My guest this week is Larry Kriesmer from Measured Risk Portfolios, where he oversees the SynthEquity® strategy to manage over $500 million focusing on using options and US Treasuries to minimize equity risks while pursuing S&P 500-level returns.
Larry aims to provide exposure to the S&P 500 without the devastating drawdowns that can erase decades of gains, especially for those nearing retirement who lack time to recover from large drawdowns.
Investors often sabotage their own results by panicking during volatility and selling at lows, as evidenced by the Dalbar Study, which consistently shows that while investments might return 10% over time, actual investor experiences fall far short due to emotional decisions and trend-chasing. SynthEquity® counters this by encouraging sustained investment through built-in protections that limit losses and reduce the urge to flee during downturns.
The strategy allocates 85-90% of the portfolio to short-duration US Treasuries, which offer minimal volatility with an average six-month maturity, serving as a stable foundation that avoids the price swings seen in longer bonds. The remaining 10-15% goes into S&P 500 index options traded on the Chicago Board Options Exchange. These derivatives provide 8-10 times leverage, meaning a 1% index rise can yield 8-15% in the options sleeve, allowing the overall portfolio to track the market's performance.
When the market advances, Larry's team harvests gains by selling profitable options, using part of the proceeds to purchase additional Treasuries for enhanced safety, and redeploying the rest into fresh options to maintain exposure. This approach has powered private accounts for two decades, and the Synth Equity ETF, which launched on the NYSE in March 2025, quickly exceeded $100 million in assets, reflecting strong demand for such risk-managed equity access.
Options function as contracts granting buyers rights and imposing obligations on sellers, tied to the underlying index for high leverage, though they carry the risk of expiring worthless—a loss confined to the small allocation, making it a calculated trade-off for potential amplified returns. The dot-com crash exposed the limits of traditional diversification, as assets correlated in decline, leaving advisors unable to assure clients on the extent of further losses, a gap that synthetic equity fills by defining maximum drawdowns through the finite value of its options component.
Emerging from 1950s pension studies, the 60/40 portfolio—60% equities and 40% bonds—aims to balance growth and stability, yet it underperforms in strong markets by diluting equity exposure and proved vulnerable in 2022 when rising rates hammered bonds alongside stocks, potentially exposing portfolios to 26-30% losses even in mitigated scenarios. Markets historically favor upside, with over 50% of annual S&P returns exceeding 15% and nearly 30% topping 20%, though intra-year drawdowns occur reliably, which synthetic equity navigates by holding one-year options passively during declines and actively harvesting during rallies.
The ETF carries a 0.95% management fee and has outperformed the S&P 500 net of costs since inception, though future results remain uncertain and no guarantees apply. Larry's drive stems from his father's post-retirement ruin in a Ponzi-like scheme, which stripped away his joy and self-confidence, inspiring portfolios resilient to unforeseen shocks—accepting full option losses but banking on US Treasuries' backing by governmental taxing power, with the caveat that their failure would signal broader societal collapse warranting emergency preparations.
TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE
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EPISODE TRANSCRIPT
Larry Kriesman: The ballast, the Treasuries, are not there to make money. They're literally just there to not lose money. Because we're taking all the risk we need to in the options space, we can't then also suffer a 2 or 3 or 4 or 6 or 12% price change in the ballast because that would be exceeding our risk budget. So we're attempting to buy the safest part of the bond curve and the least responsive to market volatility.
Phil: G' day and welcome back to Shares for Beginners. I'm Phil Muscatello. What is market risk and how can it ruin your returns? What are options and can they help you when markets turn south, as they often do? Joining me today is Larry Kriesman from Measured Risk Portfolios. To answer these questions and more. Hello Larry.
Larry Kriesman: Hello. How are you, Phil?
Phil: Very well, thank you. Larry Krisema started his career over 30 years ago as a life insurance agent and has deep expertise in option strategies. And along with his business partner Bernard Swarovski founded Measured Risk Portfolios, a 500 million plus firm that's been empowering professionals and first generation investors since 2007 with institutional grade portfolio protection.
So Larry, let's set the table by describing Synth Equity and what it's trying to achieve.
Larry Kriesman: Well, it's trying to achieve a big ask, big lift. And that is how do we get exposure to equity markets without getting our ass kicked? Can we say ass kicked on the podcast?
Phil: Yeah, we can. Of course in Australia we say ass, ass, kicking ass.
Larry Kriesman: Okay, fine. So all kidding aside, our target here in the US is the S&P 500 and that's a big benchmark that many, many investors try and benchmark their performance to and many, many investment managers attempt and fail to beat. And I think if you think about, you know, Warren Buffett and big investors that may be recognizable around the globe, they would often say that you're probably best off just to buy a low cost index fund that invests in the S&P 500 and set it and forget it and you'll be fine. And I honestly, I don't disagree with one caveat, and that is that every once in a while, not often mercifully, but every once in a while a huge sell off occurs and those sell offs can be 20, 30, 40, even 50% or more. And this is fine if you have 25 years or 30 years to go before you need the money. But it's not fine as you get closer and closer to where the money is no longer replaceable and you don't have the time on the clock to rebound. So what Synthequity is attempting to do is really address the only flaw in the index, and that is this unlimited amount of drawdown risk that exists. What we've done with Synthequity, and the name comes from synthetic equity, is we're attempting to synthetically replicate the good part of the index, which is the great long term exposure to very healthy returns, while simultaneously eliminating or at least reducing substantially the amount of catastrophic loss that might occur from any short period of volatility. So that's what Synthequity is attempting to do.
