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
Predicting the Unpredictable with Alex Shahidi
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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Well, predicting the future is inherently difficult, right? So we know that, and I think my sense and my experience is a lot of investors are probably overconfident relative to what the hard data would show that their track record is of predicting the future. Because there's something called selective memory, right, we remember our wins and we conveniently forget our losses, and so if you objectively measure everything you thought that would happen and what actually happened and you took a track record of that, my guess is most people would be somewhere in the 50 to 55% range in terms of their hit rate, of how often they're right. I think the smartest investors might be 55 or 60% at best. The average investor is probably 50 or lower, because emotions might drive you to do worse than if you were just looking at it completely blindly, without any insight.
Speaker 2:My name is Michael Guy. I'm publisher of the Lead Lag Report. Joining me here is Al Chahidi of Evoke Advisors. Evoke is a client of Lead Lag Media, so this is a sponsored conversation, but I always love talking to Al and I named this podcast on the live stream Keep Calm and Risk Parody On and I wanted to do that because I think there's a lot of angst and anxiety given everything we're seeing from the geopolitical side Iran, Israel, Trump, all kinds of things that are going on, and I teased this out to you a little bit earlier. I view risk parity as a framework, as a hedge against behavior, so I want to spend the first part of this conversation talking about behavioral responses to headlines, to geopolitical risk, how that actually hurts the very long term.
Speaker 1:It's a very good point. Behaviorally, people respond to the news that they hear and what they see, and it's a natural response. Outside of the investment world, it makes sense to react to what is in front of you. Investing is very different and counterintuitive in that way where oftentimes what you see and the information that you're taking in is already reflected in the price. So reacting to that may be very counterproductive, but that's just human nature. We've heard about fear and greed driving investment decisions. It drives many decisions, particularly investing, that's emotionally driven. Fear and greed play a significant role, and oftentimes fear and greed drive you to do the exact opposite. You want to buy when things have gone up and so high and you want to sell after things have gone down. You know so sell low, and so that's one of the challenges of letting emotions drive your investment decisions.
Speaker 2:Do you think that people have become more emotional or less emotional in recent years?
Speaker 1:My guess is that the emotions have probably been constant through time. But there's environments where you may react more to your emotions. I think people are hardwired to be emotional and they respond to those impulses. But there are environments where there's greater fear and greater greed. And if you just look at markets over time just focus on the US stock market, for example it goes through long stretches where it does really well and then it goes through long stretches where it does very poorly, does very poorly.
Speaker 1:These long, long-term cycles, if you zoom out and you just look at the S&P 500, for example, goes through very long stretches of great and terrible results and I think a lot of that is fueled by emotion. The longer the bull market, the more 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 bull market and maybe it's turned. It's hard to know, but in terms of emotions I think part of it is influencing that. And then obviously, the bigger the news and the bigger the headlines the link between emotions and timeframe People will be to zoom in and look at the problem very closely and one of my jobs as an advisor is to help people zoom out.
Speaker 1:And oftentimes the further out you're zoomed, the more clear headed you can be and the more perspective you have on the direction that you're headed on and your path. And when you look at things closely, I think you'll experience and see more volatility. And when you look at things closely, I think you'll experience and see more volatility. Then, when you look at things further back, those big wiggles up close are actually small wiggles when you look further back and then the trend line becomes more apparent and when you look at it closely, it's you know there is no trend line. It's like up and down, up and down, up and down.
Speaker 1:So I think a lot of it is just the angle through which you view the problem and the markets. And the closer you are, the more volatility you experience and you see, and that can be emotionally charging as well. So I think a lot of it is having the perspective to zoom out and it's hard to do because everything you see forces you in and I think part of the process is like push yourself out and you have to do it intentionally, otherwise you'll get pulled in and you know we're guilty of the same thing as well.
Speaker 2:So you mentioned the sort of squiggles because I often tease that on X when I refer to technical analysis. Right, the squiggles on a chart and I think related to the point about emotion is confidence that one can predict the future based on squiggles. I suspect that it's never been as easy as it is today to be a in quote technician, because you have all the software that enables you to very quickly overlay things on charts and do things like that and give a false sense of confidence. Talk us through why that's not a good way to approach investing.
