Regime Shift Ahead: Alex Shahidi on Inflation Risk, True Diversification, and Building Resilient Portfolios

In this episode of Lead-Lag Live, I sit down with Alex Shahidi, Co-Chief Investment Officer at Evoke Advisors, to unpack the structural forces reshaping markets — from persistent inflation to weakening growth, rising deficits, and the return of macro volatility.

From the limitations of the traditional 60-40 portfolio to the misunderstood mechanics behind risk parity, Shahidi explains how investors can build portfolios that survive multiple economic regimes without relying on forecasts or market timing.

In this episode:
– Why inflation volatility poses the biggest risk to portfolios today
– How the past decade created dangerous concentration in equities
– Why most investors misunderstand what true diversification means
– How risk parity protects against extreme macro outcomes
– How RPAR expresses a balanced, multi-regime investment framework

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#RiskParity #Diversification #Inflation #RPAR #Markets #EvokeAdvisors #PortfolioConstruction #MacroInvesting

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Chapters

• 0:00 Setting The Macro Stage
• 2:57 Alex Shahidi’s Background
• 4:18 Inflation, Growth, And Deficits
• 7:41 Diversification Over Forecasts
• 9:58 Redefining True Diversification
• 12:51 Risk Parity Misunderstood
• 15:43 When Risk Parity Struggles
• 18:37 Inside The RPAR ETF
• 21:36 Rebalancing And ETF Benefits

Transcript

SPEAKER_01: 1:12

Then the risk parity part of it is recognize that to build actual balance, you need roughly equal risk contribution from all these assets. So that one asset does not overly influence the total returns of your portfolio. So I mentioned 6040 is not that well diversified because the 60 is a lot more volatile than the 40, and it's overweighted. So to risk balance them, you need to own more of the less volatile assets, own less of the more volatile assets so that you have roughly equal risk contribution from all the assets, which allows you to have a more diversified allocation.

SPEAKER_00: 1:59

Markets are working through a complicated environment right now. Inflation is sticky in ways policymakers did not expect. Rates continue to sit higher for longer, and the growth outlook is getting cloudier. At the same time, geopolitical tension and shifting global policy are adding to cross-asset volatility. It's exactly the type of setup where disciplined portfolio construction matters more than ever. My guest today is Alex Shahidi, co-chief investment officer at Evoke Advisors and one of the most respected voices in risk-balanced investing. Alex, it's great to have you here. Glad to be here. Thank you. So for anyone who's new to your work, can you start by sharing your background and how you uh became focused on risk parity and diversification?

SPEAKER_01: 2:46

Uh sure. Uh I've been a financial advisor for 26 years, started right before the uh dot-com bubble and bust and the lost decade in the stock market, which helps uh form your early uh opinions of the markets and how to invest. Uh so I've been investing for 26 years for clients. I manage about$15 billion in assets, um, co-CIO of a firm that manages about$20 billion based in Los Angeles. I host a podcast called The Insightful Investor, where I interview a lot of really smart people and uh glean some insights from them. I love writing and speaking. And uh so all of that uh helps me form some opinions about what the future may hold. And recognizing that even the smartest people are wrong a lot, uh, it uh informs my views on how to build a resilient portfolio, particularly in the unique environment in which we currently live.

SPEAKER_00: 3:41

I'm looking forward to hearing some of your thoughts. So when you look across today's macro landscape then, what what are the major risks that stand out to you and what should investors be paying closer attention to right now?