Phil: And, um, this is something that I've learned doing this podcast, that it's not only about the risk of the volatility and the size of your portfolio dropping at any particular time, but that's also the time when people panic and tend to sell, which is obviously the wrong time, isn't it?
Larry Kriesman: Correct. In fact, the primary m. There's two things we're trying to do. One, allow investors to have higher exposure to equities rather than using other approaches to mitigate the drawdown risk. And two, keep those investors invested. Because we have a big study here in the US called the Dalbar Study. The Dalbar Study compares the difference between investor experience and the investment performance available from investments. And what it finds, year after year after year is that an investment may over a period of time earn investors 10% or. But very few investors stay invested during that whole time. And so they don't earn the 10%, they earn some fraction and some lower amount or worse, they end up with a loss. Because investments do vary over time. And it's very easy when you're in a drawdown with your current investment to look around or to be marketed to by another investment that's doing well. And you're kind of feeling like, well, maybe I'll sell out of this thing that's not doing well and uh, I'll move over to the thing that is doing well. And the problem with that is that, that doing well that you're experiencing has already occurred. It doesn't mean you're going to get the next section of time is going to be doing well. And so we have this sort of gerbil cage experience where you're just chasing the returns and you're trying to place bets on a horse that's already run and that doesn't work over time. So if we just stick with an investment
00:05:00
Larry Kriesman: over time, it's likely to pay off in the characteristic, uh, we expect switching from spot to spot is really difficult, almost. Well, I think it's impossible. So we don't try that.
Phil: Synthequities launched earlier this year in March, I believe. What structure was the fund in beforehand?
Larry Kriesman: Well, it was and still is. The strategy is available and has been available and we kind of cut our teeth and made all this mistakes and learning curve that we needed to over the last 20 years or so. So we've been managing these portfolios in private, separately managed accounts with the same concept. And the concept we can address is how do we get exposure to the markets without experiencing the drawdown risk. Fundamentally it comes from having the majority of the portfolio. In our case it's about 85 to 90% of the portfolio is actually used to purchase short duration U.S. treasuries. Now that currently and I think may be indefinitely considered one of the safest asset classes on the planet. Uh, as far as lack of volatility, it may be more volatile in bonds if you look at 20 or 30 year duration, but we're looking at an average duration of six months. So there's very little wiggle. It's going to be, it's not immune from pricing changes, but it's going to be very, very muted in response to any kind of market volatility. Now on top of that, then if we've placed that much money into the Treasuries, which have very low interest and very low volatility, how are we going to get a portfolio that's going to deliver the return of the S&P 500? Well, we have to go now, far off balance sheet into a place called options derivatives that have tremendous leverage capacity if they're structured properly and we're not doing like dark ops, crazy off balance sheet investments with something that isn't understandable. We actually buy options right off the exchange through the Chicago Board of Options Exchange. And they are what are referred to as listed options. So they have very defined outcomes and very defined pricing and very liquid. It's the most liquid market available on the S and P 500. And with A, uh, small allocation to those options, we're looking for an experience that's going to give us roughly 8 to 10 times the movement of the underlying index in that option space. So to put an example out here, because I'm very mathy, I apologize in advance for the listeners who don't really appreciate math, but this whole strategy is very mathy. So what we're looking for is if the market goes up 1%, we need our options to go up like 10 to 15%. And that's going to be enough of a return in that small wedge to drive the overall portfolio to be in line with the movement of the underlying. So that's what we're looking for is something that moves at roughly eight to 10 times the speed of the market. And options to do that, they're very sensitive to price movements. They can be structured to be extremely sensitive to price movements. And then what we do is we have a harvesting technique so that as the market does move, like today happens to be on the day we're recording, The S&P 500 went up over 1% today, and our options went up tremendously, typically between 8 to 10% on the day. And we take that opportunity to sell that particular option tranche, harvest some of the gain, use some of that gain to buy additional Treasuries, which raises the safety part of the portfolio, and then deploy the remaining capital back out into a new option tranche. And by continuing to do that over time, the portfolio grows safely on the treasury side and continues to keep its defined amount of risk in the option sleeve. And we've done that for a better part of 20 years in the private portfolios, and we've just brought it to a public vehicle in March of this year.
Phil: So, I, uh, know you're a methy kind of guy, but I can't let you get away without explaining for beginners, what are options? I know it's a huge question, however. Yeah, just general in nature, with all.
