Podcast Summary: Excess Returns — “99.9% Focus on the Wrong Question | Victor Haghani on Why Static Allocation Fails”
Date: November 4, 2025
Host(s): Jack Forehand, Justin Carbonneau, Matt Zeigler
Guest: Victor Haghani, Founder & CIO, Elm Wealth

Episode Overview

This episode features Victor Haghani, renowned for his work at Long-Term Capital Management and currently the founder and CIO at Elm Wealth. The discussion centers on why most investors focus on the wrong question—“what to own”—and neglect the equally critical question of “how much to own.” Haghani shares his professional evolution from sophisticated hedge fund strategies to advocating for simplicity, dynamic asset allocation, and the pitfalls of static portfolio decisions like the classic 60/40 or permanent portfolio. The conversation is packed with actionable insights for long-term investors, with a deep dive into valuation metrics, expected returns, market dynamics, and portfolio construction.

Key Discussion Points & Insights

1. Victor’s Investing Journey: From Complexity to Simplicity

• Early Career and LTCM Experience
  [03:25]

  • Victor describes his career on Wall Street, founding partner at LTCM, and the realization that, despite deep finance knowledge, he lacked a framework for personal investing.
  • The end of LTCM prompted him to reevaluate investing, moving away from chasing alpha and complex strategies:

    “Whether it works for Yale, you know, is another question. But I can tell you for sure it doesn’t work for a person like me. And that’s what got me thinking about going back to basics...” — Victor Haghani [04:21]

• Personal Investing Philosophy
  [04:55]

  • Transitioned to simple, diversified public markets portfolios focusing on expected return and risk, not forecasting “what to buy” but rather “how much.”
  • Taxes, longevity, and setting an example for family shaped his pragmatic, long-term approach.

2. The Core Investing Question: What vs. How Much?

• [00:00], [09:44]

  • Victor emphasizes that nearly “99.9% of financial media focuses on what to own,” while the equally, if not more, important question is “how much to own.”

    “If you get the how much question wrong... in the too big size, you know, then you get wiped out and have to start over. That’s really painful.” — Victor Haghani [10:51]

• Position Sizing and Risk Management
  [13:09]

  • Describes a simple, introspective approach (not reliant on formulas) to determine optimal risk:

    “Risk is like a fee. … what would you accept as a risk-free return in lieu of a higher risky expected return?” — Victor Haghani [13:13]

  • The “risk-adjusted return vs. allocation” curve is notably flat at the top—precision is less important as long as you’re in the right range.

3. Valuations: CAPE, Payout-Adjusted CAPE & Earnings Yields

• [17:25]

  • Haghani discusses using the CAPE ratio (Shiller PE) as a long-term expected return metric, reframing it as an earnings yield rather than simply a valuation tool.

• Payout-Adjusted CAPE
  [19:16]

  • Elm Wealth’s adaptation accounts for dividend payouts when calculating historical earnings, boosting the accuracy of return expectations in low-payout eras.

    “When we look back at earnings five years ago, we want to bring them to today … if they haven’t been paying out a lot as dividends, we want to bring them higher.” — Victor Haghani [20:51]

• Utility & Limitations

  • Earnings yield is a reasonable long-term predictor of equity returns, though short-term deviations are wide.
  • US investors often extrapolate the recent past, developing unrealistic return expectations.

4. Expected Returns — Practical Application

• [26:30]

  • Expected returns are indispensable to investment decisions; pure static allocations like 60/40 are “a total abrogation of duty.”

    “If we don’t have an expected return, then I think that we can’t do any investing at all.” — Victor Haghani [26:51]

• Industry estimates (BlackRock, Vanguard, etc.) currently cluster around low equity expected returns, reflecting broad consensus.

• Comparison of current and historical regimes shows caution:

  “I think going forward, the expected return of equities is going to be lower than it has been on average over the last hundred years.” — Victor Haghani [32:32]

5. Buybacks and Market Dynamics

• [34:19], [59:25]

  • Buybacks’ scale (3%+ annually) can drive equity markets up by 3–5% per year—the impact is profound.

    “It’s pretty easy to see that companies buying back 3% of their stock could be pushing equities up 3 to 5% a year while that’s happening.” — Victor Haghani [34:57]

  • Indexing helps smooth out the buyback impact across the market, absorbing flow as market cap shifts.

  • Index fund criticism is misplaced; the deeper issue is static and return-chasing asset allocation.

6. Portfolio Construction Philosophy

• [39:46]
  • Elm Wealth screens for: (1) assets with sensible, calculable risk premia; (2) low fees; (3) tax efficiency; (4) non-zero-sum exposures.
  • Broad indexed equity/fixed income, split across regional/geographical buckets.
  • Allocation changes based on deviation from baseline expected returns/risk; over/underweights are simple, back-of-the-envelope, not driven by mean-variance optimization.

    “No mean variance optimization. No complicated stuff. … So, that’s how we build it up.” — Victor Haghani [41:34]

7. Static Allocations: Critique of the Permanent Portfolio and 60/40

• [44:15]
  • Both approaches are critiqued for being arbitrary — not tied to explicit expected return, risk, or covariances.

