E15. Stacking Returns Without Sacrificing Core Exposure: Introducing RSSX

Speaker 1 0:00

Hey, everyone. Corey Hofstein here. I wanna personally invite you to an event that's all about rethinking portfolio construction. On October 8, we're hosting the return stacking symposium at Cboe Global Markets in Chicago. It's a one day in person deep dive into capital efficient strategies, and we're featuring speakers like Jonathan Glidden, CIO of Delta Airlines, Patrick Casley from One River, and Mark Horbul, managing director of the Systematic Strategies Group at Canada Pension Plan.

This is your chance to hear directly from the institutional allocators leading the charge on portable alpha and return stacking. But space is limited, so head over to returnstacked.com/symposium to learn more and register. Hope to see you there.

Michael Philbrick 0:44

You can't print more gold. I mean, there is some production of gold. It's a small amount. And Bitcoin, there will be 21,000,000 of them. That's all there will be.

And remember, diversification is not about predicting the future. It's about having it in the portfolio in order to be prepared for the future and for the outcomes that can occur. Now, how you allocate to it is another really interesting point. In the old world, the pre return stacking world, if you were going to have gold or Bitcoin in your portfolio, you might have to sell one of those cash flowing assets in order to accommodate it in your portfolio. With return stacking, you don't have to.

Speaker 3 1:29

Hello, and welcome to the Get Stacked Investment Podcast, where we delve into the exciting new world of return stacking. Join us as we break down complex financial concepts into accessible insights, speak with leading experts in the space, and analyze real world applications for return stacking. GetStacked is here to help you break out of the traditional portfolio construction mold and get you to start thinking differently about the path investment.

Speaker 4 1:55

Corey Hofstein is the co founder and chief investment officer of Newfound Research, and Rodrigo Bordillo is the president and portfolio manager of Resolve Asset Management Global. Due to industry regulation, we will not discuss any funds managed or sub advised by these firms on the podcast. All opinions expressed by podcast participants are solely their own opinion and do not reflect the opinion of neither Newfound Research or Resolve Asset Management Global. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of these firms may maintain positions and securities discussed in this podcast.

For more information, visit returnstack.com.

Rodrigo Gordillo 2:45

Alright. Welcome. Welcome, everybody. My name is Rodrigo Gordillo. I'm CEO of Resolve Asset Management Global and co founder of the Return Stacked ETF series.

And I'm joined today with Mike Filbrick. He is the CEO of Resolve Asset Management and also a co founder of the Return Stack ETF series. And today we're gonna continue the conversation on alternative assets like we did a couple of weeks ago for those who have been following. We covered, you know, why gold and the case for gold by looking at a paper that was pretty comprehensive about understanding the reasons why this asset was useful, why it may matter in portfolios, how to possibly stack it, etcetera. And I think a natural progression from gold was to address Bitcoin, right?

Because Bitcoin and gold, Bitcoin being called kind of like the the digital hard currency or the digital asset that is very complimentary to gold as we've spoken to in the past. And for this podcast, I think, you know, Mike had pulled up a couple of papers that we also wanted to talk about that really make the case for Bitcoin in portfolios. The first one is the Rick Edelman paper, which talk about first and then maybe we'll pull on some points from the BlackRock paper addressing some of the reasons why Bitcoin might be a useful addition. So Mike, why don't we pass it over to you? What is, what do you think about the Rick Edelman paper and what's your takeaway from, from what he wrote there in terms of portfolio, it being part of portfolios and why?

Michael Philbrick 4:18

Yeah, I think really to start it off, I think we need to recognize that we're reaching a point in the adoption curve where it's no longer really contrarian to own Bitcoin or gold in portfolios, it's actually becoming prudent. And in particular with Bitcoin, enough respected institutions, sovereigns, allocators have now moved on this. It becomes professionally safe for advisors to now follow. And I think now the advisor risk, the reputational risk is no longer in owning these assets, but it's in failing to understand and allocate to them before your clients start to ask you why you didn't. I think that's the overarching headline here that we want to get to.