Speaker 1:Well, predicting the future is inherently difficult, right? So we know that, and I think my sense and my experience is a lot of investors are probably overconfident relative to what the hard data would show that their track record is of predicting the future. Because there's something called selective memory, right, we remember our wins and we, relative to what the hard data would show, that their track record is of predicting the future, because there's something called selective memory, right, we remember our wins and we conveniently forget our losses. And so if you objectively measure everything you thought that would happen and what actually happened and you took a track record of that, my guess is most people would be somewhere in the 50 to 55% range in terms of their hit rate, of how often they're right. I think the smartest investors might be 55% or 60%. At best. The average investor is probably 50% or lower, because emotions might drive you to do worse 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 think people have a really hard time appreciating is it's okay to have a view of what you think the future holds, but you have to compare that to what consensus view of that is. And because you not only have to be right about what happens, your view has to be different from the consensus, the average, and so you have to be different and correct. And that is really hard to do because, on average, the market is all.
Speaker 1:The investors are reasonably smart, they're well-informed, there's a lot of data that feeds into that.
Speaker 1:So to guess correctly, it has to be different and correct and it has to be the right time. So imagine a scenario where you have some prediction over the next year and you think the market's going to go up 20% over the next year and it loses 40% before it goes up, ends up going up 20%, and so you could be wrong for 10 or 11 months and be right for one month and you still look like a native, even though you were actually correct. So getting all of this right is just really hard, and the data would support that. You could just look at all the active managers out there and the percentage of them that beat the index. It's not as high as you would think, given how smart and experienced these investors are. So I think trying to predict the future is hard. You can try, but you should be aware and honest about how difficult it is and then, obviously, if you're letting emotions drive a lot of those decisions, maybe your odds might be even lower.
Speaker 2:And stocks are kind of a unique asset class in that I feel like of all the different asset classes, that's the one people feel the most confident they can predict in the short term and apply technical analysis to. You often don't see that, and really in the bond market you see it somewhat with gold, but what is it about stocks that makes people think they understand what's coming tomorrow?
Speaker 1:I think part of it is stocks lend themselves well to narratives and you think about a stock and it's a company and you can create a narrative about why being an investor in that company is really attractive and you can tell a very good story. So I think it just lends itself well to that and people respond to stories and narratives and then when you have a strong narrative with strong historical performance, it adds fuel to that narrative going forward. So I think part of it is that stocks are just more interesting than bonds or gold or commodities. It's just easier to get excited about the value that a company is creating. And again, the challenge that most investors miss is a lot of that expectations in the price and so you have to be able to distinguish what your views are about the future of that company relative to what the market's discounting, and that's just a really hard thing to get your arms around and so it's very easy to miss.
Speaker 2:Let's talk about the risk parity framework as a way of approaching investing, approaching uncertainty, and why it might be the hedge to the emotional part and the conviction part.
Speaker 1:Yeah, the part that I think is maybe most challenging for people to get right is think of it as an investor. There's basically one big decision, assuming you want to take risk, the big decision is do you want to do it in a diversified way or do you want to not be that diversified? And my experience is most people are not that diversified because they put all their eggs in the stock market basket and over time that works, but there's long stretches when it doesn't work and I think of the risk parity framework as just a way of thinking about how you build a diversified portfolio. And, in a nutshell, it's own assets that do well in different environments and balance those assets 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, is really hard to do and it's because you're going to own things that individually you may not think look that attractive. And it kind of goes back to the starting point of our conversation, which is being overly confident in what you think the future holds and what assets are going to do well, and my experience is you don't really know.
Speaker 1:So that involves owning stocks which a lot of people may be comfortable owning, but it includes owning things like inflation-linked bonds, tips, gold commodities, treasuries Everybody hates treasuries these days because they've lost money the last five years, but the yield is the highest it's been in 15 years and it's always backward looking, as we know. So being well-diversified means owning all these assets all the time, and so to do that, you have to set aside your individual conviction of what you think, what assets are going to do best, because you're, by definition, owning all of them, and what's going to end up happening is some of those assets will do poorly and some will do well, and you don't really know which is going to be which. And then the things that do poorly, you have to buy more of to do well, and you don't really know which is going to be which. And then the things that do poorly, you have to buy more of to rebalance. And the things that have done well, you have to sell some to rebalance, and that becomes even very difficult to do. So the whole thing on paper is simple. It makes sense to be diversified.
