the past good period and say the next period is going to be good as well. They're cyclical. They get expensive, they underperform, they get cheap, they outperform.
Speaker 1:And if you diversify across a lot of different markets and, as I mentioned earlier, a lot of them have competitive returns with equities and you rebalance that now you can see that there's a benefit to it. Because if you have let's just simplify it If you have two assets that have the same return over a long period of time and they go through different periods where they do well and do poorly, and whenever one of those assets is outperforming, you sell a little bit and you buy a little bit of the underperformer. If you kept doing that over time, you could see why you would have a return that's greater than just the average of those two assets, because you're programmatically buying low, selling high, and so the key is is find those other assets rebalance, because it actually adds returns and it reduces risk because you're getting more diversified. So I think it's the reason it's not that well appreciated is because the framework is just I get returns from stocks, nothing else. As opposed to how do I build a well-diversified portfolio?
Speaker 2:Do you get the sense that most of the financial advisor community has diversification?
Speaker 1:I do, yeah, and it's based on just my experience talking to advisors. It's based on what people focus on. You know you turn on CNBC they're talking about the stock market. You look at the Wall Street Journal it's about the stock market. You ask somebody how's the market doing and they're going to tell you how the US stock market is doing. That's just the focus and I think it's misplaced.
Speaker 1:I feel like you really need to be diversified and I think in a period like this it's even more relevant. Wide range of outcomes, extreme outcomes more likely be diversified. That's how you protect yourself. You can try to time it. If you miss it, you could take a huge hit.
Speaker 1:So I do think that most portfolios are not that well diversified and the simplest measure of that is a 60-40 portfolio, which is widely assumed to be a moderate risk portfolio. That 60-40 portfolio is 98% correlated to the stock market because you have two assets you have high risk, high return stocks the 60, and you have low risk, low return bonds the 40. So the total return is dominated by how the more volatile component of that portfolio does the 60. It's overweighted and it's way more volatile. So if the 60 does well, you have a good year. If the 60 does poorly, you have a bad year. You don't go up and down as much as the stock market, but directionally it's almost 100% dependent on how the stock market does. So if you go through a long period where stocks do poorly, 60-40 does poorly and that's the starting point for many investors and they view that as a balanced portfolio.
Speaker 1:I think if you just look at a 60-40 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 a single asset, how is that balanced? 8% correlated to a single asset, how is that balanced? So I think you know, and many people don't work off of that framework- so I think it's pretty clear that they're not that diversified.
Speaker 2:I love this comment from Amin, watching this on LinkedIn. Going back to the point about buying the dip Buying the dip is a slogan, not a strategy. I think that's spot on. Let's talk about gold for a bit here. I've seen a lot of interesting charts that now show that gold has outperformed stocks, the S&P at least, since 2000. That was not the case for a good decade, somewhere between I think it was 2012 up until not too long ago. What's the role of gold in a portfolio? I know we're talking about diversification. Obviously it's diversifier, but what makes gold unique relative to other asset classes?
Speaker 1:I think gold in this environment is interesting because it's a storeholder wealth and it doesn't even act like the other commodities. So in 2008, gold was up. All the other commodities are down a lot. 2022, commodities are down a lot.
Speaker 1:Gold was about flat Um and, and I think it's because it's it's more like a currency and a storeholder wealth. It's the oldest currency in the world, um, and so it has different behavior, which which is what makes it a uh, valuable diversifier. The part about it having returns is really interesting. I think if you ask an academic what is the return of gold, they'd say it has no return. It's like cash. But when you look at the data and we came off the gold standard in 1971, it became free floating. Since that point I alluded to that earlier Gold is it's earned like 8% a year since 1971. And I think equities are about 9% a year. That is, I think, that surprises a lot of people.
Speaker 1:The other thing that I think is interesting about it is that, if you so remove the labels, you have asset A, asset B. Asset A is global equities, asset B is gold, but remove the labels Two assets One has earned 9% a year. One has earned 8% a year for 50 plus years. The correlation between those two is close to zero. The best decades for asset A were the worst decades for asset B, and vice versa. And so the 1970s and the 2000s the best two decades for gold, the 80s and 90s the best two decades for equities, and vice versa. 70s and 2000s stocks underperformed cash for a decade, and the 80s and 90s stocks were great and gold was negative. So you have two assets, comparable returns over time. Average correlation is zero. The best periods and the worst periods coincide. That is a great diversifier. Very few people that I've talked to even look at that the way that I just described, which is a very simple framework, and there's a lot of other asset classes that you can throw in there, and I think the challenge people have and part of it, I think, is the media and part of it is just our own orientation is we zoom in? We look at how are markets doing today, how are markets doing this week, how are markets doing this month? You have to look at it over decades. How our market's doing this month, you have to look at it over decades. And I know you can't act on decades, but the decades perspective gives you, I think, a better framework for investing for long-term success. You may feel like you know you said something earlier that I think is really powerful and you know the quickest, you know path from A to B is to move slowly.