Larry Kriesman: Of my footnotes and compliance. You know, you can go to the Chicago Option board of exchange, cboe.com and they will have a lot of descriptions on options and optionality. But in a very basic term, an option is a contract between two parties. The writer who creates the contract and sells it, and the buyer who pays a premium for it. And the owner of the option contract, the buyer has rights and the seller has obligations. And that's how this works. The option contract is applied to an underlying security. It could be a security like IBM or Facebook, or it can be an index like the S&P 500. And we use indexes. In our case, what the contract does is define the terms of when you can buy it or sell it, or when you're required to buy it and sell it. If you're the seller and it sets out the pricing for it, and you can Use an option contract to control a large amount of capital for a small amount of outlay, and you can adjust the amount of capital you want to allocate to
00:10:00
Larry Kriesman: an option by changing the strike price or the price at which the contract can be exercised. Now, we could spend an hour just talking about the definitions and the functionality of options, and we don't want to do that. That would be not what your audience wants. But to suffice to say that it's almost like if I buy a ticket to a musical theater, I've essentially bought an option contract to go to that theater event. If it turns out that the theater event turns into a, um, monster, super popular thing, I could potentially sell my ticket for more than I paid for it. If people are demanding to go to that show on the corollary, if the show is terrible, I can choose to just forfeit my ticket, leave it in the top drawer and not go to the show. So that's a lot like how an option contract works. It gives you rights and you have rights to do something. And what it also allows is for extreme amount of leverage in that component. Now, with our structure, those option contracts can actually lose 100% of their value. And that's not normal. Normal portfolio construction is not built knowing full well that there is, um, an above average chance that the option could expire worthless and we could have something of no value. But we rely on the movement of the underlying index to tell us that more often than not the market goes up. And therefore more often than not this option contract should go up with it. And there will be losses, and there have been losses, but they're contained to the amount of the small allocation that we, that we make into the option sleeve.
Phil: And by way of warning, I think it's worthwhile telling listeners that trying to do options by yourself with no experience is a, uh, hiding to nothing really, isn't it?
Larry Kriesman: Well, I think it is. And people that have already had an experience with options that might have had a bad experience, I want to really, really have you think about this for a second. Just pause and think about this. If you've had a bad experience with an option contract, the party on the other side had a positive experience. So it's binary this way. It's something that if you have a good experience with an option contracts, it's at the expense of someone else. And so that's where some of the treatment of options can get a bad rap, because people are going to talk about the failures and the pain more so than the success and the profit. So it's uh, not the option's fault if it didn't go your way. The option did exactly what it's supposed to do in response to the market movement. But yes, I agree with you, Phil. Options are not for the uneducated. You definitely need to spend some significant amount of time learning how to do it on your own. Or like in our case, hire professionals that can know how to do it for you.
Phil: Ditch the spreadsheets. Share site is Investopedia's top tracker for DIY investors. Invest smarter, not harder. Grab four months free on an annual premium plan at sharesite. And as a general term, when you see the term synthetic and especially in the context of ETFs, it does mean that ETF is not investing in underlying securities or indices. It is actually using things like options or futures contracts. And that's the case, isn't it?
Larry Kriesman: That is the case. And you can actually go to synthequity ETF.com. so that's s Y N T H E Q U I T y e t f.com and that actually has a wealth of information including the prospectus on the etf. And it also we publish our holdings every day. We're required to. So you can see there that there is again at any given day, about 85% of the portfolio is held in Treasuries and then the balance of the portfolio is held in options.
Phil: Yeah, I noticed that as well. I was quite surprising to see that.
Now talking about launching the etf. And again, I know you're a mathy kind of guy, but what was it like launching the ETF earlier this year? How did it personally make you feel?
Larry Kriesman: Okay, well that was a pretty humbling experience, I have to say, because when you talk about launching it, we went to the New York Stock Exchange floor where the ETF is listed and we were invited to closing bell ringing ceremony for our firm. We invited a number of partners and advisors who are, you know, ah, friends of the family, let's say. And getting to the New York exchange and being out on Wall street and seeing our firm's name measured risk on all the external monitors and then going inside and having our symbol and our corporate name plastered on every available digital space was just a mind blower because you know, we're in the hallowed halls of big, big brand names like Home Depot and others that are just well recognized household names and to be walking the same footsteps, it was just really awesome. Since then, you know, we've, we launched at $0. There was no money in the ETF when we launched and we've crested the $100 million mark in the first seven months of operation. We're substantially over that now as well. And it's just testament to the fact that there is really a serious demand for this
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Larry Kriesman: type of product and we're happy to be filling it. It was a great experience, really was.
Phil: And you find people understand what you're trying to achieve because it can get a little bit mathy.
Larry Kriesman: Yeah, I think uh, we can get into the weeds and talk about details and some people want to do that. But the reality is that it's actually much simpler. What we're doing is much simpler than trying to do research on individual companies, find out whether or not there's value and proposition as to whether or not they have a mode around their product or service or whether or not they have earnings growth that might look like it's sustainable, uh, and can deliver a change in the price of the security. We are literally saying that we're, we're banking our growth potential on the fact that the s and P500 is comprised of the 500 largest companies by, by market capital in the United States. Every morning those CEOs wake up with really only one thing on their mind and that is to increase shareholder value. That's what they are paid to do. And if they don't increase shareholder value, they're either terminated or worse, their whole company falls off the list and becomes replaced by some other go getter company that comes up and grows up faster than they are and kicks them off the list and becomes in the S&P 500. So every time you hear about a company being included in the S&P 500, that's the good news. They don't talk about the company that got removed because it is still the s and P500.
Phil: The relegation process, yes, it's uh, a.