SPEAKER_01: 3:52

Uh I think you mentioned some of them earlier, but uh inflation staying higher for longer is is an issue. If we if we just look at where we are the last four years relative to the Fed's target of 2%, we've been above that for four years running. Uh, the last time something like that happened was in the 1970s, when inflation surprised the upside for a decade. And during that time, the stock market and the bond market underperformed cash for a decade. So we had a lost decade for the stock market and the bond market the last time inflation was a problem, which is what you would expect in periods like that. So that's certainly on the radar. Uh we don't really know how inflation is going to play out, but we we've seen what's happened the last several years, and the market isn't discounting high inflation long term, and there is a risk that it uh inflation comes in higher than expected. Um that's I think something to really consider because for uh almost four decades, inflation wasn't a question. There was there wasn't much inflation volatility. What moved around was economic growth. We had booms and busts, and a portfolio that just owned stocks and bonds worked because when you have when inflation isn't moving around and growth is moving around, then stocks and bonds are diversifying. But in the 70s, they both underperformed cash. They were highly correlated because inflation was volatile. So all of a sudden, that isn't a concern. So I think that's something that should definitely be on people's radar. Uh, growth is starting to weaken a little bit. Uh, it's been resilient for a very long time. I remember after the massive tightening in 2022, almost everybody said, oh, 23, we're gonna have a recession. Every time there's an invert yield curve, anytime the Fed tightens that quickly, we have a recession. And what happened? No recession. And here we are three years later, um, and no recession in sight. Um, so but you know, recessions are always a surprise. Uh, I I don't remember the last time everybody predicted a recession and it happened. Usually something occurs and it comes out of the blue. So we should always be mindful of that. Uh, we have these massive deficits, um, and we've had them for a long time, for decades. Uh, and it's one of those things that doesn't matter until it's the most important thing. Um, and uh I don't know when that point is going to come, but at some point you can't just run deficits forever and the debt burden becomes bigger and uh eventually it uh becomes a pol uh becomes a concern. So that's something to keep in mind. Uh immigration policy and its impact on the labor market. We're seeing labor market slowing. Uh you talked about deglobalization. You know, we had uh multiple decades of globalization, and that's shifted into reverse. And what are the implications of that? And then all of those potential headwinds, you have to weigh against the potential tailwind of AI and its productivity and the timeline of that productivity, hitting earnings and uh supporting growth. Um, and so I think of it as you have these major forces of play, massive, uh, in terms of magnitude. And they're kind of going head to head, and how it nets out is really anybody's guess. It's really hard to predict how these things will net out. But but my sense is that given all that, there's a wide range of potential outcomes, and the risk of extreme outcomes is probably greater than it's been for a long time because these forces are so significant. So all of that feeds into, you know, this is a really unusual environment in that regard, and it's really hard to predict how it's going to play out.

unknown: 7:16

Yeah.

SPEAKER_00: 7:16

So with all of that in mind, most investors try to deal with risk through hedges or tactical moves. How should people think about building a portfolio that can weather the multiple economic regimes without relying on forecasts?

SPEAKER_01: 7:29

Yeah, and that's probably the most important question because what what I described earlier is that it's hard to predict how things are going to play out. And my sense, in my experience, is many investors have some prediction of what the future holds and they invest based on that prediction uh actually transpiring. And it's really risky to play that game now because you could predict scenario A, and scenario B could be almost the opposite of scenario A. And the odds of A, B, C, D, and so on are pretty diverse, meaning there isn't high odds of any outcome. Um, so so it is really risky to assume one outcome and invest for that. So basically, what that means is be diversified. It goes back to one of the first principles of investing. Don't put all your eggs in one basket. This is a period where I think that is very true, is be diversified. And what's interesting is my guess is most people would agree that who knows what the future holds, wide range of outcomes, be diversified makes sense. Yet when you look at most portfolios, they're probably less diversified today than they were a decade ago. There's more concentration in equities because they've done well. There's more concentration in U.S. equities, because U.S. equities until this year have significantly outperformed the rest of the world. And there's more concentration within the U.S. equities. And the concentration within U.S. equities are a lot of these big tech companies that are competing with each other. So there's far more concentration today in portfolios. And we live in a world where you probably want more diversification than you have in a long time. So there's a there's a pretty big disconnect there. Uh, and oftentimes investors, their portfolios reflect what's worked in the past. And it seems like the environment is shifting. And the next 10 years is probably gonna look very different from the last 10 years. I don't know when that inflection point is or if we've already passed it. Oftentimes you don't know until years have passed and you look back and it was obvious, right? And we everybody knew this was gonna happen. Uh, when you're living through it day by day, it's not as obvious. So, so all of that feeds into be diversified. And and my sense is most people are not that well diversified.

SPEAKER_00: 9:32

Yeah. And talking specifically about diversification, you, Alex, have a much more specific definition of diversification than most investors probably use. How do you define true diversification? And why do you think so many portfolios fail to achieve it?

