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Hey, everyone. Welcome back to Open Windows Investing with The Pacific Financial Group. I'm your host, Julie Mochan and if you listen to any of the other episodes of this podcast,
and I urge you to, if you haven't.
I talk a lot about In-plan advice and, using self-directed brokerage accounts to help your clients before they retire, you know, while they're still working. and all of the benefits that can come from having this conversations with your clients. And our prospects. But, here at TPFG, we do a couple of other things as well. even though we're sort of known for being, um, the SDBA champs of the United States.
We also have some other things that we do because we realize that that obviously you, um, there's not just qualified accounts in the universe. So one of the, , strategists that we work with, that's currently outside of the SDBA
product shelf Is someone who I had a great conversation with. He's the strategist for three of our model portfolios. Called Capital Defender TPFG Capital Defender. Available, not within the SDBA program, but if you have, uh, IRA accounts or are even taxable accounts, you might want to look at these models because they are doing extraordinarily well
in this crazy market that we're in. And Elio Chiarelli is here with me today. He's a strategist on these portfolios. So we have a growth model, moderate and moderate conservative. Anyway I sat down with Elio and he, blew my mind because he, he got his BS from the ag program here at Penn state university. Then went on to get his master's and his PhD, has a story. About, helping. farmers and, equating to how he manages money today that I am almost positive. I could probably guarantee you, you can't really use guarantee in this business very often, but.
I could probably guarantee you, you're not going to hear a story like this anywhere else. From another money manager, this is very, very, very different. So did I say very enough? It's very different. Anyway , Elio was kind enough. Sit down with me. Recently, and here is, uh, our friend Elio Chiarelli who, again, a strategist for our Capital Defender model portfolios. So here we go. Elio welcome to Windows! Julie, it's a pleasure
I know you're different.
What a lot of advisors and investors are used to. But if you could just get into how you got there. , I always like to , look at it this way, eleo. Like, what, what drives you? Like your purpose, right? That's kind of a heavy question.
Sorry, I loaded a lot into that .
No, that's good. I, I, I, um, No, I love that. I think it's a great kickoff into kind of my philosophy, um, ultimately how we got to where we are and how we manage money, because I think that's really important as a foundation. And so, I got started, in this business, from the agricultural side. was heavily involved in agriculture, grew up, on a farm outside of Pittsburgh, Pennsylvania. Moved to Florida, to get my graduate degrees in agriculture, food and resource economics, agricultural entrepreneurship. That's my background. Oh, wow. And so I, I started working with farmers and ranchers and growers.
Specifically on transitioning this family farm to the next generation. Right. There's this, this huge challenge in states like Florida. Uh, California, Texas, uh, and growing throughout the Midwest and other places where, farmers and ranchers and growers, they have, they, they have huge net worths, but couldn't buy a new truck if they wanted to, right?
Because their money is tied up in the land. and so that's what that makes transitioning the farm to the next generation a pretty good challenge. And that's how I really got started in this business about 15 years.
Interesting.
And you know, in that, in that time I came across this, uh, they had reserve accounts, right?
They'd have 500,000 or a million or 5 million or 10 million or whatever the farm size was in these reserve accounts. And they kept asking me, Hey, what, um, what can we do with this money? We, we wanted to grow, right? But, but at any given time we, we might need it, We. We might need half of it, or three quarters of it to buy a piece of land or put a crop in or, or replant a grove or whatever the case may be.
Right.
So like a short timeframe they could need it at any time. Yeah. So that's, yeah.
Well that's what's interesting is it was like this perpetual timeframe. A moment's notice, right? It was, it was,
hey, I need a tractor.
We wanna build generational wealth, uh, but I might need it tomorrow.
Um, okay, well that, so I, you know, I started scanning the world of investments and, and I thought, well, sure, we could come up with something that shouldn't be too much of a challenge and. Well turn turns out, that's a pretty big hurdle. Um, without tying up somebody's money, without, you know, the potential of being down in a market cycle or whatever the case may be, that that started to be a really big challenge.