Larry Kriesman: Wonderful thing, is not discussed. But the reality is that's who I'm going to say is going to be responsible for my wealth creation over the next 15, 20, 30 years. And yes, there are years where it can not go well, that's fine. And what we're going to do is mitigate the amount of damage that can do to a portfolio structurally through the use of the synthetic equity approach. And those two combinations make it really simple. You have just a handful of positions, a couple of bond options and then you know, a few option contracts, uh, really is straightforward and if you just exhale and go, listen, I don't know when the next sell off is coming And I don't know when the next rally is coming. I just know that rallies come more often than sell offs and I have to be invested if I want to participate. So to me, what's the best way to stay actively engaged and participate? And it's. It's this and that's. We looked around at the end of the tech bubble when market started to just crumble and all the correlated diversified holdings all became correlated and we realized we needed something else and it didn't exist. And so we started to figure out how to make it ourselves.
Phil: Larry, you've got a personal story that's really affected the way that you think about investing. Can you share that with the audience, please?
Larry Kriesman: Yeah, I will. My father is in large measure, I think, responsible for my seeking out a different alternative to investments. And that's because he went through a very rough experience. He was an executive for a large oil company, worked there for 30 years, retired from overseas in the Middle east and came back to the United States and elected to take a pretty large pension and take a cash distribution. He felt he could get better performance on his own. He invested with a large firm that was very fancy. They had baseball stars and, you know, athletes and celebrities as clients. This was in the late eight or, um, early 80s, I think, up in Northern California. And it turned out that even though this firm had been run well for many, many years, the last few years were not run well. And it had turned into a Ponzi scheme trying to cover up losses that the advisor didn't want to admit to. And so my dad went from being a guy with the brass ring firmly in hand to, to a guy that had to go back to work in his 50s with having lost almost everything. That was devastating. And I, I felt like I didn't really realize it at the time, what had happened. But what really happened is my father, you know, he died about 10 years ago, but he actually passed away maybe 30 years ago when this happened to him. I lost the man who was full of joy in life. And I was replaced by a guy who was always second guessing his decisions and blamed himself terribly for having done this to himself and to his family. And I guess what my takeaway is is that investing, everybody has their number where they can just be rocked by bad experience. It could be for some people, as little as 3 or 4% loss. For other people it might be 30% loss. And certainly for somebody who takes 100% loss, that can be very, very difficult. And investments have this weird thing, even in professional investment managers. Can sometimes not see the risk that's there, or they discount it to a point that they don't respect it. And they can have losses arrive that were not expected. And that can happen to the manager as well as the investor. And when that happens, as I said, rock their experience and their ability to feel like they can make a decision that's meaningful. I wanted something that would be as immune from that as possible.
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Larry Kriesman: I can't possibly predict what's coming, what kind of bad news there's going to be in the future. There's no way to know. And we won't know it until we look back on it and then it becomes obvious and we all kind of shake our heads and go, I should have seen that coming. But we can never see it coming. It's unknowable. So in building a portfolio and a model, what I'm looking for is something that is going to be able to withstand anything. Now, we talked, I think, a little bit off camera about the idea that my flaw is going to be in the US treasury space. I'm already committed to the fact that the options can lose 100% of their value. That doesn't bother me. I'm taking that risk in exchange for what they can do for me. And it's a fair trade. It's the Treasuries that keep me up at night. In fact, it's my partner Bernard, that used to use that as one of our questions. We'd ask professional managers, what keeps you up at night? We'd ask that about their own portfolios and what they were concerned about. For me, it's not the options. For me, it's the Treasuries. If the Treasuries fail, oh, my gosh, that would be devastating because it's where you have the most of the money. But I have to say that the Treasuries are based on the full faith and credit of the U.S. government's ability to tax its citizens. That's not going to go away. And so because of that level of confidence, I'm confident that that portfolio is going to be able to withstand nearly anything that comes down the road with a great degree of success. It doesn't mean that we still couldn't have something happen. But if something happens to the Treasuries, to the extent that the US government can't pay off their debt obligations, you'll.
Phil: Be wanting the tin foods and the Emma.
Larry Kriesman: Yeah, heaven help us. Exactly right. So that, to me is really a guiding principle as well, is that we will never position the portfolio, no matter what, no matter what our confidence level is, that could expose the portfolio to some sort of catastrophic loss that we weren't thinking about. It just never. It will not be the case with us that that won't be the case.
Phil: It reminds me of that great book by Nicholas Nassim Taleb, Black Swan, Exactly. Where he describes so many situations where no one expected what could go wrong to go wrong. And it did. I think one of the great examples was Siegfried and Roy, the Las Vegas entertainers, where they ensured for any kind of eventuality where, you know, a member of the audience was going to be attacked by one of the Tigers, for example. But they didn't insure against the Lions or the Tigers turning on the trainers themselves, which turned out to be devastating for them.
Larry Kriesman: Yeah, exactly. Well, there's a, there's a fund that, in, I think it was 2017, marketed itself as a preservation and growth fund. And they did. Part of what they did was involved in selling short volume volatility, which means you're, you're short of volatility exposure. It wasn't for much, but we had this event that we referred to in the US as Volumageddon, so a huge volume experience. And that Fund lost about 75 or 80% of its value over the weekend. And it was because they, they just said, well, we've never had this big of an, of a Sigma event and so it's not likely to occur. And it occurred and they had so much short exposure that it's like that expression you're bending over in front of the, what's it called, the steamroller, to pick up pennies. You know, you're not realizing the risk you're taking. So that's just something we really focus on is making sure that we're not exposing investors or the portfolio strategy to unweighted risk reward ratio. We take the opposite approach. We're prepared to lose money, but we want the reward to be substantial or potentially substantial while protecting the downside.