And we want to bring some clarity and some understanding and how might you allocate to these things and what are the reasonings behind it. Since these papers have been published as well, we've had the passing of the Genius Act, which is that legislation that has brought into the forefront clarity that's required, the regulatory clarity that's required around who's going to regulate it, how they're going to be regulated, how they're going to be allowed to be put into not only non registered portfolios, but we've also seen this starting to open up to The US retirement market. So this is a clear and relevant thing to be talking about with respect to allocation to client portfolios and they're going to start asking advisors. So I thought it was critical that we get on and talk about this in addition to the In Gold, we trust paper. And so Rick,

Rodrigo Gordillo 5:52

one of key Yeah, sorry. One of the key differences here is that from like when Rick was talking about this stuff five years ago to what he's saying today, like before the Trump administration, he was recommending he was seeing the nascent value of of the Bitcoin space and the crypto space and recommending something like a 1% allocation. And and the reason it was 1% is because if you lose 1%, it didn't matter, but they said there's so much potential here that it could actually provide significant, you know, if you're doubling that 1%, it actually might matter if you're rebalancing and taking advantage of the diversification of that Bitcoin. But what's changed since really is the fact that you talked about the genius act. You talked about, you know, Trump being pro Bitcoin in the beginning before he was elected, talking about how he was gonna do something about it.

He's now done something about it in the past and not for legislation that makes a lot of sense. And so all of a sudden, a lot of these risks have been set aside. And like, as you said, I think, you know, the allocation hasn't gone from one to two for Rick. We'll talk about what he recommends. Yeah.

Risk levels. But it has been that drastic change, that risk reduction from a regulatory perspective, from the biggest market in the world, right? And now, as you said, like the conversation can't be about like, you know, just, don't do Bitcoin. I mean, people are gonna, like people are clearly asking and demanding about it and it's going to be part of our lives. And now it's a matter of understanding its unique reasons to exist.

Talk about what Rick said. What did Rick say about that as the portion of somebody's portfolio?

Michael Philbrick 7:28

Yeah. And I just want to emphasize that in a lot of the studies, the number one detractor or reason that endowments and institutions where the board has fiduciary responsibilities was that regulatory clarity. Yeah. Right? Because if you're a fiduciary on a board, it's a lot harder than when it's your own money.

Yeah. So what Rick lays out in his paper, there's several challenges that people face just in the financial planning side of things. So Rick was a progenitor of the Digital Asset Council for Financial Planners. And so it is really a financial planning based type of approach that he's taking. He looks at first thing is longevity.

People are living longer. Their financial assets are going to have to last a bit longer. What is the opportunity for traditional assets to be able to deliver on that? Especially into his next point, which is this is a disruptive technology. He makes some correlations to the internet and how it disrupted media and how it disrupted communications.

When you get that type of disruptive technology, it might be that stocks aren't where the winners in that exist. Maybe it's in the crypto space where these new companies or new approaches are going to be starting to be developed and have market cap. If you're only doing stocks or you're only investing in stocks, you don't have any access to those types of assets. You've got longevity, you've got disruptive technology, the internet of money three point zero cross border payments. And then he did talk about regulatory clarity and the regulatory burden and things like that.

Rodrigo Gordillo 9:07

Yeah, but you also think about, sorry, the regulatory clarity part is also the fact that there's not a cabinet member in the Trump administration that doesn't own crypto, right? That the people involved in every facet of government seems to also be adopting and creating crypto legislation. You can find now with the fact that you have not just Coinbase, which was still considered kind of like a fringe asset traded in the US stock exchange, but now you have Fidelity digital asset platform that is legitimately doing some, like making it as easy as possible for people in TradFi to really be able to use it seamlessly in their portfolios, be able to collateralize it, to trade on it. It's becoming easier and easier. You got the BlackRock Bitwise ETF that really makes it just as easy to own it as GLD for gold, right?

So all of these things from a regulatory standpoint, the adoption that it's it's becoming safer from a regulatory perspective, plus also the machines are starting to come together and and and make it possible for the average investor to invest.