And as interest rates began to fall, so again, I started 15 years ago as interest rates began to fall, that became harder and harder to do. And. About six years ago, we really started spanning the world of investment options. , I started doing a lot of research at the time, I'm, I'm getting my graduate degrees in, in agriculture, entrepreneurship, also taking economics courses, learning about different methodologies.
And I came across a strategy that really stuck out from the pack and it really stuck out from the pack by, it wasn't. A long only strategy. Um, and what I mean by that is most money managers, in our space, by their prospectus, they have to own, they have to be long, whatever it is they're doing.
So if you're a, if you're large cap growth fund, you have to always own large cap growth companies, right? If you're a, if you're a bond manager in the high yield space, You have to own high yield bonds. Like that's your, that's your mandate. And so I started getting into this, , space where I just thought, well, what if we don't have to be long only? What if we can go to the sideline if, if things aren't looking good, Right? And so that's what got me into, the defender strategy, the way we founded it, and we've modified it over the years. We'll certainly, certainly get to, So that's the, so that's the 30,000 foot view, , of what we've done ,
that was perfect. . ,
I guess one other thing I want to add to that is so in the world of economics, you have a lot of different economic foundations, Right? Our foundation is gonna be that of Austrian economics. . I'm gonna boil this down for, what Austrian economics is, or at least what it is to me.
What it is to me is in the philosophy behind what we do is a, it's a very long term approach. So we're gonna not be concerned with short term results because we know long-term success happens over time. And in Austrian economics, they talk about this concept of, the roundabout. You have this concept of, the conifer trees where, you know, they, they spend so many years just setting a tap root and really being a small little seedling.
But when the forest catches on fire and all the other trees burn up, then they then, You know, shoot for the sky, right? So that's the concept that we build all of our models off of, is that concept right there. Here's what I say, I'm not worried about hitting home runs. I'm not even trying to get you triples or doubles.
I just want to get you on base every single time. And the reason why that becomes important is going back to my farmers ranchers and growers, as long as I can keep 'em on base. Every single time, then they live another day and they're taking so much risk on the production side that they don't need me to take a whole bunch of risk on the money side.
but yet we still wanna get on base. And as long as they're okay with, continually hitting singles year after year after year, they'll be better having known us than not. That's the, underlying philosophy. and so I think that's really important for people to understand is I'm not worried about making you 40%.
I'm worried about losing you 40%. And so what that's called in the economics world is that's called tail risk. So if you think about a bell curve, right? You plot data on a bell curve. people are mostly familiar with that. You plot a bunch of data, most data's gonna fall within what they call a normal distribution.
And so if you take all the returns of the s and p 500, or the NASDAQ or the, or the Bond Ag Index or whatever, you take all the daily returns or monthly returns and you plot 'em over any period of time, that's more than a few years. And you'll find that it falls in this bell curve, right? Um, so within two standard deviations, 95% of all those returns are gonna fall right inside that bell curve.
But then if you think about the ends of the bell curve, so I. On the far right, which is called your right tail. What's that?
I say good times on the far right.
Yeah. So those are the, Okay, so nobody's upset if we make more money than we said we were going to.
Right? That's the right tail. Like I don't care about the right tail. Right. This is the far left that gets, you know, the, it's the left tail vortex. Right? It's, it's. , it's those three times or those four times, or those six times that fall outside that normal standard deviation. It's the, it's the, it's the 87 crash.
It's the 2001 crash. It's the 2008 recession and it's the March of 2020s that, that absolutely destroy wealth. and so most people in our business are gonna tell you.
Hey, we've allocated correctly, we've scored you from a risk tolerance perspective. Just hold tight. Things will come back Well, that works generally speaking. And if you were gonna ask me today, hey, is the stock market gonna be worth more 20 years from now than it is today?
Well, yeah, generally speaking I would agree with that. But what about if you're an investor in 2000, and you needed your money in 2010, how'd that lost decade feel? Well, it was a pretty rough ride, but you still have the same amount of money in the end. and that's not very, And so what becomes a challenge that I learned with my farmers ranchers and growers is that, when they need the money matters and for people accumulating wealth for retirement that matters.