Yeah.
Phil: So do you employ a strategy of long and short, as in you're trying to, uh, profit from movements up and down as well, or is it all long up only?
Larry Kriesman: Yeah, it's all long. So we have a directional bias that it's always the right time to invest and that the market's always going up. Now, we know we're going to be wrong, but we have set structures in place to defend us against being wrong and, and too expensive. So we don't use shorts directly. So we're not trying to make Money on the market going down. But we can use option spread contracts which allow for an even more leveraged return. So we do have some short option contracts in the portfolio from time to time, but they're paired off against a long contract in what's referred to as a spread trade.
Phil: So you and Bernard, you just referred to the tech bubble and the dot com crash. That's when you first met what was the floor in traditional diversification that convinced you to build these kind of portfolios? Measured risk portfolios.
Larry Kriesman: Yeah, it was just that I think for me as a young advisor back then, you know, we were building portfolios using software optimization tools to try and pull from all of the sectors we could in the large cap, small cap, mid cap, domestic, foreign. We were using bonds with short duration, mid duration,
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Larry Kriesman: long duration, both corporate and foreign, and Treasuries. I mean, all, uh, all the kind of things that you could bring to bear back in the late 90s and when the, when the market started to correct, everything just went, correlated and started to go down together. And as a young man, when someone who's substantially older than me, that has trusted me with their money, calls me and says, larry, geez, I mean, I see we're down, let's pick a number, like 17%. How much worse do you think it's going to get? That question just stunned me, frankly, because I knew I couldn't give him an answer. Because when you own individual pieces, even if you've diversified up and down the block, there is no answer to how much worse can it get? Because whatever you own today can still go down more tomorrow. Literally. Right. So that was kind of the catalyst and it was the thought process of, oh my gosh, this is not a good place to be. Because you have a conversation, you convince a client that what, what we bought six weeks ago or six months ago is a good decision and it's going to work out well in the long term. They start to lose faith when the portfolio has dropped 10 or 15 or 17. Everybody has their number, but there's a number at which everybody starts to freak out and they want maybe a solution or at least confirmation or comfort that it's not going to get any worse. You can't give it to them. And then 10 days later or two weeks later, they call back because now their portfolio is down 22% and they were already concerned 5% ago and you didn't do anything to stop it. Well, now the advisor starts to get the feeling that maybe I did put them in the wrong things or maybe I can't offer them what I need to. And it's a terrible place to be when the only solution you have to stop the bleeding is to sell the asset and get out of the thing that's going down. Because, you know, I know other investors have experienced this. Know this. I swear to God, the market is waiting for you to sell, and it will start the rebound the moment after you hit submit to get out of the thing you were losing money in. Um, I'm joking, but I know there are people listening who've experienced this. And it's devastating because then you're stuck in this place where you weathered all this loss. You popped out at a bottom, somewhere near a bottom. Now the market's making a rally and come back and you're like, oh, my God, when am I going to put the money back to work? And you can miss maybe 6, 7, 8, 9, 12, 15% of recovery before you finally realize, oh, my God, I just. I have to. I can't stay in cash for the rest of my life. And if you're really unlucky, that's also when the market makes its second decline and starts to go back down again. And it just is brutal. So that was really the catalyst for me is realizing that if I couldn't answer that question comfortably and meaningfully, then I wasn't going to be able to keep clients in the seat and keep them invested. So that's, uh, a really fundamental part for me is being able to answer that question of how much worse can it get? And now with the portfolio structure, if someone, if we're going through a drawdown, which we still have, and the portfolio is dropping, they can at least be assured that Maybe there's only 3% left or 5% left or 2 and a half percent left in the options. And it's not because we're selling the options and we're doing any active rebalancing. We're just watching the options get crushed in value, but realizing that they're a finite amount of the portfolio and they just can't keep on losing us money because they're getting less and less valuable.
Phil: So what percentage is usually kept in Treasuries to provide the bulwark against this?
Larry Kriesman: Yeah, it's a starting position of about 85% for a growth portfolio. That's where the public ETF is at that level. In private accounts, it can be anything that the client wants. So we could have 75% in treasuries and 25% in options, or we could have 95% in treasuries and only 5% in options. So it's uh, a bespoke, custom made portfolio for individuals in our firm. And on the public version it's just our straightforward 12 and a half to 15% risk sleeve. But it's a lot. I mean, the whole point is you're trying to structure it in a way that there's a defined amount of risk there and the ballast is the treasury part.
The traditional portfolio from modern portfolio theory is a 6040 spread
Phil: And you haven't talked about it yet, but the traditional portfolio from modern portfolio theory is a 6040 spread, isn't it? Can you describe what that 6040 portfolio was?
