If You Do The Math…

This interview on the Get Stacked Investment Podcast is one of the most interesting I’ve stumbled upon in a long time. Not because the topics discussed are novel. But because the guest is an Europoor like us!

Rafael Ortega is a Spanish chap who got the “efficient, diversified portfolio” bug, and in this interview, he explains how he made a job out of his disease. It is insightful and inspirational.

It was great to hear from someone who made the same journey and arrived at the same conclusions. He touched so many key points worth restressing as a reminder on why this blog exists.

If only the lads were able to do simple math

The concepts explained in the video are not straightforward, and for good reason. When dealing with risk premia, nothing is simple. The very nature of a risk premium is that it shouldn’t be easily provable. If it were, everyone would exploit it, and the premium would disappear. The apparent simplicity of the math depends on a specific set of assumptions or beliefs.

In investing, one of the most overlooked but powerful concepts is that volatility is a finite resource, not a boogeyman to fear.

Most people think about risk the way they think about turbulence: white-knuckled and passive. But you should treat volatility like fuel. You can choose how to burn it. And, crucially, you can aim to get farther without necessarily making the ride bumpier.

That’s the truth of markets: when you combine investments that zig and zag in different directions—stocks, bonds, carry trades, volatility strategies—you can generate a more stable portfolio than if you bet on any one of them alone.

It’s like mixing hot and cold water. Individually, they’re extreme. Together, you get a perfect shower.

This is the logic behind uncorrelated strategies. Alone, they’re risky. Together, they’re efficient. And that opens the door to a surprising idea:

You can actually increase your returns without proportionally increasing your risk.

How Much Volatility Can You Handle?

Everyone has a different risk budget. Some investors panic if their portfolio moves more than a few percentage points. Others ride 20% drawdowns like they’re on a lazy river. Return Stacking, or simply the use of leverage, allows the investor to set their target volatility as if it were a “risk thermostat”:

• Low tolerance? Aim for 6–8% annualized volatility
• Moderate? Try 10–12%
• Aggressive or institutional? 15% and up

The process is simple: you build a well-diversified portfolio across different return streams. Then you check your actual portfolio volatility.

• If it’s too low, you can scale up using leverage.
• If it’s too high, you dial it down.

This technique, known in the finance world as post-diversification leverage, lets you calibrate your portfolio to your ideal level of risk, like tuning a guitar to the right pitch.

Rebalancing and Glide Paths

Your ideal level of risk may change over time. When you’re 30 and want to maximise returns, 15% volatility might feel like an acceptable thrill. At 65, when your portfolio becomes your only revenue stream, you want to choose a level that minimises the sequence risk. Smart investors use glide paths, which are shifts in portfolio exposure that gradually reduce risk as retirement approaches. That’s what this framework allows, simply and effectively.

It’s not about avoiding risk altogether. It’s about using risk intentionally, allocating it across strategies, scaling it to your goals, and adjusting it as your life changes.

In other words, treat volatility like a budget, not a bomb. If you spend it wisely, it’ll take you farther than you think.

Once you see it, you cannot unsee it.

I didn’t find the slide they showed during the video, so I had to recreate it:

I have switched commodities with Managed Futures (KMLM) and intermediate with long-term bonds. Portfolio 5 is the Equal Weight of the 4 ingredients, rebalanced annually.

I think I will always use this image going forward to explain why people get it…and why people don’t get it.

Mixing four, very volatile, ingredients in a very naive way to get a very smooth, up to the right line should convince everyone. IT IS that simple.

The issue with this point is magnificently explained by my pal at Bankeronwheels. In the last few weeks, I had two types of haters in my life: people laughing about the objectively laughable performance of FC Internazionale in the Champions League final and people laughing at managed futures performance. Those groups have the exact intersection of one: Raph.

From the 1st of January 2009 onward, KMLM had a Sharpe of 0 (0.04 to be precise).

From the 1st of January 2020 onward, TLT had a Sharpe ratio of -0.4.

Live by the risk premium, die by the risk premium.

For every possible argument I can bring to the table, “it is supposed to be hard“, there is a reasonable counterargument. Funny enough, the reason why bonds should not work – inflation is going to be higher than priced by the market – is the same reason why managed futures worked in the past. But managed futures is a…strategy?…that has been arb’ed-away by market forces…even if it has no more supporters than it had yesterday.

Do you even beta, bro?

The issue outside stocks and bonds, maybe even including stocks and bonds, is whether there is actually a risk premium. Should gold perform the way it did?

ReSolve AM, one half of the Return Stacking guys, runs a carry strategy that is supposed to generate returns by going long and short various asset classes. The foundation of the strategy is to isolate and milk a risk premium. They run the same strategy in two different vehicles that can accommodate a higher (lower) level of volatility and a bigger (smaller) universe of securities.

Here is the high vol/expanded universe performance:

And here is the low vol/restricted universe performance:

It is the same strategy.

Please set aside for a second the very valid point that no one should judge the merit of anything looking at such a small sample. It is easy to understand why no one can do “simple math”. Carry as a strategy should be easier to digest than managed futures so, imagine when we cross that bridge…

“orthogonality comes at a cost which is the anguish caused by the periods that deviate away from the index by the largest amount” – Roger Nusbaum

It is the single line item all the way down. Even if you manage to look at your ensemble, free of bias, your neighbour will always remind you about that asset that is having a spectacular run.

We live NOW, a specific point on the above graph, where the purple line is dominated by another market. It will always be this way. No one (well, except me and Rafael) cares what the purple line did and what it is reasonable to expect from it tomorrow; there is always a greener asset out there. A somewhat funny realisation for an Europoor, because there is not even a consensus if that big beautiful asset are US, International or even Ex-US stocks. For sure, it is not the purple line.

Is the math that simple?

Yesterday, I read this piece from ERN on small and value factors. Toward the end of the post, he goes off against the Golden Butterfly. I understand the portfolio might be a product of too much data-mining. I have written about it in the past, but the ‘evidence’ he provides is…silly?

The gold price was a bloody straight line before the end of Bretton Woods. No shit in your analysis the GB performed worse than a 75/25: 20% of that portfolio was doing nothing. The GB was not optimised with the ’70s in mind, it simply makes no sense in the world before that date. The reason why the GB performance dramatically improves after the 70s is BECAUSE that part of the engine is working. I am just writing this because I think ERN is a guy that gets math, generally speaking, and yet…

Here, if you want, there is another recent example of someone who should get the math but doesn’t (or maybe he just doesn’t understand inflation, who knows).

If you browse this blog, you would probably find many errors from yourstruly. Too many. I am not here to stress that guy is wrong, I am right. Just to highlight the fact that the math ain’t that simple at the end of the day.

You need to go through a TERRIBLE (stock) market to see the difference

In the video, both Rodrigo and Rafael hit on a hard truth: most investors only truly appreciate diversification after a major market crash. And we’re not talking about your run-of-the-mill 20% correction—we mean the kind of selloff that makes headlines and scars portfolios. I’ve had that same thought more times than I care to admit.

Living like the “guy in the corner party meme” ain’t fun nor sane. It’s lonely, borderline crazy-making. Cassandra probably didn’t smile much either. Sure, it’s nice to have some company in that corner, but let’s be honest: it’s a pretty lousy consolation prize.

What I am reading now:

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