    “…the permanent portfolio is exactly the same problem as the 60/40 portfolio… has nothing to do with expected return and risk...” — Victor Haghani [44:22]

8. Advanced Strategies (Managed Futures, Alternatives)

• [47:15]
  • Managed futures can be justified as diversifiers, but don’t fit Elm’s strict criteria due to uncertain expected return and inability to meet their ultra-low-fee demand.

    “I have a soft spot for managed futures… But it doesn’t really fit with our five-star thing because we can’t say what the expected return is…” — Victor Haghani [47:32]

9. Elm Wealth’s ETF — Dynamic Asset Allocation in Practice

• [49:55]

  • Dynamic index investing: baseline 75% equities, 25% fixed income, flexed within and across asset buckets as expected risk premia or risk regimes warrant.
  • Momentum (1-year moving average) is used as a practical risk signal rather than pure volatility measures.
  • Weekly, smoothed rebalancing; extremely low internal and external costs (24bp all-in).

  Notable point:

  “…as far as we know, it’s the only rules-based, relatively low-cost, dynamic asset allocation product out there.” — Victor Haghani [51:56]

10. Market Concentration & Current Risks

• [55:56]
  • Less concern about index concentration in big tech due to proportionality globally; more concern about low expected returns, continued buybacks, and irrational extrapolation by investors.

    “It’s very difficult for corporate earnings to like totally break away from GDP growth the way that people have to be believing that to be the case if they thought about it.” — Victor Haghani [56:46]

11. Dynamic Asset Allocation: Market Timing vs. Rational Response

• [61:31]
  • Victor argues investors should be willing to make significant allocation changes based on shifts in expected return and risk, despite the industry’s fear of “market timing.”

    “We should be dynamic in our asset allocation and pretty, pretty dynamic—not just a couple percent here or there.” — Victor Haghani [62:22]

12. Most Important Lesson for Investors

• [62:55]
  • Emphasizes skepticism about “sure thing” investments:

    “If somebody comes to you and offers you an investment that has a 20% return with virtually no risk, what should you do? ... assume the guy is either lying or doesn’t understand the situation and save yourself the time and walk away.” — Victor Haghani, quoting Matt Levine [63:15]

Notable Quotes & Memorable Moments

• “Almost no one teaches personal investing, not even at the highest levels of finance education.” — Victor Haghani [05:37]
• “The whole 60/40 portfolio is a total abrogation of duty.” — Victor Haghani [00:36], [26:38]
• “Buybacks could easily be pushing equities up 3 to 5% a year. While that’s happening, I’m really worried about this level of low expected returns.” — Victor Haghani [00:48]
• “Risk is like a fee. … I just need to kind of think about that and search over that and think about that a little bit.” — Victor Haghani [13:13]
• On ETF structure: “We rebalance on a weekly basis, sometimes more frequently if the markets are moving—smoothed out, but low turnover.” — Victor Haghani [53:00]
• “People focus 99.9% on what to buy, but the how much question is just as important, if not more.” — Victor Haghani [00:00], [09:44]
• “Market timing, as people define it, is different from rational dynamic adjustments in asset allocation.” — Victor Haghani [62:14]

Important Timestamps

• 00:00–01:10 — Opening theme, focus on “what” vs “how much”
• 03:25–08:06 — Victor’s personal investing journey post-LTCM
• 09:44–13:09 — The “how much” question and risk-adjusted sizing
• 17:25–26:00 — Valuation, CAPE, payout-adjusted metrics, and earnings yield
• 26:02–33:59 — Practical use of expected returns and skepticism about mean reversion
• 34:19–39:13 — The impact of buybacks and the misunderstood role of indexing
• 39:46–43:46 — Portfolio construction, the use of screens, and the relevance of buckets
• 44:15–46:38 — Critique of permanent and static allocation portfolios
• 47:15–49:06 — Managed futures and advanced strategies
• 49:55–55:20 — Elm’s ETF, dynamic allocation process, and ETF vs mutual fund landscape
• 55:56–61:18 — Market concentration, current risks, and peculiarities in the corporate landscape
• 61:31–62:46 — Being dynamic in asset allocation and overcoming industry inertia
• 62:55–64:46 — Top lesson for investors: extreme skepticism about “too good to be true” investments

Summary Takeaways

• Static portfolios like 60/40 or permanent allocations fail by ignoring expected returns, risk, and adaptability.
• Most investors and even professionals overlook the critical “how much” sizing decision, at their peril.
• Dynamic asset allocation—driven by explicit expected returns, risk, and a willingness to substantially adjust exposure—is more rational.
• Valuation metrics (such as CAPE) are useful but noisy; systematic approaches can help, but realism about limits is crucial.
• Buybacks continue to support equity prices but foster complacency and could reverse dramatically.
• Skepticism and simplicity—grounded in what can be measured, implemented with low costs, and adaptable to changing regimes—are key to long-term investing success.
• Be wary of purportedly high-return, “low-risk” investment schemes; if it sounds too good to be true, it is.

End of Summary