Michael Philbrick: 10:17

Yeah. And Coinbase was included into the S and P 500 in May.

Rodrigo Gordillo: 10:22

Yeah, didn't know that.

Michael Philbrick: 10:23

We have cover now. I'm going to say cover as if you're an advisor and you're advising client portfolios, you do have cover. Now, obviously you do have to deal with your own internal compliance departments. That's a challenge that you're going to have to navigate as you go through trying to think about this asset class. Another interesting thing in Rick's paper was 50% of financial advisors own crypto, but only 20% recommend it for their clients.

So again, you've got a bit of a dichotomy there. Also, he points out, listen, if we think about assets, and you and I have talked a lot about the global market portfolio, the portfolio of all the assets in the world that nobody owns. It's the allocation of assets. If you take all the assets of the world and you say, I want to own the world in a boggle sense. I want to be allocating exactly like the world allocates to its market cap as it exists.

And so it is the portfolio that the world does own, but very few people actually own it. If you look at that and you back out, well, what would digital assets be in that circumstance? They'd be about 3%. If you're at zero, you are structurally short digital assets in the portfolio. And from an efficient market hypothesis, that is also not efficient.

So, Markowitz would be rolling over in his grave, I guess, if you will. These are the types of things where you're starting to see this asset class be broadly accepted across a number of domain domains. You're getting that clarity. Rick and his company and the council have been on the forefront of that and also willing to meet with the compliance departments of various companies to help the compliance departments get across the line, as well as having a bunch of educational and certification processes if you wanted to actually brush up your knowledge and get your CE credits. There's a free plug for Rick.

But he does go, I think that the thing he does here is he goes out on a limb, I'll call it, or certainly there's some shock jockey aspect to his allocation when he says sixtyforty is dead. The new allocation is, you know, if you're conservative, you should have 10% Bitcoin. If you're moderate, 25 Bitcoin. And if you're a growth investor, 40%. Now I don't I don't think we're gonna get a lot of people there.

Rodrigo Gordillo: 12:47

No. We're not gonna get a lot of biters there. But before we I think the reason we're not gonna get a lot of biters there and this is a long ways off, right? Is this is Bitcoin struggles and suffers from the same lack of proper narrative for advisors to be able to explain to the clients as to why something that is non cashflow is going to make me any returns at all. Right?

So you have gold being in that cap. We've always talked about how gold has been an incredible diversifier that clearly should be in everybody's portfolio. We banged the table on it for a couple of decades and have had very few writers until now, now that now everybody seems to want to have an allocation. But the real issue is why does, why should one expect a positive risk premium from a hard asset like Bitcoin or gold? Like we we've been able to figure that out yet.

Right? Just put those two together. Why why is it an upward sloping equity line?

Michael Philbrick: 13:45

There's a number of ways to approach that. What's interesting is land also would fall into that and as would art, fine wine. These are real assets. And so to some degree, that's exactly why they behave differently than the rest of the portfolio. Cash flowing assets like bonds and stocks often have this interest rate sensitivity and non yielding assets diversify those exposures.

And they have, again, a counterparty risk when you're talking about something that has cashflow. Gold and Bitcoin, when you hold that doesn't have a counterparty risk. So to some degree, there's a diversification aspect just from the fundamental point you're making that makes them different for the portfolio. And then I think you've got a few ideas on that as well so that there is a risk premium. I'll throw it back to you on the risk premium side for gold as an example.

Yeah. So

Rodrigo Gordillo: 14:50

we just wrote a paper for gold. It was mostly gold, but we did talk about Bitcoin at the end there because there's this long held belief that something that has no cash flows like gold should have, while it may be diversifying in real terms, you should have, you should expect a zero real return, right? So if you have it as part of your portfolio, it'll be a good diversifier, but does it actually have P and L? And what we found in our paper is that there is a structural risk premium that gold exhibits. And the reason that it makes sense that there would be an empirical positive risk premium, I think for gold is 2.7, 2.8 historically, is that, you know, investors actually demand compensation, or assuming inflation courtesy and policy risks that when when like Bitcoin didn't exist and when gold was pegged, especially when gold was pegged, that risk was taken on by the government.