Speaker 1:I always say slow and steady wins the race, and it's because when you look at it too closely, you're focused on getting high returns over a short period of time.
Speaker 1:That invariably means you're going to have bad returns for short periods of time.
Speaker 1:When you add up all those good returns and bad returns, they don't amount to much over a long period of time. There's many investors that I've seen that have been investing for a long period of time. They feel like they've done great because they remember the wins, they forget the losses. They underappreciate how the math is cruel Meaning when you underperform, it takes so much outperformance to make up for that because the you know you gain 50% versus losing 40, losing 50%. The math is not the same, and so I think you underappreciate the pain that losses cause. So that's why I think slow and steady wins the race, and I don't think you really see that unless you zoom out, and we're always forced to zoom in. I try to get people to zoom out so you can see where things are headed and you can get a better sense of the right framework. And I think you put all that together and I think those are part of the reasons why many investors are just so focused on one asset. I love that.
Speaker 2:The math is cruel it is. Very well articulated. You have an ETF RPAR risk parity ETF. I want you to talk about why you launched that fund, how it's done, what's the theory thinking behind it. Just kind of go off on that for a bit.
Speaker 1:Yeah, yeah, the idea is well. First off, the reason to launch it is we want investors to have the opportunity to click a button and become well diversified, because I just feel like it's not that well appreciated. So what it includes is equities, commodities, which commodity equities, gold treasuries and tips, and it's risk balanced across all those assets. It's passive and you get a well-balanced portfolio with just buying the ETF and I think of it as a tool to take your total portfolio and take it one step towards being more diversified. And we keep it intentionally very simple so that you know what you own and why you own it and how it should perform. So that's the framework and so this year it's up a percent or so.
Speaker 1:Stocks are down a lot, but a lot of other assets are up, including gold, and over time. You could go back and look at all these assets over the last 50 plus years and just that balanced mix of assets should get you an equity-like return with a lot less risk. But it won't zig and zag with equities, which is what actually makes it difficult to hold over time, because most people's reference point is the stock market. So if our par is up three and the 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, not the volatile path. And if your reference point is the volatile path, you'll be disappointed about half the time because the volatile path will be way above, it'll be way below.
Speaker 1:This year it's way below and people are more satisfied that, oh, this is doing well, but it's doing what it's always been doing. It's slow and steady, wins the race. So it's basically diversifying to growth and inflation surprises, and it's doing that by owning assets to do well in different growth and inflation environments. 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 influenced by consumer behavior. There's a lot of unknowns, and so to me, it just makes sense to be diversified across those things, and that's what RPAR offers in a simple package.
Speaker 2:Those things and that's what RPAR offers in a simple package. It's hard for people to to your point think in terms of decades, right.
Speaker 1:You don't have to act in terms of decades, but I think it is important to think in terms of decades.
Speaker 2:Especially if you have a family. You're thinking about generational wealth and building on your lifespan, which is much more of an institutional mindset. How has risk parity done in this, in this most recent volatile you mentioned? It's still. It's up for the year, right.
Speaker 1:On the ARP side.
Speaker 2:but take us through the different asset classes. Gold really actually did, I think, fairly well throughout this. Equity is obviously not so much. Treasury is mixed right, but talk about just kind of more recent, Not so much.
Speaker 1:Treasury is mixed right, but talk about just kind of more recent. Yeah, I mean when you say equities, so US stocks are down about 8%. International is up about 5%. You know. So you know. I think that statistic actually surprises a lot of people. So developed non-US is up about 5%, the index year to date. And you just think about everything that's happening in the world. And if I polled most people who don't pay attention to, who don't actually look at the numbers all the time, and I said what do you think is doing better, us stocks or international, I think most people would say I know US is down, but it's probably gotta be doing better, because if US is down, international will be down more. And you got a 13% spread year to date. Emerging markets is down about a percent. Developed non-US is up five.