Speaker 1:If we were to zoom out and just look at a chart of a balanced portfolio, through time, the line would be a lot straighter than an imbalanced portfolio that is stock concentrated. It'll be much more volatile and go through lost decades. A well-balanced portfolio shouldn't go through lost decades and be more resilient through time. So when you zoom out, it's obvious Most people would pick the straighter line. But when you're zoomed in, as most people tend to do, and probably more zoomed in today than 20 years ago because information's in front of you all the time then it's hard to hold on to that straighter line Because you have to own assets that you may not be as convicted in. You have to hold them and buy more when they underperform. Those things are just emotionally very challenging.
Speaker 2:And that's always where the opportunity is, it's where people are unable to hold on Right. I always go back to the core idea of being contrarian is to not bet with the crowd, because you're splitting the pot among all the bettors, right, whereas if you're betting on a pot that might be smaller but there's less other players, you know the expected value is higher.
Speaker 1:Yes, although you could look like an idiot for an extended period of time. That introduces that challenge of you know. So if you're just a contrarian, there's no simple strategy, so it's not like you can say I'm a contrarian, then I win all the time. Maybe you win over time, but you lose over shorter times, and shorter times in the market could be a year, three years, five years, even 10 years. Just look at the last 10 years.
Speaker 1:The less diversified you were meaning the more US stocks you own, which is the asset you know class most favored the more of that you owned, the better you were. Meaning the more US stocks you own, which is the asset class most favored the more of that you owned, the better you did. And the more diversified you were, the worse you did. And so you could look backwards and say diversification lost the last 10 years, even 15 years, and the more concentrated you were, the better you did. And so maybe that teaches you the wrong lessons long-term.
Speaker 1:But that's a long enough time where even those who are highly convicted and being more diversified and trying to be on that straighter line could start questioning whether that's the right approach. Maybe times have changed. Maybe these asset classes are not going to have the returns they've had historically. Maybe there's new information that they didn't consider before. So you start questioning the validity of that approach, and so that's another reason. It's just difficult, because you can go through long periods where you just don't it doesn't work. You know quote unquote work even though if you're zoomed out it's doing exactly what you would expect. But that just introduces that challenge of actually implementing some of these in practice.
Speaker 2:So at your ETF RPAR you came out with it. I believe it was the end of 2019. Been kind of a crazy cycle for this to be live in, right before COVID, right before COVID, and then you know, fastest rate hike cycle in history and all kinds of insanity in between. Talk me through sort of the genesis of the fund, the history, the idea behind it, how it's done, everything around it.
Speaker 1:Yeah, the idea is to build a balanced portfolio and it's an approach that I've been using with my clients for 20 years and, in summary, it's just own diverse asset classes. So own gold, own commodities, tips, treasuries, global equities, and be globally diversified on the equity side. So I've been doing that with my clients for decades and about six years ago we figured out it'd be a lot more efficient if we took those asset classes and put them inside of an ETF wrapper, which is what our part is. And the reason that I think it's interesting is twofold. One is it's a lot more efficient to manage a single vehicle than to do it on a separate account basis. But the second, which goes to our conversation today, is it helps minimize some of those emotional biases. And the way to think about it is you have to own gold all the time. Today, people are very fine owning gold because it's up a lot, but there were stretches where it did very poorly, and especially when you compare it to the favorite asset class, US stocks, and that becomes a reference point for a lot of people. When these diversifying asset classes are doing poorly relative to that, it's really hard to own it and it's really hard to rebalance and buy more, and that's how you actually maintain a diversified portfolio through time.
Speaker 1:So we put all those asset classes inside of a single ETF wrapper, the ETF as a whole. The package is easier to hold over time because those individual asset classes are embedded within it. It allows you to manage it more efficiently. There's a little bit of leverage, which you can. You know the cost of financing is cash, so that becomes very efficient.