With the moment the government said, I'm absconding this risk, I'm just passing it onto the market. Well, you're taking by holding gold, you are taking on certain risks that you demand compensation for. So it's a risk based argument here as to why this risk premium would exist. Now, the same reasons that gold has these inflation currency and policy risks, hedges, and demands compensation really does apply to Bitcoin. And we see it right.

ecially since it's matured in: 2018

Nobody nobody has ability to print more gold. The yeah, role is an exactly. And the role is an alternative store of value. And so those three things Right. If we really kind of understand their unique qualities and the fact that you're taking risks that, hey, the risks are what?

There may not be, you know, that central banks may actually be more prudent and that they will print less money. Maybe there's this inflation. Those things are gonna be bad for Bitcoin and gold, but you're taking that risk. It is a part of a portfolio with your equities and bonds that do well when when that does isn't happening. That's that's the key differentiator.

And then and then finally, we identify that there is an excess rate of return that actually rivals equity bond excess returns. So it's not like you are necessarily taken away from future returns. In fact, you're probably making your return profile more robust. And I think I don't even talk about longevity issues here and why these be key in terms of us living longer. So, you know, that's the, that's I think a strong argument.

ing record amounts of gold in: 2024

So Yeah. Are all elements that kind of come into play for me to make a strong case for why you own it, and then why they should demand a cause of risk. Of course, the volatility to be much higher for Bitcoin, you should expect a higher excess return because you're taking on more volatility. Right? That's couple of things that I think you don't understand.

Michael Philbrick: 19:04

A couple of things I would emphasize there, and I don't know if potentially add, but you can't print more land. You can't print more gold. I mean, is some production of gold, so it's a small amount. And Bitcoin, there will be 21,000,000 of them. That's all there will be.

And so you have that on a backdrop where the world is looking for some new reserve asset to store value that is not connected to a single sovereign nation. So the backdrop against which you're seeing these assets is actually a pretty interesting regime to make sure they're included. And remember, diversification is not about predicting the future. It's about having it in the portfolio in order to be prepared for the future and for the outcomes that can occur. And the fact that they're so different, the fact that they don't have that cash flow, that they are scarce, that's what creates the different diversifying returns for your portfolio.

It's the very nature, it's the very basis of how that happens. Now, how you allocate to it is another really interesting point. In the old world, the pre return stacking world, if you were going to have gold or Bitcoin in your portfolio, you might have to sell one of those cash flowing assets in order to accommodate it in your portfolio. With return stacking, you don't have to. Yeah.

So you can maintain those cash flowing assets while stacking these diversifying assets on top. And that is really the beauty of bringing return stacking to this particular asset class and diversifying those traditional cash flowing assets that clients know, love and trust in their portfolio. Don't get rid of them.

Rodrigo Gordillo: 20:57

Absolutely keep them. But this is this is the stacking part is so key here. And because again, this is not like anything, right? It's going to take decades and decades, I think for for this to become a true adoptive asset class. And it is because there's still, in spite of the arguments I just make, people would be like, that doesn't sound right.

I just want cash flow and stuff. Right? So, so the key here is you can do the Edelman approach. We'll see how much adoption there is for that. But the ability to recognize that, hey, in fact, these hard assets, I, we can make a strong case for why they will have excess returns.

And what is excess returns? It means that it's just returns minus the cost of borrow. Meaning if I buy a gold Bitcoin futures contract, sorry, a Bitcoin futures contract, and I expect it to have a positive risk premium, then I get the benefit of getting the equity risk premium from my 60, the term premium from my 40 and the credit premium, depending on if you're using corporates. And you get to stack the excess returns from the Bitcoin holding, right? So it's a yes and solution to the problem.

Michael Philbrick: 22:07

So in Rick's paper, he does talk a little bit about how might we get the exposure. So you can look at things like, do you buy spot Bitcoin ETFs, Ethereum ETFs. So those have been quite popular issued by the various major players from BlackRock to Fidelity. There's also a buffered ETFs that are starting to include those into the portfolio. You can look at equity exposures, the individual equities.