Speaker 1:So when we say the stock market's doing poorly, I think we should be specific. The US stock market is doing poorly. Other stock markets are doing fine. Up 5% in four months is above average. It's actually better than average. Gold is up 22%. Treasuries are up. Tips are about flat for the year. Commodity equities are up a couple percent.
Speaker 1:So when somebody asks me how's the market doing, I don't talk about the US stock market. My answer is if you want to know how the market is doing meaning a balanced mix of markets, not just one specific US stock market I'd say the market is doing fine. This year. It's up a little bit and, considering everything that's happening up a little bit is about right. So it is really interesting when you have that orientation and that's what I with my clients.
Speaker 1:I always try to shift their focus from US stocks to all other markets because as an investor, you're investing in many markets, not just one, and it's become more difficult the last decade to change people's perspective from one market to all these other markets. And it's because you've had a bear market in diversification. Just about every market has underperformed, us stocks have done great and now it's the opposite. So you asked earlier is this a difficult time for you? This is way easier than the last decade because diversification is working and that's the challenge, with slow and steady wins the race. When you have that approach and being concentrated in the thing that's done the best, that is a harder conversation than periods like this. This is a much easier conversation. I get very few calls today because this is what we've been talking about for a long period of time.
Speaker 2:You get a bull market in diversification, the wider your outcomes are using your term earlier, right and wide outcomes, I think, are directly correlated to uncertainty, yeah, and it seems like nobody even has a clue what's going to happen under the the Trump administration. So it is kind of a curious thing to make the case that, um, trump may have ushered in a bull market in diversity.
Speaker 1:Yeah, it is interesting, you know, I think it's easy to get caught up in what's happened recently. So uncertainty is typical. If you study market history, uncertainty is normal and we got so used to things being on autopilot. You know you had low geopolitical risk. Anytime there was a recession, we knew what was going to happen. The Fed is going to step in. Oftentimes they stepped in before the recession and with increasing strength. So just go back to the last 25 years. You had 2000 to 02.
Speaker 1:It took the Fed a couple of years to step in and, fiscally, to step in and stimulate. Then you had 07 or 08, 09. It took about half the time to step in and stimulate and so the time to respond has gotten shorter and the amount of force in responding has gotten greater. Then you go to, so you got 08, 09. Then COVID hit and it took three months. So you go three years, 18 months, three months and we threw the kitchen sink at the problem 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 shortening the response time and increasing the amount of stimulus, because now we've got the highest inflation in 40 years. Okay, now we've reached that line, we got to step back and at the same time we're at massive deficits, so you're kind of running out of your bullets.
Speaker 1:That is very different environment where we're in a completely different environment, not because of the policy of insurgency that's just part of it, not because of the policy uncertainty that's just part of it but because of the reaction function of providing stimulus anytime there's a downturn. So it's easy to look backwards and say this is the playbook, this is how it works. You got to recognize that that is very different today for a whole host of reasons, and the recent uncertainty introduced by the policy is just another element in that. And so all of that again goes back to is this a world? You want to be more diversified or less diversified?
Speaker 1:Most people are less diversified than they were 10 years ago, and I'm arguing that you should be way more diversified than even 10 years ago. You should have this decades perspective, understand that you can go through long periods where US stocks do poorly. Not just they fall a lot, but they don't bounce. For a long time the 2000s. The US stock market was negative for the decade, the 1970s and underperformed cash. I think of that as negative and you could easily get the next 10 years where stocks do poorly. So if you're betting it all on that and your strategy is buy the dip, you could be in for a difficult period. I don't know if that's going to be the case, but I think there's material risk of that. It's a lot safer to be diversified.
Speaker 2:Yeah, I think that's also very well articulated. By the way, folks those that are watching appreciate those that are watching this. If you have any questions during this conversation I see several that have commented Feel free to type it in whatever platform you're watching it on and I'll bring it up. Let's talk about how to think about risk parity as a framework in terms of weightings overall in a portfolio. Yeah, I think about RPAR and I look at it and I say you know that could be a whole portfolio. Sure, I mean, it's ultra diversified, it's got all the asset classes that you need. It's rebalancing. I get the sense a lot of financial advisors don't do that because it seems like there's no purpose then for their job. That's the case. But talk to me about what you find other advisors typically do and individuals do with RPAR.
