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 Melanie Schaffer (@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
Rethinking Diversification: Alex Shahidi on Risk Parity and the 60/40 Problem
Rethinking Diversification: Alex Shahidi on Risk Parity and the 60/40 Problem
In this episode of Lead-Lag Live, I sit down with Alex Shahidi, Managing Partner and Co-CIO at Evoke Advisors, to talk about why most portfolios aren’t nearly as diversified as investors think — and how risk parity aims to fix that.
We dig into why the traditional 60/40 portfolio fails, how to truly diversify against growth and inflation shocks, and why today’s market risks make balance more important than ever.
In this episode:
Why “balanced” portfolios are still stock-heavy
How risk parity works — and why it’s really about true diversification
Building portfolios that avoid “lost decades”
Why inflation risk has returned after decades of stability
How today’s concentration in U.S. mega caps could backfire
Lead-Lag Live brings you inside conversations with top financial minds shaping markets in real time.
Subscribe for more interviews, insights, and raw takes that cut deeper than the headlines.
#LeadLagLive #Investing #PortfolioStrategy #RiskParity #StockMarket #AlexShahidi #AssetAllocation
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So if you ask somebody how's the market doing, they know or they assume you're talking about the stock market. When somebody asks me how's the market doing, or clients ask me, my response is always well, what market are you talking about? A balanced portfolio is just not hard. It's very hard to implement because it requires patience. It requires your ability to zoom out and see the picture from further away.
Speaker 2:I'm your host, melanie Schaefer. Welcome to LeadLive Live Now. Right now, the S&P 500 is trading just inches below its all-time high, powered by gains in mega cap tech, and while rate cut hoax are keeping bulls in the game. It's exactly the kind of market where portfolio design, especially market strategies like risk parity, really matter. My guest today is Alex Shahidi, managing Partner and Co-CIO at Evoke Advisors. Alex is one of the most well-known advocates for risk parity and has spent decades helping institutional and high-end net worth investors rethink how portfolios are built. Alex, thanks so much for joining me today. Thanks for having me Now. Let's start with sort of a bit of a background how did you get into this space and what led you to co-found Evoke?
Speaker 1:Well, I go back a couple of decades. I started my career as a financial advisor at Merrill Lynch back in the late 90s, and when I started, I always thought of it as I work for my clients. I didn't work for my firm, I don't work for anybody else, I work for my clients, and so I approached it from an independent thinking standpoint of what's best for the client, and I've always felt that way. So I set out to talk to the smartest investors I could find. I now have a weekly podcast that I host called Insightful Investor, where I'm interviewing a lot of these people, and so I collect this insight, synthesize it and come up with what I think is the most appropriate investment framework for investors, and that's basically what I've built my career on so far.
Speaker 2:Yeah, so what does your overall investment framework look like and how do you approach the markets at a high level?
Speaker 1:Yeah, I start with what's the goal and I think most people would have a similar goal which is to earn attractive returns through time and do it with as little risk as possible. And the way I think about risk is in three dimensions it's volatility, standard deviation. But I think even more important possibly is you want a portfolio that is resilient through time. You want it to hold up during those terrible bear markets that occasionally occur and are always a surprise. And then the part that I think a lot of people miss is you got to really be thoughtful about avoiding the lost decade. If you just look at the stock market in the last five decades, two of them were lost decades the 70s and the 2000s where cash outperformed stocks. So if you can build a portfolio that achieves attractive returns call them equity-like returns over time and avoids the lost decades, minimizes the drawdowns and tries to reduce the volatility, to me that's the goal of a well-constructed portfolio, and the way to think about how you build that is just conceptually is you want a bunch of return streams that are individually attractive but diverse to one another. In other words, they all go up over time but they go up and down at different times. And if you can do that, if you can do that well, then you can achieve that objective that I described, and so the way I categorize all these return streams that we face is in three buckets.
Speaker 1:There are public markets, private markets and a category I call hedge funds. That hedge, and so public markets, which is where I think we'll focus on today. There's a, I think, a very reasonable approach to building a diversified allocation within public markets. In private markets private credit, private real estate, private equity there's a lot of alpha potential there, a lot of potential to add value on top of whatever the market provides, because that space is much less efficient than public market space. And then hedge funds. There's a lot of hedge funds out there. Most of them, in my opinion, are not worthwhile because they give you market returns with high fees. So there I focus on managers that generate returns that are, by and large, uncorrelated to what you can get cheaply and efficiently in public markets.
Speaker 2:Yeah, so risk parity is something you've become deeply associated with. For people who aren't familiar, how would you explain what risk parity is and how it's different from sort of the traditional 60-40 portfolio?