Now I would be less inclined for that because you have that equity risk that's inside of that or on top of that risk of the actual cryptocurrency. But you've heard of things like MicroStrategy or Strategy now. I do see a number of issues from providers coming out with more of a crypto index fund. That's something that will be interesting to look forward to where you take that sort of boggle mindset to the crypto world and just simply own the market cap weighted index. And if you're doing that, really the Bitcoin, Ethereum, XRP, and Solana probably get you 90% the way there in the total exposure.

Obviously, things get a little bit harder if you're trying to hold cold coins and do that on behalf of individual clients. Maybe that's more apropos for institutions who have the ability to do that sort of thing. So when you think about that from that perspective and what we were talking about earlier when Rob was on the call was the idea of making sure you stacking these types of real return assets, these real assets on top of the cash flowing assets, making sure that you don't give up those cash flowing assets like US stocks in order to provide that layer of diversification. And that's where return stacking can come in handy, where you maintain those exposures in the portfolio and stack these diversifiers on top. That has a number of advantages in that it prevents the inevitable tracking error that occurs when one does allocate to an asset class that is unique and you're building intuition from the perspective of the individual investor.

From an allocation perspective, a couple of thoughts from my perspective. One would be, let's stack it on those cash flowing assets that clients know, love, trust. That'll help attenuate some of that diversification tracking error that occurs. A friend of ours, Brian Portner likes to say diversification is always having to say your story. And it manifests in funny ways.

Generally investors and clients don't panic and sell things at all time highs. They tend to do that when you get into those trying and challenging moments when it'd probably be opportune to be rebalancing or allocating to, but instead they give up on the asset or the strategy, thereby locking in those losses and not getting the commensurate gains. If you can stack that portfolio, avoid that tracking error, avoid those behavioral vulnerabilities that gives the end investor a better chance of having success at allocating for the long term in the portfolio. So the idea of thinking through stacking, stacking on the cash flow assets rather than eliminating them Some of the behavioral biases that come along with that, avoiding those, avoiding selling at the bottom when you probably should be allocating to and keeping the investor in these asset classes for the long haul to get the benefits of those. And then another thing I was going to add to that is start from a position of strength.

So, make the allocation small, something that you can absolutely stick with so that when the time comes to rebalance, you can do that. And then if it goes down a little bit, you'd be comfortable rebalancing because that loss, temporary loss is small enough that you can withstand it. And if it goes right, when it starts to go in your favor, maybe you, as Rob Barnett says, you sin a little, maybe you don't rebalance down, or maybe the client becomes comfortable with it and the intuition builds and you can allocate a little bit more and you feel comfortable doing that from a position of already having a profit in the portfolio. Thinking through the allocation strategy in that format, I think can help build that intuition for the individual clients as they climb the learning curve on these new assets that they might allocate to in the portfolio.

Rodrigo Gordillo: 26:28

And I will say that let's talk about proper portfolio construction here the way we like to see it, right, Mike? It's Yeah. When I hear Edelman in the 60% allocation for a high risk client, Let's remember that Bitcoin runs at 60 to 70% annualized volatility, not long ago was 80%. So what that would mean is just to put things into perspective, a let's say if you're a high risk investor, the volatility of 100% equity portfolio runs between 15 to 20%. Right?

So when you add a 60% allocation to a 60 or 70 volatility asset class, you're now doubling likely the and that the variance in the standard deviation of a client's portfolio. And when you're doing a 40 ball, you're probably going to expect that portfolio to also exhibit something like, you know, a 60 to 70% drawdown. Right? So it's, let's just be careful what we mean by high risk here and saying, okay, well, just gonna, you need to add this asset class. Well, it's a risk beyond what any investor has ever experienced in a traditional asset wealth management setting.