Speaker 1:It becomes very tax efficient when you put an ETF wrapper around all these asset classes. And one of the challenges with rebalancing which we all know is a good thing to do and we know it's emotionally difficult to do but the other challenge is when you sell the winners, you typically have cap gains. So not only do you have to sell the winners by the losers, you have to pay taxes on selling the winners, which makes it really hard to do in practice. When you put those asset classes inside of an ETF wrapper, you can effectively defer the cap gains until you sell the ETF. So there's all these advantages that come along with that ETF wrapper and it's obviously liquid and you can price it every second. So that's why we created it and I view it as a tool to build a more diversified portfolio.
Speaker 2:Diversification has been a bit of a dirty word in this environment. Let's set the record straight on what true diversification is.
Speaker 1:Yeah, it's a good point, and diversification this year is quote-unquote working. When you look across asset classes, us stocks are one of the worst performing asset classes in 2025, after being one of the best in the last 15 plus years. So you're starting to see the benefits of diversification. I think they're always there. They're more obvious when the favorite asset class is doing poorly, as it is currently. But you asked what is diversification and I think it's a very important question different environments, so that your returns aren't dominated by a single risk factor. So think of growth and inflation as being the main risk factors that drive asset class returns.
Speaker 1:Most portfolios are heavily concentrated 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 matters or even the drawdowns. You see, stocks can drop in half. We saw that in the 2000s. They fell in half twice. So it's not really that which is obviously a concern. But the bigger concern is stocks can go through 10, 15, 20 years of doing poorly, and those are hard to come back from. You can live through the dips as long as you don't sell, but living through a lost decade is hard. We had a lost decade in the 2000s Stocks underperformed cash. We had a lost decade in the 1970s Stocks underperformed cash. That's two out of the last five decades stocks had a lost decade. So that's important. So basically, don't put all your eggs in the stock market basket.
Speaker 1:Diversify across multiple assets. So that includes things like gold I mentioned. Many people underappreciate the benefits of gold through time. I think there's a general view that gold doesn't have high returns. Since we came off the gold standard in 1971, gold is within 1% a year of equities global equities in terms of its returns. Gold is within 1% a year of equities global equities in terms of its returns. Its best decades were during the worst decades for equities the 70s and the 2000s and its worst decades were during the best decades for stocks. So it's a really good diversifier.
Speaker 1:Tips long data tips started in 1998. They're only about a percent a year behind global equities since 98. That surprises a lot of people and it's a great diversifier. Commodity producer stocks have outperformed global equities by 2% a year over the last 50 plus years Great diversifier. Those stocks were up in 22 when equities were down. So there's a lot of really interesting diversifiers you can own that actually have reasonable returns through time, so you don't have to give up returns to be diversified. But that balanced portfolio will travel a very different path from a US stock focused portfolio, but that's a more resilient path. So to me that's what diversification means is just be more diversified across asset classes, don't bet it all on one segment and the odds of a lost decade go down dramatically.
Speaker 2:What would you say to those people that would counter and say equities are the only place to be because, aside from the fact that over the long run they tend to go up, you have this structural bid from flows that go from the 401k side into large cap S&P, like products that other asset classes don't have the benefit of right, Just in terms of that kind of default flow and buying.
Speaker 1:Yeah, I think that's fair. Now that's in the data. So when you just look at historical returns, that's already in the data. Now there's also valuations, so at some point valuations get so rich that you can't really go up anymore. The markets collapse under their own weight. So we saw that in the 2000s. You had money going to 401ks all through the 2000s and stocks underperformed cash for a decade. So maybe they have that advantage and again times change. A lot of money goes into US stocks because they've done well. But what happens if they don't do well for five years or 10 years? Maybe those trends reverse. In the 1970s people loved commodities because that's the thing that did really well. In the 70s, stocks and bonds underperformed cash. I don't think there was a 60-40 at that time because the 60 and the 40 did worse than a money market fund for a decade. 60-40 was born out of the 80s and 90s bull market in stocks and bonds, and so I don't think it's a great assumption that those flows will always go into US stocks. That can change as well.