Larry Kriesman: Well, it really came out of research in the 50s and there was a study in pension plans, Bree Bauer Brinson, I think of a large number of U.S. pension plans. And what they determined is that very little of the return in a portfolio is attributable to stock selection and timing. And the majority, like over 90% of the return you're going to receive from a portfolio is going to come from asset allocation, where the money is allocated. Now, uh, we have to point out that back in the 50s and even today, option type of structures are not available in retirement plans. So we don't have the effect of what that might have done to change the outcome and even the development of modern portfolio theory. But the concept is that it appears from study that about a 60% allocation to equities and the 40%
00:30:00
Larry Kriesman: allocation to bonds was the optimal allocation that allowed for a good amount of growth with a modest amount of volatility because the bonds dampen that volatility. The problem that I experience and that I see and I try and counsel people about is that by putting 40% of the portfolio or 30 or anything in other than equities, you're dumbing down the performance. The good performance that you want. You want volatility when it's positive, we don't like it when it's negative. But we want that positive volatility because that's what propels the values up. And by putting 40% of the portfolio into bonds, you can't possibly do as well as you would if you had put the money into equities over the long term. That's just math. I mean, that's a very simple thing to understand. And the failure in the 6040 portfolio is even more pronounced when you look at a year like 2022 and you realize that if the bonds are declining, which they did because of the rapidly rising interest rate environment we had the US and the equities are declining because of market pressures to put the brakes on owning equities. Now you have both sides selling off. And so you have the worst of all worlds where you are taking losses from the part of the portfolio that's supposed to protect you from losses. And let's just go back mathematically. Again, I'm a math guy, right? So if equities can lose 50%, let's just say that's a number. And by the way, it's not the maximum number. It's just a number that has been achieved. It doesn't mean it's the worst case. It could lose more. But if equities can lose 50% and you reduce your exposure to 60%, people that can do math will know that 60% of 50% is 30%. Now that means that before we count the bonds into the factor, a, uh, 60% allocation to equities can still lose your portfolio 30%. And I would argue for most people that's bigger than they're prepared to take. I mean, honestly, that's a big loss, right? So now let's put the bonds back in and say, okay, if we're 40% in bonds, let's say that that somehow manages to go up 10%. Well, that's a big ask, honestly. Right. Bonds don't generally generate 10% returns, but if it did, 40% of 10% is only 4% positive return. And that means that you've got 30% negative coming from your equities, 4% positive coming from your, uh, super athletic bonds. Not likely, frankly. But let's just give it the benefit of the doubt. So you're down 26% now, that's much better than down 50, admittedly. Right, but when the market's up 20%, you don't get 20%, you get 60% of 20%. Well, that's 12%. Right. And bonds are not earning 10% normally. They're earning just a couple of percent, maybe 4 to 6%. So 40% of that's 1 to 2%. So maybe you might get 13 or 14% in a 20% year. So you give up substantial amounts of positive return when the markets are running and you still are exposed to some pretty bad news if the market's negative. So that's where I find the disappointment results in the 6040 portfolio. And they can be improved with an approach that uses something where you're really mindful of the drawdown, but also very respectful of the fact that the markets run more often than they decline. And, and you've got to get exposure.
Chloe: To that super is one of the most important investments you'll ever make. But how do you know if you're in the best fund for your situation? Head to lifesherpa.com to find out more.
Math is a harsh taskmaster when it comes to investing
Lifesherpa, uh, Australia's most affordable online financial advice.
Phil: Maths is a harsh taskmaster, isn't is?
Larry Kriesman: Well, particularly let's. I mean, my favorite thing to talk about is gains and losses. If you take $100,000 portfolio and you make 10%, so you're now at $110,000. If you lose 10% in the next time period, you're not even. You're actually negative because your account has gone from 100,000 to 110,000. And 10% of 110,000 is 11,000. So you would end up up 10, down 10 is you've lost $1,000 in the round trip and it doesn't matter the order. If you start out with a hundred thousand dollars and lose 10%, you're down to 90. And if you make 10% from 90, you don't make 10,000, you make 9,000. So you don't get back up to 100 either.
Phil: That's a lot of slippage there going on, isn't there?
Larry Kriesman: It is. And the bigger the volatility event, the worse it is, right? So let's say you experience a pretty good run in the markets and you've doubled your money. You've taken $100,000 and you've grown it to $200,000 over the course of three or four or five or six or seven. However many years it takes to do that. Once you've gotten to $200,000, it only takes one year at a 50% loss to bring you right back to where you were seven years ago. That's brutal. And again, long term, I know you're going to get out of that hole and that 100,000 will grow back to 202
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Larry Kriesman: will become four and four will become eight. But you'll never get that seven or eight years back. That's gone. That's irreplaceable. So part of the structure that we have is designed to try and limit that amount of backward slippage so we don't end up having to earn our investments twice. We don't want to have to grow our portfolio over and over again only to give it back when the market collapses.
54% of days on the new York Stock Exchange are up and not down
Phil: I have heard a statistic, and I'm not sure if this is correct, but you might be able to enlighten us. Is that something like 54% of days on the new York Stock Exchange are uh, up and not down. Is it something like that?