Speaker 1:Yeah, so just quickly, rpar's allocation could be surprising to many people. So it's a quarter in global stocks, a quarter in commodities, which is commodity equities and gold, and then it's 35% long dated tips, 35% long dated treasuries. And the reason it's not 25, 25, 25, 25 is because the treasuries and the tips long dated are less volatile than equities and commodities. And the key to diversification is equal risk contribution, meaning you don't want any single asset class driving your returns. So you have to own more of the less volatile asset classes and less of the more volatile asset classes so that the total contribution to your risk is roughly equal. It doesn't have to be perfect. You just even ballpark is is way better than what most people do. So you can see 60-40 not well diversified, because the 60 is significantly more volatile than the 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 of assets that do well in different environments, risk balance, and you're done. That's very simple. So you're done. That's very simple. So you're right, it is a total portfolio. You could theoretically put your entire public market portfolio. There's other things you can own private markets, hedge funds, et cetera, but public markets. It's a very efficient mix and I would expect it to have an equity-like return over the very long run, with less risk and much lower risk of the significant periods of underperformance over a long period of time. So I think that's the framework.
Speaker 1:Now how do you implement this? It's very difficult to put all your 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 more diversified and I think that conceptually, the way I think about it is there's a spectrum. On one end of the spectrum is a conventional portfolio 60-40 call it, or you can think of it as a framework. On the other end of the spectrum it's RPAR, which is a super diversified portfolio, and somewhere along the spectrum is the right point for every investor and the reason there's a trade-off is more conventional, less diversified, less conventional, more diversified.
Speaker 1:So it makes sense to be more diversified, as I've described, but in practice it's hard to do because the reference point is a conventional portfolio and so you could be more diversified, feel bad about it, sell that diversification, go to this and you go back and forth and it's usually backward looking and it's influenced by what's happened in the past. So people like it now, so they buy more, but they didn't like it, you know, six months ago, and so they don't get the benefit of those past returns. So the way I think about RPAR is a tool to help you get more diversified, and so you have to find the right point along the spectrum of how diversified can I handle my portfolio. If I get too diversified, I may sell it at the wrong time. If I'm too conventional, it's not diversified, I could significantly underperform. Somewhere along the spectrum is the right point. So maybe a little bit more diversified than conventional, or maybe a lot more diversified, depending on my comfort level. So RPAR is a tool to get there.
Speaker 1:So you take your existing portfolio, whatever it is, if you want to take a step towards being more diversified. You own some RPAR as a diversification tool, and the more of it you own, the more in this direction to go. The less of it you own, the more in this direction to go. And the reason I think it's a useful tool is it's very efficiently structured, where you get all these asset classes with one click, and it is very tax efficient because all the asset classes have an ETF wrapper around them. So even if you went and bought all those underlying exposures, you can buy ETFs for all those that would be less tax efficient than if you just bought the wrapped vehicle. And also there's this rebalancing that happens inside that, I think, adds returns over time. So I think of it as a tool. The more you want to be diversified, own a little bit more, the less you own a little bit less. But it's just a way to get there.
Speaker 2:And so it's very much kind of a core satellite type of mentality, right Core on our part, for example, satellite if you want to play around with different overweights or underweights. It is interesting, right? A lot of people that are watching this on the comments are saying or asking questions about views on gold and views on tariffs and views on things. Yeah, which is what you would expect, because that's what people are used to doing. The nice thing about your viewpoint on things is that you're very Zen.
Speaker 1:None of this really matters to you In the context of risk parity at least one of those asset classes will probably benefit, no matter what happens. Yeah, Let me, let me talk about that a little bit. So I think it's just a natural behavior to to try to predict the future. Um, because we feel like that's how we add value is by I think this is going to do well, I think that's going to do poorly, and then you position based on that, and then this is what I was saying earlier, which is you can act near term, but you should have a longer term perspective. I think if you do that, you'll recognize that timing these things is really hard to do.