Speaker 2: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 of leveraging RPAR with UPAR.
Speaker 1:So the way I think about it is there's two different decisions. The first decision is do you want to be diversified or not? And I believe a well-balanced allocation will own those asset classes global stocks, commodities, gold tips and treasuries. They're diverse to different economic environments, which is the main driver of asset class returns. So the first question is do you want to be diversified across all those assets? And then the way you have to weight them. It doesn't do you much good to put 90% in US stocks, 10% in those other assets, and say you're diversified. So the weighting matters. And conceptually you have to think about the volatility of those assets when you're weighting them. So the assets that are more volatile you have to own less of and the assets that are less volatile you have to own more of, so that you have equal risk contribution across these assets. That's what it really means to be diversified. So 60-40, as an example, it's not diversified because you have 60% in something very volatile, 40% in something that's not very volatile. So the 60, not only is it more volatile, it's overweighted relative to the less volatile asset, so it drives a return. So 60-40 is 98% correlated to the stock market. By definition, mathematically it can't be diversified. So the first step is be diversified. Then the second step is you can lever that diversified portfolio so you could have an.
Speaker 1:I think most people conclude risk parity means you're levering bonds. I don't think of it that way. I think of it as you don't have to have any leverage in a risk parity portfolio. You're just matching the risk of diverse asset classes. So think of it as an unlevered risk 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 that portfolio a little bit and that's what RPAR is. So RPAR has about 20% of leverage and that portfolio has an expect to return that's equity-like and the risk is like a 60-40 portfolio. And then you can lever that even further and it's the same allocation, same exposure, just more leverage, and you could have an equity-like risk but then expect a return that's a little bit better than equities. And that's what UPAR is ultra-risk parity.
Speaker 1:And if you look at a pie chart of the unlevered risk parity, rpar and UPAR, the pie chart looks exactly the same. The only difference is there's leverage applied to RPAR and UPAR and, importantly, the cost of leverage is cash. That's the financing cost. We use futures to get the leverage and the implied financing cost of futures is cash. So if you have an unlevered risk parity portfolio, that's a starting point.
Speaker 1:If you can lever that a little bit and your cost of financing is cash, then as long as a balanced, poor mix of assets beats cash, then RPAR will beat an unlevered RPAR and if that's true, then UPAR will beat RPAR over time because your cost of financing is cash and, as we know, asset classes should beat cash over time, otherwise capitalism would stop. But there's shorter periods where cash beats asset classes. That happened in 2022. And in those periods it's challenging. Same thing happened in the early 80s. It's a challenging environment, but those don't persist and over time, assets beat cash and so more leverage. You should have a higher return, more risk as well, and you'll go through those occasional periods where cash is king, it's designed to be, you know, steady-ish, right.
Speaker 2:I say ish because obviously things happen in the short term, but you know it's not going to appeal to sort of like you know, the hot action that you see with some of these. You know true X, 2x, 3x levered funds or individual stock positions. What would you say to somebody that's like you know what? I just want more action in my portfolio. I like RPR, but I want some of that stuff that gives me some extra juice.
Speaker 1:I think of it as a spectrum. On one end you have get rich quick strategies and on the other end you have get rich slow strategies. And the get rich slow strategies have higher probability of success because they're more diversified. And it goes back to the concept of the one free lunch in investing is diversification. So we've heard that since the beginning of investing times and what that really means is you get more return for the same amount of risk. That's the free lunch, and so the more diversified you are, the more free lunch you have. So let's get rich slow, and the less diversified you are, the more upside you have, but much greater risk and the ratio is less attractive than a more diversified portfolio the return to risk ratio. So if you're in the get rich quick game, then you probably own less of RPAR or none of it. And if you're in the get rich slow game, then you probably own more of it.
Speaker 1:And I think of it as a spectrum, not as all or none. And so if you're 100% in get rich slow, you could theoretically have 100% RPAR and be done. If you're 100% in get rich quick, maybe you put it all in one stock and roll the dice and hope it hits. But you could also go to zero, and most people are not a hundred percent or either extreme, they're somewhere in the middle and depending on how much of one or the other you want, you can navigate along that spectrum. And I think of RPAR as a tool to build a diversified portfolio in a very efficient package. And so let's say you're 90%, I want to bet 90% on that single stock, or a few stocks, or the max 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 with a single vehicle and most people are probably somewhere in the middle of that spectrum. So that's conceptually how I think about it.