Right. So that's why I think it's going to be difficult. The way I see it is I all, I always see it and we, I think we see it at resolve and, and from the perspective of risk budgeting all this stuff, right? Where you don't want the maniacs to take over the asylum and if you're gonna be adding to an allocation of Bitcoin, I think a reasonable starting point can be, you know, couple of percentage points to 10% maybe, at which point, I think we had some stat, right, Mike, where where if you added Bitcoin to a portfolio up to four or 5%, then you got then you got volatility levels. Maybe tell tell us a little bit about that.

Michael Philbrick: 28:20

Yeah. I'm I'm looking at the I just wanna share this screen right here. I'm gonna share this. We'll put it up for everyone to have a look at, and and and we'll walk through it. So this is from the Bitwise paper that we were talking about earlier.

And as you alluded to, when you have, you don't want a maniac running the asylum. So it is a good idea to allocate to something in an appropriate fashion. What Bitwise did was they look at, well, what is a 1% allocation do? What is a 2.5% allocation do? And what does a 5% allocation do?

And what's interesting is the risk doesn't start to increase in a portfolio until you hit 5%. So if we look at the annualized volatility of a portfolio, and I'm sharing the screen, at 5% addition of Bitcoin to a total portfolio, the annualized standard deviation goes from 8.49 to 9.74. So it goes up very marginally. But as Rodrigo was talking about, it's a sixty, eighty, 100 vol asset or well, was 100, was 80 and now dropping to 60 as it gets financialized. But you add this crazy thing to the portfolio and in fact, it doesn't increase the volatility much.

And if you look at the Sharpe ratio, the Sharpe ratio actually increases because of the asymmetric return contribution from Bitcoin. So the Sharpe ratio goes from 0.43 in the sixtyforty portfolio to 0.84 with including a 5% Bitcoin allocation. Now it will add, adding 1% or 2.5%, both reduces the volatility, keeps the drawdowns practically indifferent and increases the return. That's true diversification. And I think that's what you're getting at Rod, right?

Is that if you add these things and you add them in the right, if you add that little bit of the salt to the dish, the dish improves dramatically.

Rodrigo Gordillo: 30:23

Exactly.

Michael Philbrick: 30:24

Yeah, that's what we're talking about. Then the other idea is, well, okay, you don't have to actually get rid of that traditional portfolio. You can stack these on top rather than it being an and discussion rather than or discussion. I think the Bitwise paper is definitely worthwhile adding to the reading while you're looking at Rick's paper. If you'd like to increase the returns of a portfolio or historically what's happened is that if you've added small amounts of Bitcoin to portfolios, the returns have increased and the risk has remained stable.

That is a wonderful diversification and a great example of how lowly correlated assets can really add value. And again, these are those real assets. Gold has a similar experience. When you add gold, it does improve a lot of the final outcomes in a portfolio.

Rodrigo Gordillo: 31:16

Yeah. And I think if there's an expectation here from anybody who's looking at Bitcoin and saying, look, I actually do believe that Bitcoin's going to outperform equities bonds. Part of the argument that Rick is making and others like Raul Powell is that if you measure inflation, like true inflation, there's a few metrics like TruFlation. I think the guys at Real Vision have another metric. They expect actual inflation to be around 11% a year.

Right? So it just maybe there is a case to be made that the old volatility realms that we have existed in in private well, which is kind of like 8% annualized for annualized volatility for conservative, maybe 12 for moderate, like 15 for aggressive, those possibly need to be bumped up because you need to be able to the the hurdle is now no longer four or 5%. The hurdle is 11%. And so I think that's one of the reasons why these guys are allocating so heavily towards Bitcoin. And but but you're taken away from equities and bonds that provide a balance in diversification.

So there's another strong case to be made for the yes and for keeping the equity risk premium portfolio for keeping the term premium and then stacking the excess return on Bitcoin on top. And by the way, when you stack, you also have similar qualities here of diversification, volatility doesn't add that much if you're adding one, two, 4%. And then like you stack another fire like gold within there. Now you have, now you're really cooking, right? You're actually stacking these risk premiums on top of each other.