Speaker 1:Public markets are relatively efficient. There are a lot of really smart people that are more resourced and experienced than any one of us who are trying to time things, and you're competing with all those people and you have to throw in on top of that that the future is inherently unknowable, and it's probably more unknowable today than it's been for a long time because there's all these highly uncertain inputs that are truly unpredictable. So trying to time markets is a difficult game to play. You're going to be right sometimes, wrong sometimes, and on average, you might be right a little bit more than 50%, I think the best traders might be right 60% of the time. That's not great. If you know nothing, you're right 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 game that you're playing, which is the game most people play, you're not going to do great because the odds are significantly stacked against you. If the game you're going to play is I'm going to be diversified, that wins over time with high probability. Now, it may not win over short periods of time, but to me that's still winning because you're just on a smoother path, and that's what I was saying. You got to zoom out and think in terms of decades. You can act in shorter term. So I have views. I think gold is good, I think tips are attractive. I'm concerned about US stocks, but I place much less weight on those views and acting on those views than I do on diversification working, and so the Trump phrase that I use is diversification always trumps conviction. So it has nothing to do with the president, it's just this concept that diversification trumps conviction. You could be highly convicted in what's going to happen in the future Diversification. You should always have more confidence that diversification works over time, that you'll win with diversification than winning with picking things that are going to outperform, and so I try to stay away from it. I still fall into that trap because I think that's just a natural human tendency. That's what we. You know.
Speaker 1:You turn on CNBC. People are talking about what the future holds. You know, I've always felt there should be a rule, a regulation, that anybody up there predicting the future below them should be their actual track record. That is, it's not. It's the actual data and you know. So you have somebody up there saying you know, I think you know, in the next three months, this is what's going to happen. It should say odds of success are 52% 52% chance that this guy talking is right. Cnbc will go out of business overnight if that happened. But that's the reality. I think it's always good to examine what truth is. That's the reality. You could study anybody's predicting abilities If you actually had the data. The success rate is probably low. Most people probably think it's higher because they remember the wins. They conveniently forget the losses. But that's the reality, and diversification has a much higher odds of success.
Speaker 2:Alex dropping some bombs on people on this. I like this. This is good. Anything that we should hit on as far as how, behaviorally, people should be thinking about market. Again, we talked a lot about diversification, obviously, but you know, loss aversion is often what causes people to do the wrong things. They feel the pain of losing a dollar more than the happiness of gaining a dollar. Diversification should be an answer to that, but any sort of words of wisdom or advice for those that tend to find themselves much more emotional than they maybe should.
Speaker 1:Yeah, I think you know it's interesting. I feel like the more diversified you are, the less emotional you are. That's just been my experience Because 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, your portfolio is less emphasizing a single asset class.
Speaker 1:So I think if you're in the game of I got to pick when to go into stocks, when to go out of stocks, you're going to be more emotional because there's so much riding on that making that decision correct, correctly making that decision as opposed to if you're diversified, you don't have to predict the future. You just diversify and you know that wins over time. You don't have to be as emotional. You could be actually be more front footed. It's like you get a big downturn. You're like you know, maybe I need to rebalance a little bit. Um, you, you're, by and large, taking emotions out of the equation because your framework is diversified. I know I can't predict the future with high consistency and therefore I'm just removing that as opposed to I got to ride the ups and downs and when the market is doing well, I'm winning. When the market is doing poorly, I'm losing. That is very emotionally charged.
Speaker 1:So I think, if you feel like there's too much emotion and you're not happy with how things are going, this is a really important opportunity to be more diversified and to really think and understand what that means and to assess is that the right framework for me?
Speaker 1:And if you think about it from a timing standpoint, so let's fast forward five years from now and you look back five years and you say you know, I was less diversified for 10 or 15 years. It really worked out, and then around that time, when things started to turn, I got a lot more diversified and that really worked out. You just you just won the game. If you, if you ride it all the way up and you hold that strategy and you ride it all the way back down and you look backwards and say I had the opportunity, I didn't take it, and so I view this as one of those potential inflection points. Again, we won't know for sure for years, but it does feel like that. So I feel like, if there's too much emotion in your portfolio, use that to drive you towards becoming more diversified.
Speaker 2:I'm going to just show this comment because I think it's hilarious. From East Wing 52% rate of commentary. Success for CNBC would be huge, Absolutely yes. Obviously a lot of people agree with you, Alex. For those who want to learn more about RPAR and just in general, maybe just learn about risk parity, you've got your book. Let's talk about where people can find it.
Speaker 1: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 books and I'm always beating the drum of be diversified, be diversified. And it feels like there's at least more interest in that today than there has been for some time, so I'm excited about that.
Speaker 2:Again, folks, this was a sponsored conversation by Evoke Advisors. Al Chihides for Amir. Learn more about RPAR. Appreciate those that gave the comments, 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.