Speaker 2:The nice thing about ETFs is that for an investor, you can see the holdings daily. So you can argue maybe not a nice thing for the issuers because anybody can replicate their holdings right as far as the day after. What's the argument for using an RPAR or a UPAR when somebody looks at the holdings and says I can just buy these funds myself?
Speaker 1:Now you're asking the right person, because that's exactly what I did before. We created our part and your part, and what I learned is it kind of goes back to the beginning of our conversation is on paper, it's easy to own these assets. In practice, it's really hard to implement it, and it's because you have to buy low and sell high, you have to rebalance, you have to own the asset classes, when everything in your mind and your body tells you this is not the thing I want to own. And so in practice, it's really hard to not only be diversified all the time, it's hard to rebalance and sell the winners and buy the losers, and then there's obviously tax advantages that come with putting it all inside of an ETF wrapper.
Speaker 1:So what you're describing is effectively what I've been doing with my clients for a couple of decades, and through that experience I learned how hard it is to implement and practice, and so I wasn't able to be as diversified as I wanted to be. I wasn't able to rebalance as frequently as I hoped to do in practice because of those challenges emotions being part of it, taxes being another part and so I feel like the ETF wrapper. It doesn't eliminate all those challenges, but it significantly mitigates them. It also makes it a lot easier to just own that piece and focus your energy and your resources on the get rich quick opportunities, so that you don't have to focus so much on managing the balance portfolio, and so I think of it as just a tool to get you a very efficient balance exposure as part of that portfolio, and then you just own that and then you forget about it and then you focus on the other strategies that you want to use as a compliment.
Speaker 2:By the way, I know this may sound silly, but for those that are listening, I would think that a good way to do that is to have RPAR in a totally different account than a more speculative trading account, Because there's going to be a temptation, right? Oh, I can use RPAR to fund my losses from buying some insanely levered position that just went against me.
Speaker 1:Yes, and also a big issue with investing is everybody has a reference point on what they compare results to to judge success or failure. And one of the challenges of owning a balanced portfolio through RPAR is that you have to compare it to something, and I view it as that's what you should be comparing to, not that to something else, because that's a balanced portfolio. But it's very common for people to look at that relative to US stocks and judge whether it's doing well or poorly, and I don't think it's the right analysis because it owns US stocks. But whether it's doing well or poorly and that is I don't think it's the right analysis because it owns US stocks, but it's not a massive proportion of it by design. So, part of putting in a separate account, it's almost like you have to put it there and forget about it and not compare. So, as an example, you could have an environment where US stocks are up 30% and RPR is up 10. And you look at that and say, hey, this isn't doing as well as I thought.
Speaker 1:You could also have an environment where the US stock market's down 30% and RPAR is up the same 10, and now it looks brilliant and RPAR doesn't care what US stocks are doing. It's just a small piece of it. It owns a lot of diverse asset classes, but emotionally you can look at that and judge success or failure over that timeframe based on your reference point, which is a lot more volatile, and that reference point is going to outperform, probably half the time or more. So the further you remove it from that type of side-by-side comparison, the less likely you are to react to your emotions of okay, this is quote unquote working or not working. It's a balanced portfolio. You just set it aside and you don't think about it, and so putting it in a separate account is probably a very wise strategy in that regard. I should.
Speaker 2:So institutions and retail let's separate out the two. Think about portfolio positioning, weighting in risk parity. I would assume a lot of institutions would view it more core-ish. Maybe individuals, retail, would view core-ish as part of a separate account, like we just said. But is there any difference between sort of the two and how to think about weighting?
Speaker 1:waiting. I think there are some differences. Institutions tend to focus more on diversification. They tend to have an investment policy where they have targets and ranges, so they're more likely to appreciate the benefits of having a diverse portfolio and then rebalancing because there's a written document that dictates this is the strategy, as opposed to individuals that typically don't have an investment policy. So I think that's one difference.