Like I get that Warren Buffet is claimed as to be this awesome investor, but he, but Berkshire Hathaway has a forever timeframe, he can hold onto a company for 35 years. Right. But you might wanna retire next year , or in five years, or in seven years or whatever it is. Right? And once you start, you transition from the accumulation phase over to the distribution phase, that compounding interests that helped you on the way.
Will negatively change your life on the way down. and so what we do is we choose to defend those assets. That's why we call it Capital Defender. We're not necessarily worried about quarter results. We have a long term outlook, but at any given time, We don't want you to be down double digits.
Right? Um, and for our history of running it, that has always, held true. Now, just because something has never happened doesn't mean it can't. We absolutely understood we are investing, right? It's not a guarantee. but everything we deploy has that mandate. How do I earn an eight to 10% rate of return on an annual basis without ever being down double digit?
that's our mandate. And that's kind of the, the foundation and the key of. What we do and how we run the strategy. Hopefully that's helpful.
Well, I was not ready for how you got from. Pennsylvania. Ag degree. To Florida. a master's PhD then managing money for farmers, ranchers and growers.
Austrian economics.
tactical management, as opposed to just strategic and then. How, how do we get from farmers, ranchers and growers to. what I know capital defender as is for another huge subset of, of the American culture and the American workforce. And, uh, Yeah take me there Yeah, no doubt. No doubt.
We started working with, uh, first responders, right? Because the strategy and the story. That worked so well on the agriculture side all of a sudden was the exact strategy that high risk employees needed
It applied?
Yes. The same applies. Yeah,
the same applies. And think of it like this, first responders again, they take so much risk on their job side. They come outta the academy, they get a SOP, manual, standard operating procedure manual. They're rookies. They're, they're followed around.
They need to learn all these rules. How do I do this? How do I do that? How do I make sure we do this correctly and do that correctly? And they're learning all this. And then they get, they get more advanced in their career and they get confident. Uh, but all the time they're trying to manage risk on a daily basis.
And then when it comes to their finances, they either listen to their, the person sitting in the cubicle next to 'em, or they listen to their cousin's, brother, sister, or they just. , guess Yeah. Quite off time to, And they don't have time to do anything. Right. And so first responders are unique because they can retire early, right?
They can retire at 50, not 59. And so the good news is, is they can retire early. Well, the bad news is, is they can retire early, which means they might actually have to draw from their assets for a much longer timeframe than the average person. and so again, it goes back to this, how do. Use my assets to, so I don't have to do what I've done for 20 years or 30 years or whatever it is, but yet not be down in the double digit range, especially when I'm taking a distribution.
And so we've been able to grow capital defender, especially with the TPFG partnership for first responders, leaps and bounds, because we're doing the right thing. For the right people, for the right reasons. And defender is literally defending the money of those that defend America.
And it's an awesome story for advisors to take and use it with those audiences, uh, in that way because it matters. And we know behind the scenes we have the same philosophy. Risk first, how do I live another day? And. Don't just be long only and give me the story of, we'll just hang on. Yeah. We'll take what the markets give us, right?
Yeah. And again, it could work for, I mean, obviously I'm biased towards it, right? I think it could work for anybody. Um, Oh, certainly it, it works for, it works for those individuals really.
I think they have just been through like, uh, the last couple of years have just been so tough on first responders, uh, physically and psychologically in this country. the fact that they could have something like this, like someone who's has that much passion about making things work on the retirement side for them is really.
Spectacular. I, I love that story. and I should say this, these models, are they, tax managed or are they for qualified only?
So we use 'em for both. They're certainly gonna be most efficient inside of a qualified account, however, In a non-qualified account, if you're avoiding large losses in the markets, I would argue to be okay with paying the taxes because you're not negative.
But I get that there's different situations, different circumstances. Clients are sensitive to, you know, taxable accounts. What, what really the challenge where the challenge comes there. And we saw this exactly in 2021. Into 2022. This is where the challenge can occur is 2021 was probably the largest capital gain distribution year from ETFs, mutual funds, uh, managed accounts.