Speaker 1:Yeah. So if we zoom in on that public market allocation in terms of the total portfolio there, if you think about it, you don't even have to think of it as risk parity. I just think of it as a balanced, diversified portfolio and my experience is a lot of people don't fully appreciate what it means to be diversified. So a very simple example you talked about that traditional 60-40 portfolio. 60-40 is about 98% correlated to the stock market and it's because you have 60% in something that's very volatile, 40% in an asset that's not very volatile. So the 60% that's overweighted and much more volatile drives directionally the outcomes of the portfolio. So if you go through a lost decade I mentioned stock market, two out of the last five decades were lost decades and all your eggs are in that stock market basket then you'll probably have a bad decade. That's not a diversified portfolio. If you're 98% correlated to anything, that can't by definition be a diversified portfolio. So my experience is many investors, even that conventional framework is just flawed because it violates one of the core principles of investing is be diversified. They'll put all your eggs in one basket and we know that diversification is a one free lunch in investing. In other words, you can get the same return with less risk by being properly diversified, or more return for the same risk. So you should do that. And 60-40 doesn't solve that problem. And so the way you can construct a more diversified portfolio, which is termed risk parity I just think of it as being more diversified, more balanced is think about what drives the returns of these assets.
Speaker 1:Why did the stock market do so poorly in the 2000s and why did it do so poorly in the 1970s and the 2000s was because growth disappointed. The market was discounting. Economic growth would look like the 80s and 90s and instead it was the slowest rate of growth since the 1930s. So that downside surprise in growth is terrible for stocks. Stocks underperformed the 1970s. It was less about growth and more about inflation. That's a topic today. But inflation surprised to the upside, not for a quarter or for a year, but for a decade or longer. So stocks underperformed cash. So growth and inflation are key drivers of asset class returns.
Speaker 1:I described the impact on stocks, but it's the same thing with bonds, with inflation linked securities, with commodities, with gold, other asset classes. Now those asset classes have a different bias to growth and inflation surprises. So if you diversify across all those, rather than just putting all your eggs in one basket. Now you're diversifying that big risk that can impact asset classes over a long period of time. So, rather than just focusing on stocks, own stocks, commodities, gold, inflation-linked bonds or TIPS, and then core bonds or even treasuries and that portfolio is much more diversified.
Speaker 1:Now the challenge there is. Most people will say well, you get returns from stocks, but all the other assets? Yes, they're diversifying, but it lowers your return. And I would challenge that because you can structure these other asset classes in a way where you're actually not giving up returns over the long run. So with equities, you can just buy the index and get equity return and risk. With commodities, you can own commodity producer stocks the companies pulling the commodities out of the ground.
Speaker 1:Complemented with gold, which is a different type of asset, does well when growth is weak. That basket has a similar expected return on risk as equities, but it's a much better inflation hedge. So in 2022, that basket was up when stocks were down. In the 1970s, that basket did really well when stocks underperformed cash. So that's one step towards being more diversified without giving up returns. And then tips and treasuries. All you need is longer duration, a little bit of leverage, you can get the same return out of those over the long run as equities and that basket can basically get you a more diversified allocation with less risk than equities and achieve an equity-like return over the long run.
Speaker 2:Yeah, so it sounds like something that would be much more difficult to explain to people or to get people to understand when the markets are going in a massive bull cycle, like they are, and much easier when it's in a bear cycle. But I wanted to ask you what's the hardest part about explaining or implementing risk parity, especially with clients who might be used to a more conventional allocation?
Speaker 1:Yeah, I think you're exactly right. I think the way that I described it makes sense, meaning it makes sense to be more diversified. And then what does it mean to be more diversified? The challenge is, doing it in practice is difficult. And it's difficult because of our of the typical or conventional reference point, which is the stock market, and, and so if you ask somebody how's the market doing, they know or they assume you're talking about the stock market.
Speaker 1:Uh, when somebody asked me how's the market doing, or clients asked me I I'm, my response is always well, what market are you talking about? You're talking about the stock market, the bond market, the commodities market, the real estate market. There's a lot of different markets and we're diversified across all of them. And so I think of risk parity as a balanced mix of public markets. And to me, if you just think about the index, when somebody says how is the market doing the public markets, I refer to that index. That's how the markets are doing, not just the stock market. That's just one component of the market.
Speaker 1:But I understand that's not conventional. So most people they have a reference point of the stock market. They judge success and failure relative to that. So, for example, if a balanced portfolio is up 5% and the stock market's up 20, they'll say you know that 5% isn't very good. I could have just bought the S&P. That's easy to do. I would have been up 20%. Now, if the stock market is down 20 and a balanced portfolio is up 5, then all of a sudden that balanced portfolio looks brilliant and it's the same 5% as it was before.