Larry Kriesman: You know, I don't track that as much, but what I do track are the annual numbers because again, I'm not a day trader. We're not putting on or taking risk off daily in response to what's happening in the markets. We're very much focused on a, uh, longer term investment because that's what this should be. And what I can tell you is that the vast majority like over 50, 55% somewhere in there of annual returns in the S and P 500 are above 15%. Now that's like, wow, that's a big number. Something close to 30% are above 20%. Now again, these are real big returns, right? The distribution curve. And by the way, there's, this is something that your readers could go to J.P. morgan's guide to Markets. They can type that in and search for the J.P. morgan Guide to Markets. And unless they change the slide somewhere around slide 16 or 17, they put up a beautiful chart of 45 years worth of uh, S&P 500 performance. It shows where the calendar year return ended, but it also shows very importantly what type of entry year loss was experienced during that year. And what you see is that in every year there are loss drawdown periods of 6, 9, 12, 20, 25, 30%. There's always a drawdown period every single year. But the positive years far outnumber the negative years. And the severity of the negative years is relatively light. Like in most cases it's under 10%. But there are some doozies. And that's also my beef with the 6040 portfolio because we know that the exposure to a doozy, big huge sell off exists. We respond with the 6040 portfolio to limit the damage and then we don't even really get the defense we need when it happens. And we dumb down the performance long term by trying to do that.
You buy long duration options and pair them with short duration Treasuries
Phil: Can you walk us through a typical options trade? What sort of duration are you looking at? What is the investment in how long it takes to bear fruit?
Larry Kriesman: Well, it can be extremely variable. But let's just start with the concept that we're looking to buy option contracts that are going to be about a year long. And I say that about, because that's for us, we've observed that three months is too short and two years is too long. There is a sweet spot for us. We think a year is about the right number where the options can be structured to be responsive enough to market movement, but not so responsive that they burn off quickly. I'LL do a little bit of technical stuff, but there are so many more measurements involved in options with you have to manage against the safe money rate of return. The great thing called.
Phil: There's the great.
Larry Kriesman: The Greeks. Yeah. The Delta is an important one that kind of attempts to measure how much your option should move in response to the underlying securities movement. There's a decay theta that matches how much of the time value of an option contract might decay. Other terms that manage how much change in that in those numbers occur based on movement in the markets and based on implied volatility. It is very complex, I'm sure. Like it's the difference between buying a stock, which is you get in a car and you have a steering wheel and a brake and a pedal for gas. Right. Versus you get in a cockpit and you look at all those switches and buttons. That's what it feels like. The difference between flying an option portfolio versus flying a stock portfolio is markedly more complicated because there's so many more things to put into the. Into the equation. But in very simple math, we buy long duration option contracts and we pair them with short duration Treasuries. So we have a lot of time on the clock for a market event to go through, uh, a dip and a recovery and uh, hopefully not have to repurchase the options by selling off Treasuries. So we're passive when the market's declining. If the market is declining, we just let the options take the beating, uh, knowing that we have hopefully a lot of time on the clock to recover. If we don't get a recovery, then we have to sell off options and buy new ones. But if the market does recover and those options become profitable, then we'll sell that option contract and roll it to a new option contract.
Phil: And are these typically in securities or the index?
Larry Kriesman: It's on the index. So we're not trying to pick one company over another. We're just again putting all of our confidence and capital behind the S&P 500.
Phil: And what is it that you're actually looking for when you're buying these particular options? Is it just directionality?
Larry Kriesman: Yes. So the process
00:40:00
Larry Kriesman: for us is that we are almost triangulating. We have a risk budget and then we also know that we need a certain number of contracts in order to approximate the daily movement of the underlying index. And that leads us to what strike we buy because we know two of the three things. We've done the math to figure out the contract count and we've done the math to figure out what the risk budget is. And that leads us to what the strike must be in order to meet those criteria. So for us, it is very mathy. We don't have any input as to whether or not the market's going to go up or down over the next 30 days. We just assume it's going up. And as far as how long we hold those option contracts, we only hold them for as long as it takes for the option contract to be profitable relative to the benchmark. So we sold our option contracts today and replaced them, for instance, in response to this day's move. And we'd only done the previous option purchase maybe just 10 days ago or something. So sometimes it's very quick. It could be again tomorrow. If we have a strong day tomorrow and the market goes up a good amount, it's likely we would want to sell it again and harvest the gains. It can also be months between purchases. It could be if the market's drifting sideways or going down and then back up again a little bit and then down and back up a little bit. We don't have any opportunity to have a harvesting event. And we just stick with those options, including all the way through 2022 where the options all expired, worthless. Because there was never an opportunity in that calendar year to sell the option contracts profitably. It's a process for us, but we're active managers when the market's rising, passive managers when the market's declining.
We've exceeded S&P 500% performance after taking out fees and expenses
Phil: And what's the management expense ratio? How much does it cost for holding this ETF?
Larry Kriesman: It's 95 basis points. That's the limit in the fund expense. So 0.95%. Now we're really pleased. We only launched in March, as we said, we've been able to exceed the S&P 500% performance and that's none of our fee. So even after taking out fees and expenses, we've been able to post returns, double digit returns, substantial returns actually, that are quite a bit higher than the S&P 500. Now obviously that can change anytime, you know, so we're recording this on today's date. We're, we're in that position. But obviously future performance is not indicative of past performance.
Phil: There's no guarantee, no guarantees in this.