I mean, we saw, we saw huge capital gains distributions because the markets were so strong in 2021. Right? Right. Then when do you get your tax. Well, you don't get it in 2021. You get it in 2022, right? So now you're having to pay taxes on an account that's down because 2022 obviously has been, has been negative.
So whether you paid your taxes in April or you deferred 'em until September, you're paying taxes from a decreased account. So where defender is not as, bad Is I'm paying from, I'm paying taxes on gains from an account that's not down double digits. Now, With that said, qualified is still the most efficient, but I wanted to throw that out there. ,
I appreciate that a lot because I was literally, just explaining to someone the other day about, customers or end clients paying taxes on funds that threw off capital gains, but they're down and then they come after their advisors with pitch forks like exactly what's going on.
Exactly.
Ugh,, taxes, um, Elio, the real quick, who are the first responders out there in the workforce? You know, Do you define a first responder could you
So your high risk employees are classified as police, fire, ems, air traffic controllers, and now, uh, in many states nurses, um, really? Yeah. So, and that becomes an important distinction, right? Because. Especially on the pension side, , when you're a high risk employee, you get a different pension factor, so, a pension factor may be of like three versus one and a half. So if you work 30 years, you get, you know, times three, uh, you get 90% right of your, Yep. Of your, say your highest three or your highest five years. If you only have a factor of 1.5, then. You don't get 90%, you only get 51% or whatever it is. The other thing that I think is really important, and this is another kind of philosophy piece, when I was doing my research, at the University of Florida, I studied, uh, I studied entrepreneurs, , and I tried to come up with a, , a theory that. Helped me understand what made people successful. And what I found was, a really interesting, Kind of philosophy that fit exactly into the way I was managing money for ag and natural resources. It fits exactly into the way we manage money for first responders and defender, and it fits into why we are so passionate about what we do.
It's this concept called hardiness.
So wait, say that again.
It's a concept called hardiness.
Oh, hardiness, okay. Got it.
Yep. Hard. So here's the, nuts and bolts. If, if change, ambiguity and unknown, if those things bring you energy, you are hardy. If they bring you fear, you are less hardy.
in the investment world, there's a, a really popular, guy in the hedge world that that hedges out investments. wrote a book called Antifragile, his name is Naim Taleb. Anybody that likes to read, uh, it's a great book. the first two-thirds of the book is awesome. The last third, he gets into these little, uh, personal vendetta against different things, which are kind of weird, but first two-thirds of the book.
Awesome. But it ties into this concept of anti fragility and hardiness, and this is what it is. Change, ambiguity and unknown. You know, energy and fear like I talked about, but if we coin it into the finance business, anti-fragility is this: how do I benefit from chaos? Most money management models are gonna give you what the market gives you, but what if, What if we can design a portfolio that actually benefits when chaos happens in the markets, what if we can be positive in March of 2020 instead of negative? And the reality is, is we can, but we don't know when those events are gonna happen. And if anybody tells you they do, they're just lying or they're just really naive. And crazy things happen more often than we're willing to admit.
And in the investment world, We call those the tail hedges, going back to that bell curve. Right? Right. And I wanna have these tail hedges in place because when crazy things happen, I wanna benefit from the crazy that's anti fragility, that's looking at things being hardy, and that's how we build Capital Defender.
is it perfect. No, it's not perfect, but it gives us a fighting chance that in chaos we have a chance to either not lose nearly as much money as the market, or maybe in a really good scenario we can break even. Or in a really crazy event, maybe we'll actually make money. And so if I were to ask the average investor or.
Do you think the next 10 years are gonna be calm, or do you think the next 10 years are gonna be crazy if we're being honest? My slant is, I think it's gonna be pretty crazy. And so
I think most people would say the same thing. ?
Yeah. So how do we, how do we benefit from the crazy, It's called anti fragility.
or in, , psychology sometimes they call it grit. but that's our philosophy. That's the underlying premise of what we do. Um, and it came from, that research I did on successful entrepreneurs, which stemmed into working with farmers and ranchers and growers and now first responders and running , this model.