Speaker 1:But the reference point is the stock market and the stock market is a lot more volatile than a balanced portfolio. So about half the time you'll be thrilled with that steadier return and half the time you'll be disappointed. And I'm not talking about days or weeks or months. It could be five years, it could even be 10 years, but over the very long run, if you were to zoom out and look at the picture of a very volatile portfolio that goes up and down a lot either all stocks or stock heavy, even 60-40 is basically betting on the stock market versus a more diversified portfolio that will have a steady or ride through time, but any moment in time you could compare the two and feel disappointed.
Speaker 1:So I think therein lies the challenge with implementing what I described. A balanced portfolio is just not. It's very hard to implement because it requires patience. It requires your ability to zoom out and see the picture from further away, and everything we see in the news, what people talk about, what our friends talk about, what we read online, is pulling us in and helping us and forcing us to zoom in, and so you have to be very intentional about zooming out so you can see the big picture and not get lost in what's happening most recently.
Speaker 2:Yeah, so that's what I wanted to ask you about next, that you're sort of your perspective from a more zoomed out way and given where the stock market is stock market specifically is right now, with equity valuations stretched and macro risks simmering do you think risk parity is especially timely?
Speaker 1:I do. I think it's always timely to be well diversified. Obviously, with hindsight we can look back and say oh, that was a bull market for stocks. You would have been better off being less diversified. But you just don't know that in advance. You don't even know it when you're in the middle of it, because yesterday could have been the peak or today could be the peak. You just don't know. It's only that those inflection points are only obvious in hindsight and years later. So when we look at the world looking forward, just think about how many risks are out there.
Speaker 1:For decades, until most recently, inflation wasn't even a concern. It was relatively stable. We had high inflation in the 70s, early 80s and then it came down and inflation volatility was relatively benign. And then in 2022 or 21, 22, 23, inflation all of a sudden became part of the conversation. But for decades we didn't even have to worry about inflation. Growth swung around and you'd have the Fed reaction function to growth and try to manage that. But all of a sudden, inflation is now a concern. We have tariffs, we have inflation that's persistently above the Fed target.
Speaker 1:There's structural reasons why inflation may be higher long term. There's other reasons inflation may be lower productivity and AI and so on, but there's a lot of uncertainty with inflation, and so that is something that's new, that we haven't had to worry about for some time. So we have we probably have a bigger risks with inflation. Um, growth is at risk. Uh, tariffs are a tax on on the consumer. Depending on how, uh, those prices are pushed through, it could be inflationary, it could be stagflationary. Uh, we've had a long uh uh market, uh economic cycle, uh, where, where we haven't had a recession for some time, and we know markets are cyclical and economies are cyclical. So there is certainly growth risk, there's inflation risk. There's growth risk, there's geopolitical risk. There's a lot of uncertainty there. And the Federal Reserve their hands are a little bit tied because there's fiscal constraints. So on the fiscal side, there's challenges. On the Federal Reserve side, there's challenges. There's just a lot of uncertainty.
Speaker 1:And the way I would summarize that is if you just look at what the next few years, five years, even 10 years, looks like, I'd say there's a wide range of potential outcomes. The world could look very different. It's hard to guess which of those outcomes is most likely, and the risk of extreme outcomes is probably greater than it's been for some time. So, given that world and given that perspective, which my guess is a lot of people would share, it makes sense to be more diversified than less diversified. In a world like that, particularly as it relates to growth surprises, inflation surprises, geopolitical surprises, it's hard to predict where they're going to go. So you should be diversified to those risks.
Speaker 1:And if you look at most portfolios today, relative to where they were a decade ago, they're probably less diversified today, and it's for good reason. It's because US stocks have done exceptionally well and most other assets haven't done well. So if you just held on to your US stocks, you would be overweighted US stocks relative to probably where you started five or 10 years ago. The US stocks themselves are concentrated in just a handful of names. So if you look at most portfolios, they're heavily concentrated in stocks, in US stocks and a handful of names within US stocks. And again, if you look forward, the next 10 years could look very different from the last 10 years. They could be almost the opposite. And in that world, does it make sense to be more diversified or less? And then, what does it mean to be diversified? That's, I think that's what I always go back to.
Speaker 2:Yeah, Alex, and before we wrap up, where can people follow your work and learn more about what you're doing at?
Speaker 1:Evoke. So we have an ETF called RPAR Risk Parity ETF. That basically is an index fund that represents risk parity in the structure that I described. So the website for that is rparetfcom. So that has information on the fund fact sheets. We do a quarterly webcast that's on there, and so the ETF information is there. My advisory firm, Evoque Advisors we're a $26 billion RIA in Los Angeles. Our website is evoqueadvisorscom. There I post a lot of information. I write some white papers. I have this weekly podcast that I do, so you can find information about that on that site as well.
Speaker 2:Well, thanks again for joining me, alex, and thanks to everyone for watching. Be sure to like, share and subscribe for more episodes of Lead Leg Live. I'm Melanie Schaefer. See you next time. Bye.