If we look at different asset classes, the more concentrated you are
Just getting back to the 6040 or uh, the traditional 60 40, uh, portfolio. Because one of my observations now is that 40 is not necessarily just going to be just bonds. There's things like private equity and private credit and infrastructure and all of these and fixed income all being bundled in as well. And they're kind of Bondi like products. But I think a lot of people, when they're being shown a portfolio and what would be considered a traditional portfolio is not a portfolio as we would traditionally recognize. What do you. What are your thoughts?
Larry Kriesman: That's true. Yeah. I think it's interesting. I'll, uh, tell you why we don't do it in our firm. If we look at different asset classes, whether it's Bitcoin or private equity, private credit, you know, levered products, engineered products, the more you put into a portfolio, the less concentrated you are in any one thing, right? And I remember being fascinated years ago when I realized that, I think it was an insurance company. One of our early trainings, they had a chart of something like, you have a choice of a 8% guaranteed rate of return or an allocation to five investments, one of which loses 100%, one of which you get your principal back, one of which makes you 5%, the other one makes you 10%, the other one makes you 15%. And it was for a long time, like 20, 30 years. I don't remember the exact details. And if there's somebody even more mathy than me, they can put it on an Excel spreadsheet and figure this out. But the point of it is, is that the opportunity to be in that 15% piece was sufficient to drive the portfolio to be able to beat the 8% guarantee. But what I take from that is that if we can limit the losses and lean into the asset class, that has a good chance of making big returns over a long period of time, we should be able to do better. You know, even like gold. Gold is up a huge amount this year, I think, like leading the S and P by a large factor. But gold has been a dog, and it has been a dog for decades in times. And if you consistently have an allocation to that asset class, just imagine how much that's pulled down your performance. Whether it's a 1% allocation or a 5% allocation or something. It's been negative for so long that finally you get a pop, right? But how much money did you have in gold? I mean, is it meaningful? Has it been enough to move the portfolio now in some way? If you have 3% in gold and it goes up 20% again, it's only 0.6% return to your portfolio. So in order for it to be meaningful, you'd have to be carrying like 25, 30, 40% of your portfolio in gold. And people don't do that. It doesn't make sense. And if they had, it would
00:45:00
Larry Kriesman: be not good for them in the long term. I personally think private credit is potentially, you know, another one of these weapons of mass financial destruction. The amount of lending that's going on against asset classes that are theoretically maybe partially securitized. You know, some are probably excellent and solid, but some are probably not. And if that starts to unwind, we could have a really negative effect in that space. And, you know, liquidity is a huge component to what pricing is. And if things are not liquid, pricing can just be blown out. So having an allocation to that space, again, you might be looking at annual returns of 10 or 12 or 13%, but it's in exchange for potential catastrophic losses. And that's where we just don't want to be in that kind of place. So I think there's some portfolios, I'm sure, that have been built that have gone and delivered excellent results. But I think it could be just a matter of time before something unwinds in one or two of those sleeves and things could go terribly wrong.
Larry Epstein: When you say you hold us Treasuries, what is the form
Phil: Another thing I just wanted to explore. When you say you hold us Treasuries, what is the form of that? What does it look like?
Larry Kriesman: Well, in the fund, we actually hold the individual bond. Like we are actual bond holders now. We're not. We don't have them in physical form. We hold them in street name, which means that they're held in a brokerage account. But we actually own a bond that is due to mature in each of the quarters. So we hold March, June, September and December quarters. And we have about a quarter of the portfolio is owed to us by the US government every 90 days. And that puts us in a position to have a liquidity event and a, uh, reinvestment opportunity into the bond ladder every 90 days. That's what that means.
Phil: And what are they paying at the moment? It's not a great deal, obviously. Yeah.
Larry Kriesman: In the short duration space today, let's say late October 2025, is about 3.7% blended return in that neighborhood. That's the gross return before fees and expenses.
Phil: And presumably you get your capital back at the end of every period.
Larry Kriesman: Yes. Right. I mean, that's, that's the whole premise. That's the reason why we do it. In fact, it's the primary reason we do it. The ballast. The Treasuries are not there to make money. They're literally just there to not lose money. Because we're taking all the risk we need to in the option space. We can't then also suffer, uh, a 2 or 3 or 4 or 6 or 12% price change in the ballast because that would be exceeding our risk budget. So we're attempting to buy the safest part of the bond curve and the least responsive to market volatility.
Phil: So, Larry, thanks very much for coming on today.
Larry Kriesman says people in Australia can purchase synthequities ETF
Can you let listeners and viewers know how they can find out more about synthequities? And just as an addendum to that question, I believe people in Australia can purchase this ETF as well.
Larry Kriesman: Yeah, I actually don't know the details to that, but we are a, uh, publicly listed ETF and we're trading on the New York Stock Exchange. So to the extent that people in Australia, or anywhere for that matter, can have access to that, yes, we'll make more shares for you if you'd like some. Synthequity is more detailed information is available@synthequity ETF.com and then our firm Measured Risk Portfolios. That's our website, measuredriskportfolios.com and there's additional information available to investors there as well.
Phil: Larry Kriesman, thank you so much for joining me today.
Larry Kriesman: Thank you, Phil. It was a pleasure.
Chloe: Thanks for listening to Shares for Beginners. You can find more@sharesforbeginners.com if you enjoy listening, please take a moment to rate or review in your podcast player or tell a friend who might want to learn more about investing for their future.
00:48:42
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