So you kind of mentioned in the beginning, you know, what's, what's your passion, what's your story? And, and Julie, that's it right there is I wanna, I wanna bring. I guess here's the other piece. If you have, if, if you have 10, 20, 40, 50, 80, a hundred million dollars to invest, there's people all over the investment management space that are gonna bring you all kinds of strategies and hedges and do all kinds of cool, unique custom work for you.
If you have a half a million dollars, they're not interested. and that's the really unfortunate part about our business and what our passion is, is this. We wanna bring that really good strategy of smoothing the investment curve, hedging against the crazy, We wanna bring it down market for advisors and retail folks to use.
Whether you have a hundred or 200 or 500 or a million or $3 million to invest, we wanna bring it to you. In a way that you can understand and in a way that you can, you can really, feel comfortable with what we're doing and how we're doing it. The only trade off that we're going to, ask is that you can't have FOMO.
Fear of missing out. Right.
I was gonna mention that because it always shows up, right? it's like, uh, it's like the evil jealousy monster. Fomo. Right? It shows up every time.
Yes. And people are always gonna tell you about their wins, but they're never gonna tell you about their.
And in 2020 when the markets are up 28% and our strategy is up 13, a little over 13, people are gonna look at it. Um, and they're gonna say, Eh, well, that was okay. Right? Nobody's, nobody's upset, but, Well, it wasn't 28, right? You didn't do what the market did, you so just own the indexes, own the markets, but year to date, when your average balanced model is down, When your bonds are down 20, when your 10 year treasuries are down 19, when your Nasdaq is down, you know, 30 and we're down single digits now you've actually protected wealth because now I don't have to earn 30 to get right.
Or or or 40 or 50 to get back to even, I just have to earn 10 or eight again. Right. And so Going back to the Austrian example, you have to look at this from a long-term perspective, and you have to look at it from a perspective of I want to smooth the curve. I want to continue to get on base and hit singles, and I don't want to be down double digits.
At any given point because I might need to draw from that money, or I might emotionally not be able to handle that. And then I'm gonna make negative decisions I'm gonna make, I'm gonna sell when I should not be selling. Um, and so that's the trade off
which is the biggest, always the biggest issue advisors have is, is that psychology of the investor just, Yeah. So that's jumping out and screwing everything up yeah. Things that gain from disorder. I looked it up while you were talking. That's, uh, I'll back link that too. That's that's amazing.
Yes, I would, I would recommend anybody, uh, read that book. It's a good one. It's a good, again, the first two thirds ..
Um,, really quickly. As far as you, talking about being defensive like, explain just a little bit if you don't mind, about what type of underlying investments are in the models, or are you using options to hedge, you know, what, what are your, what are your strategies?
Yeah, so absolutely. What I think is important to understand, and then we'll talk specific details about the strategy, is that I don't believe diversification happens through Asset classes.
There's people fainting all around me.
Yeah, exactly. Modern portfolio theory and all the economists and the money managers and all the fund companies, they just, they hate when I say that, and I've been on panels where I said that, and you can, you could hear the audible gasp, but you just don't, Year to date is a perfect example of that.
Um, what Asset class. diversified you. Year to date, gold is down. Commodities are, uh, pretty good. That diversified you a little bit. Real estate's down, small caps, large caps, mid-caps, bonds, investment grade, treasure, it's all down. Uh, commodities is the only thing that wasn't. And so the, the idea here is that Asset classes don't give you diversification.
We believe that strategies give you diversification. And so the way we've built Defender is this. We have a core model that accesses the Asset classes in this way. We are not market timers. We are not trying to pick the top and pick the bottom, find the peak, find the valley. That's not what we're doing. We're not trying to time the market.
We're simply scoring momentum of the 12 top Asset classes. And we're doing that over one year on a monthly basis. We invest in the top six with the most momentum, you never with with momentum. Momentum has gotta change before you take action.
So you're never gonna pick the, you're never gonna get out at the peak and you're never gonna get in at the valley. Sure. Right. But you're gonna,
That's almost impossible to do. Luck would have you doing that, maybe.