Speaker 1:But, keep in mind, institutions are made up of people. There are trustees and I'm in front of them all the time, and those people have their personal experiences or personal biases and they're also emotional. So it's not that different from individual investors, and the main difference is you have this written document. Also, the trustees are this is not their money. They're fiduciaries for somebody else's money and they have people they're reporting to.
Speaker 1:So that creates a slightly different dynamic as well, and so they're probably more on the get rich slow side of that spectrum that I described earlier than the get rich quick, because they don't put as much emphasis on the get rich quick side and they put more emphasis on I just don't want to embarrass myself and lose a lot of money. And then people ask what am I doing with the foundation or endowments or pensions assets. So I think those are the main differences between the two. But in general, investors are not that different. They want to do well and they want to minimize losses, and on the institutional side it's just a little bit more formality around that.
Speaker 2:What do we not cover that you think is important when it comes to thinking about markets, thinking about risk parity, thinking about how to deal with the unknowable tomorrow?
Speaker 1:Yeah, I mean the unknowable tomorrow. It's a big unknown. The way I think about the world in which we live is there's a wide range of potential outcomes and the risk of extreme outcomes is probably greater today than it's been in many decades. There's just a lot of major factors at play, a lot of major forces that it's hard to know how that's going to net out. And the other aspect that's happening today that we really haven't had for 40 plus years is inflation. Volatility is probably greater. I don't know if we're going to have high inflation, I don't know if we're going to have low inflation, but the volatility of inflation is greater. And you can see, even the Federal Reserve is not sure whether they're going to lower rates, whether they're going to raise rates. There's too many unknowns. And inflation volatility is a big deal because it impacts the reaction function of the Fed. It impacts the reaction function of corporations, of individuals, and that's an additional risk factor on top of geopolitical and growth volatility and uncertainty. So there's just a lot that we don't know and if you look at that world as an investor, it's hard to predict how things are going to go. But what you can control is your allocation and you control your investment framework. And I look at that world and I think a lot of people probably agree that there's a lot of uncertainty. And I look at that world and I think a lot of people probably agree that there's a lot of uncertainty.
Speaker 1:And I look at that world and the conclusion that I draw is is this an environment in which you want to be more diversified or less diversified? I think that's like the core question, and my guess is is most people who are looking at this especially those in the get rich slow game and maybe stay rich game are thinking this is probably an environment that it makes sense to be more diversified. Yet when you look at portfolios, they're probably less diversified today than they were a decade ago. Most portfolios probably have more US stocks in them than they did before. They probably have more equities than they did before, and even those equities are more concentrated than they were before.
Speaker 1:So it's a period where you probably have more concentration than you've had and also a period where you probably want to be more diversified than normal, and I think of it as diversification, as a risk parity framework. You can diversify even beyond that with private markets and other strategies that are low correlated to public markets. But I think that's one of the key takeaways is just ask yourself do you want to be more diversified or less diversified? And then ask am I diversified? And remove the emotions. Just look at the allocation. If you have a high allocation of stocks and high allocation US stocks, by definition you're not that diversified. Maybe it's the right decision and you won't know that for years ahead, but it's a really dangerous game considering how uncertain the environment is.
Speaker 2:Alex, for those who want to learn more about RPAR and UPAR, where would you point them?
Speaker 1:to Our website. Rpar. R-p-a-r-e-t-fcom has a lot of information about the ETS. We do a quarterly webcast. The replays are available on there. Our advisory firm, evoque Advisors, has a website at evoqueadvisorscom. I regularly post articles that I write on various topics not just risk parity, but a lot of different investment topics. I also host the weekly podcast called the Insightful Investor on Spotify, apple and YouTube, and insightfulinvestororg is the website for that. That's a weekly podcast with smart investment people and others that I post. So a lot of different ways to keep up with us.
Speaker 2:I am a big fan of Alex Shahidi's. Everybody. Please learn more about Apar on that website. Also get access to his book, which is a good read, and hopefully I'll see you all on the next episode of Lead Lag Live. Cheers everybody. Thanks, alex.