SPEAKER_01: 9:48

Um I think you have to have a uh you you in many ways you have to be a market historian. You have to study markets for 100 plus years. You have to look at different environments, what what has done, what did well in the 70s, what did poorly in the 70s. Uh, you have to think about the 80s and 90s, the 2000s, the loss ticket in stocks. I think you have to have a broader perspective. Um, and so I think what I found is people who've been investing for 40, 50, 60 years, who've lived through all these different environments, they tend to have a broader perspective of what does it really mean to be diversified? Um, and then if you study history going back hundreds of years, you're you're you become even a broader thinker and you think of it globally. So um uh I think my sense is most people use what I call a conventional framework for building what they view to be a diversified portfolio. They think of you basically have two assets, high risk, high return stocks, low risk, low return bonds, and you allocate between the two to give you uh the return and risk targets that you're trying to achieve. And the assumption there is that stocks and bonds are diversifying to one another. And that's been true for a few decades. But when inflation was a problem, they were not uh diversifying to one another because they both do poorly in the same inflation environments. Um and so I think you have to think of diversification as including more assets within that portfolio. So you need inflation hedge assets within that mix. And then secondarily, the the challenge with that conventional framework is it's not diversified. So 6040, and the simple math is 6040 is about 98% correlated to 100% stock portfolio. So by definition, it can't be diversified. You can't have a portfolio that you call balanced that is 98% correlated to the stock market. And the reason it's so highly correlated is think of it, you have two assets. One is stocks that it's very volatile, goes up and down a lot. You have bonds that tend to be shorter intermediate term that goes up and down a little bit. And so your total portfolio is dominated by the overweighted asset class that's significantly more volatile than the underweighted asset class. So directionally, what matters is how the stock market does. So stocks do well, your 6040 does well, stocks do poorly, 6040 does poorly. It's just a matter of magnitude by reducing the risk with bonds. So that can't be diversified. So include inflation hedge assets, include other assets that might do well in different environments. And I think of that as a as a in many ways a different framework for building a diversified portfolio that my guess is is 10 years from now, people look back and say, yes, that that makes sense. Um, but but today it may be less obvious.

SPEAKER_00: 12:22

Right. So I mean, risk parity has a strong long-term record as uh as opposed to what you've just spoken about with the 6040 portfolio. But there are critics who argue that certain environments can break the strategy as well. In your view, what is the real risk that risk parity does not work? And what do people misunderstand about it?

SPEAKER_01: 12:40

Yeah, no, it's it's a it's an important question and it comes up uh quite frequently. So I think of risk parity as just a balanced portfolio. Um, and and the way I think about constructing that balanced portfolio is own assets that do well in different environments. So own equities, you can own um bonds or treasuries, but include inflation hedge assets like uh commodities, including gold uh and inflation link bonds. Uh so many portfolios own very little in commodities or gold or inflation link bonds. So include that as part of your balance mix. Then the risk parity part of it is recognize that to build actual balance, you need roughly equal risk contribution from all these assets so that one asset does not overly influence the total returns of your portfolio. So I mentioned 6040 is not that well diversified because the 60 is a lot more volatile than the 40, and it's overweighted. So to risk balance them, you need to own more of the less volatile assets, own less of the more volatile assets so that you have roughly equal risk contribution from all the assets, which allows you to have a more diversified allocation. So that's effectively what the risk parity concept uh implies. You don't have to have any leverage. So this is a misnomer. You don't have to have any leverage in risk parity. You can just own a balanced mix of assets, overweight low-ball assets, underweights, high vol assets, and you have a balanced mix. You could take that portfolio, you can lever the whole portfolio to raise your expected return, raises your expected risk. The sharp ratio stays about the same because it's the same portfolio, it's just levered up, and you can lever it up to different degrees. And that's a very efficient way to manage a portfolio, particularly when you're trying to be diversified. So, so I think of that as a risk parity framework, which to me is a little bit more efficient than a 60-40 framework that's less diversified. So, so your question of, well, when does it not work? Um, so the assumption in building that portfolio is that a balanced mix of assets beats cash over time. That that tends to be true over long periods of time. Otherwise, capitalism wouldn't work. Um, but it could be not true over shorter periods of time. And I think of those as periods where cash is king. And and 2022 was a was a recent example of that. When cash went from zero to five percent very quickly, cash was king. It's hard to compete with cash, the risk-free rate going from zero to five very quickly. All assets tend to do poorly at the same time. They face that headwind at the same time because they're all competing with the risk-free rate. Think of equities that you know, equities have outperformed cash by five or six percent a year over 100 years. If cash is zero, that's a different expected return for stocks than if cash is 10, right? Like it was in the in the early 80s. So when cash all of a sudden goes from zero to five, massive headwind, you should expect the balance mixes of assets to underperform cash, which is exactly what happened in 2022. But the the risk that you're really diversifying, which is the really important risk, is growth and inflation surprises. So what happens if growth is really weak for an extended period of time, like what happened in the 2000s, what happened in the 1930s? What happens if inflation surprises to the upside for an extended period of time, like the 1970s? If you build that diversified portfolio that I described using that risk parity framework, you don't experience a lost decade during those periods because you're diversifying the growth and risk uh uh sides of the equation. What you're not diversifying is cash is king. Recognize that hard to predict when it starts, when it ends, just hold through those periods and diversify the things that are diversifiable that you're not compensated for. And that's generally how I think about that risk parity framework.