And depending on your risk profile and whether you believe that true inflation is really 11%, you can kind of calculate roughly what is, what exposure you need in order to be able to beat that hurdle and at the very least, maintain your purchasing power if not beat, right? So it's about this this high concentration of Bitcoin, I don't think is absolutely necessary now that we have this type of stacking process. Yeah. And and products out there that can do this. Right?

Michael Philbrick: 33:15

And and Rod, maybe talk a little bit about how you might how that manifests in a gold Bitcoin allocation if you were to equalize the risks of them and some of the thoughts about going through that? Maybe walk through that for everybody because Yeah.

Rodrigo Gordillo: 33:27

Yeah. So I didn't I did a Christmas episode where this whole thing started with Meb Sabre, Corey Hastin, and Wes Gray, and everybody had to bring their best ideas. And mine was actually equal risk contribution portfolio between gold Bitcoin. Because what's interesting, as I mentioned in the beginning of this podcast is that they both seem to have similar drifts in response to similar things, but their daily correlation is zero. Right.

And so when you put those two together and you expect them both to make money over time and you could, and you continue to expect them to be lowly correlated, the portfolio construction of having both together creates a much smoother equity line and you benefit from this diversification benefit, higher Sharpe ratio and so on. So the interesting thing is we came up with that. Obviously we've done a lot of work on that since if anybody wants to dig into that. But the interesting thing is if you, who was it? Paul Tudor Jones goes on TV a couple of weeks ago and says, and it's press, would you, what would your bet be on in this environment where there's currency debasement, you know, fiscal malprudence, etcetera, etcetera.

And eventually they got him to say, okay, what I would do is I would have an equal risk between gold Bitcoin and, and stocks. And what that turns out to be roughly is a 100%, 90 to a 100% US stocks, around 80% gold and 20%. So like these are, that's an interesting from a equal risk contribution, things that will benefit in this environment. That weighting scheme is one that I really, really like. And as I said, you know, there's, if you look at our research, you'll be able to see what, what we talked about, what we launched on that, on the back of that in really thoughtful portfolio of stacked risk premiums.

And I'll say the last thing, the last benefit behind all of this is that when you're handling high volatility assets as an allocator, where you have to address ticket charges and rebalancing more often than you want to, because when you're dealing with high volatility, you're have to rebalance if you're gonna be a fiduciary. You know, there's trading costs, there is ticket costs, there is the time invested in order to do that. Now there are like prepackaged solutions out there where you don't have to worry about that, where you're going to be able to really have somebody else deal with all the operational burden that is required to maintain an allocation to something like that and be able to rebalance on your behalf at a cheaper rate and actually have the second. So I think that's another innovation in the market. There's a handful of securities that do that for investors right now.

Again, Todd, going back to the beginning of the podcast where we said it's become easier and easier to allocate to these things. It's not just because you're getting direct access to Bitcoin, but because there are there are solutions like this that do report. So anyway, that's that's kind of my thoughts on on how to allocate, how I like to allocate, it's become easier the number to do it.

Michael Philbrick: 36:32

And I think just, I'm not sure if you said this or not. I was listening, but I might've missed it. So when you think about looking at the volatility, equalizing the volatility contribution of gold and Bitcoin into a portfolio at the moment, it ends up being about $4 of gold for every dollar of Bitcoin at the moment. And that will change. As we've talked about the financialization of Bitcoin as an asset, we're seeing the volatility continue to drift downward.

And so in your portfolio, you might want to consider that as you move forward to have something that actually is responsive to the changes in the assets themselves, making sure that they're contributing equal amounts of volatility to your portfolio.

Rodrigo Gordillo: 37:10

Yeah. And actually, you did remind me of something. So when you do that, you also have another thing that you need to manage is, okay, when is a prudent time to own Bitcoin and by how much? And that's another one that, you know, Edelman was talking about one percent three to five years ago before the Trump administration because of all these risks. At that time, you're looking at Bitcoin volatility being 100% annualized, if not more.

Today, I'm actually measuring the annualized standard deviation and we're looking at 60. So the volatility has collapsed for Bitcoin. In a in a way, a prudent, thoughtful, I think, way of looking at this and saying, okay, well, I don't, I don't, I'm not in the news for Bitcoin. I don't know what's happening day to day on the regulatory side. There an easy way to be a proxy adoption or lack thereof for Bitcoin over time?