SPEAKER_00: 16:17

So Alex, staying on the topic of risk parity. Um, for the audience who may not know it very well, can you walk us through uh RPAR, the risk parity ETF that you manage, and talk a little bit about what problem is what problems it's built to solve and how does it express the principles behind your approach?

SPEAKER_01: 16:34

Yeah, so this is something that I've been using with my clients for 20 years, this framework. And and basically owning, you know, things like gold and commodities and inflation link bonds on top of equities and high quality nominal bonds. So that's something I've been doing for 20 plus years. I learned it from Bridgewater a couple decades ago. That's the framework that they use. I think it makes a lot of sense in building a diversified allocation for clients. Um, so about six years ago, uh, we figured out, you know, it'd be a lot more efficient if we took that strategy and wrapped it inside of an ETF vehicle. Um and and and it basically allows you to implement the strategy a lot more efficiently and effectively. And and the areas where I think it's really helpful is uh, you know, number one, is it's not easy to be diversified. It's not easy to be balanced. So for example, you know, gold, everybody loves gold today because it's gone up so much, but there was periods where it did terrible. And those are the periods you have to own it so that you can enjoy the benefits of the run that we're seeing uh currently. It's too late to buy it after it's up, you know, 50, 60%. Um, so so it's hard to do it in size. Um, same thing with with treasuries, uh, inflation-linked bonds. Uh, both of those have been negative the last five years, long-dated treasuries and tips. Um, but those are great diversifiers in a portfolio. Commodities have gone through long stretches with them done great, long stretches with them done poorly. So, to get more balance, it's helpful to wrap it inside a single vehicle where you can put all those allocations in place. Uh, rebalancing uh can potentially be a huge benefit to clients, you know, buying low, selling high. Uh in theory, it it makes sense. The math proves it out. In practice, I can tell you it's really hard because it's hard to tell people sell your winners, buy your losers. Because the assumption is the winners will continue to be the winners and the losers will continue to be the losers. Why would I why would I make that trade? Um, but we know that works over time. Uh it's also difficult when you have to sell the winners and pay taxes. You have cap gains when you sell the winners typically. So you put all that inside of an ETF wrapper and you gain the efficiencies of overcoming that that emotional burden of buying low, selling high. Uh the ETF automatically does it. Uh, and then the cap gains get deferred inside of the ETF uh because of the tax efficiency uh structure of the ETF. Um so I think that's a very important aspect of that. Uh you know, the the our par uh has a little bit of leverage at the portfolio level. It's achieved very cheaply. Basically, the financing cost is cash. It's hard to do that outside of the ETF vehicle by using futures. Um, so there's all these efficiencies that come along by wrapping that framework inside of a single vehicle. Um, and then the vehicle itself is very tax efficient because it's an ETF. And so the way I think about it is I think of it as a tool. If you're trying to build a more diversified allocation, you can own some RPAR and you can basically take whatever your current allocation is, add RPAR to it, and you take a step towards being more diversified. And the and the further you want to go along that spectrum, the more you own. If you don't want to be that diversified, you can own less or own none. Um, and I just think of it as a tool in the toolkit to help you get there in a very efficient way.

SPEAKER_00: 19:43

Wow. So you did a great job of uh explaining the psychological psychology behind uh buying and selling. Uh, just lastly, Alex, for anyone watching who wants to follow your work or learn more about what you're doing at Evoke Advisors and about uh RPAR, where's the best place for them to go?

SPEAKER_01: 19:59

Uh sure. So the RPAR website is rpar.com. Uh we do quarterly webcasts there that are uh the replays are uh posted. Uh there's a lot of information about the ETF, so you can go there and learn about that. Uh and then evokeadvisors.com uh is our website. Uh we we share insights there, a lot of other tools. And then also my podcast is insightfulinvestor.org uh if you're interested in tuning in there.

SPEAKER_00: 20:25

Oh, Alex, thank you for that. And I always appreciate your insight and thanks to everyone for watching. Be sure to like, uh share, and subscribe for more episodes of Lead Light Live.