And I think volatility in price is a good way to decide whether you need to have more Bitcoin or less, because of volatility as it becomes more and more adopted, more and more adoption means lower and lower volatility, and lower, lower volatility in a portfolio that's looking to risk balance between equities, gold or whatever, sixty, forty and whatnot. It'll mean that it'll naturally allocate more and more to gold as volatilities come in, probably they're going to end up landing in the similar type of volatility profile as gold, which is around 16% now. Also gold went from 30 to 15 over the last couple of decades. And so as it comes in, you're going to allocate naturally more to Bitcoin. And if it and if it becomes less and less adopted, something happens, somebody something else beats Bitcoin in terms of being the a better crypto reserve currency, then it'll have more and more volatility, you allocate less and less naturally without you having to follow any of the news.

That's another easy heuristic to be like, all right, I want it, don't want to take too much risk. How do I manage it? Looking at volatility seems like an easy and prudent way to do.

Michael Philbrick: 39:06

Yeah. And I think lastly, as we started out, Rick points out the global benchmark risk, right? If you're not at 3% in some sort of digital assets, you're underweight you're underweight in asset class that is the number one performing asset class over the last thirteen years. Now, I wouldn't want to put too much weight on the performance side of it. It's more of the clear delineated opportunities for diversification that I would sort of want to lay my bricks on, if you will.

And the fact that we are seeing that adoption at several levels, starting with sovereign nations. And so these are very serious developments for an asset class to be considered that. And it's a global asset class. It's unknown in every single country. And now maybe some of the large companies in the S and P 500 are known like that, but most companies in let's say The US small cap or mid cap index, they're not going to be known globally.

You're comfortable owning those. Anyway, just a thought. I think that the other thing is layering these real assets on top of the assets that are the cash flowing assets is a really magical way to incorporate them and make you feel comfortable with the allocations of the portfolio.

Rodrigo Gordillo: 40:24

Yeah, it's less strange. Like if you're doing it for yourself or for if you're an advisor, you're doing it for clients. You know, there will be times where Bitcoin underperforms equities bonds or or maybe has negative value. And it's a lot easier to like the the the opportunity costs of a couple of years of Bitcoin not doing well as you having taken away equity like returns or your S and P 500 and added Bitcoin in a period where it's negative is a lot higher than if you keep your S and P 500 allocation and then stack the Bitcoin on top. That is you if you if you look, do the math on that.

And if you look at any of our research, it's an easier way to handle periods where the diversifiers might not do so well. It's an easy conversation for clients.

Michael Philbrick: 41:13

Exactly.

Rodrigo Gordillo: 41:14

Right. And if you guys have any questions, look, we've we've written a ton of new research on hard assets and currency debasements. A couple of blog posts are coming out this week as well. The gold paper that you can go returnstack.com and download actually covers mostly the gold, but does discuss Bitcoin at the end there and the reasons for owning it. And there's a, another article that I think is already published that talks about how these can help with currency hedging.

If you are a domestic investor and don't want to sell your, you know, your home country bias equity markets for international allocations, It turns out that most of the outperformance of your international holdings ends up being from currency appreciation. You know, if you stack some of these gold Bitcoin on top, you might actually not have to sell your domestic equities for international. And so take a look at our website. If you have any questions, let us know. And I think we dropped the link there for the white paper, if you guys want to download it.

And if you have any questions, we easy to reach out to us, go to the contact us page on that site, send us a message or actually book a time to chat and see how all of this stuff could come together for your portfolio or your clients portfolios. All right, with that, I think we'll leave it. Mike, any parting words?

Michael Philbrick: 42:39

None at all. Thank you very much for the time, Rod. It was great to get on and chop

Rodrigo Gordillo: 42:43

it up

Michael Philbrick: 42:43

a little bit on this stuff,

Rodrigo Gordillo: 42:44

and here we go. Awesome stuff. Have a great weekend, everybody.

: 42:49

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