Exactly. But what we are gonna do is we're gonna give you the greatest chance of success.
Uh, quarter in and quarter out, how we access those classes in the model are the lowest cost, cheapest, most efficient ETF we can grab. So, you know, for example, s and p 500, we use the s p lg, right? It's, it's literally very similar to the S P Y, except I think it's a basis or 0.2 cheaper, right? So we find the most efficient, cheapest ETF we can find to access the different Asset classes.
For commodities, for example, we use one that doesn't spit off K one s because advisors, CPAs, and clients hate K ones, right? So we, so we, we find the ETFs that are the most efficient, cheapest, lowest, uh, possible way to access those Asset classes. And we invest in the top six. Now, the, the amount that we put in those top six is equal across the board.
But is dependent upon the number of overall positive and negative categories. So if you have 12 positive categories out of 12, we're a hundred percent invested. If you have six out of 12 positive categories, then we might be 50% invested. And if you have no positive categories or only one positive category, then we're out.
I mean, that's just, that's. That's just the way, that's the way we do it. So that's, that's it. It's that simple. It's, we call that the core, right? Yeah. And so that's a strategy. Now what we do is we add another strategy to that, which is also risk on risk off. we access that through, another fund that we have in the model, they do risk off risk on, same as we do with the same mandate.
Except they use completely different signals. They don't use momentum. They use relative strength. They use counter trend, overbought, oversold. You know, they use other signals in their model and they don't scale it like we do. It's either a hundred percent in or a hundred percent out. So that's another strategy Then.
We add a third strategy to it, which is our general market exposure with put options on it. So it's general s and p 500 exposure with, with layered put options. Yeah. that roll every month or two. so the account doesn't actually hold the options. They hold them in the fund so that, you know, a client doesn't need an options agreement.
They don't have to be a, a sophisticated investor or anything like that. Yeah. Gotcha. Very simple. and then the final piece is, is really the fourth strategy, which is volatility. We, have a volatility ETF in there that's harvests volatility along the way. that spits off a pretty nice yield while it's harvesting that volatility.
But it also has call options on the VIX deep, deep two, 300% out of the money call options on the VIX, which is our left tail. That's the thing that's gonna really benefit when things get bad. Um, and the only time that position is gonna be really, really, really up is when everything else is really, really, really down
And so, you know, it's the, it's the day that when that kicks in is the day that, you know, that's the March of 2020, right? It's the day where the market loses 15 to 20% in say, a week, or two. Or maybe hits the triggers on a day down, five stops for 20 minutes down, another five stops for the day. Right? That's when that strategy is gonna be beneficial.
And so through the diversification of those strategies, we actually are what we believe to be diversified because we don't just own asset classes, we own things that act differently. Remember things that benefit from disorder. And so that's kind of the, easiest way I can explain what we do and, how we do it.
and so you're collecting a premium. also, for your investors, when you're using those options and they're protecting you, in extremes, it's great.
Right? Right. And again, we're not actually writing options in the account.
we're counting on the strategy to do that in terms of the different, the funds that we're using
You did say that.
We have to use what we have to use to, to reach the most folks, but to the,
to help the most people who don't have absolutely as much, uh, assets to invest.
Right. Exactly. remember, what we're trying to do is we're trying to offer a strategy that is really only available to, the ultra, ultra wealthy down to, a market that really anybody can use.
Yeah.
I see the thread that runs through everything.
I know where your passion comes from and where it's going. I want to have you back on soon because I, um, have a lot of things I'd love to talk to you about.
Julie, it's been a pleasure as always, if there's anything I can do to help, just let me know. All right. I think you did enough for, for one day, , you've done enough.
All right. Thank you. Take care. Thanks. Take care..
Important Disclosure: This podcast recording has been prepared and made available by The Pacific Financial Group, Inc., also known as TPFG, a Registered Investment Adviser (RIA) offering advisory services. Information in this podcast is to be used for informational purposes only. The information contained herein, including any expressions of opinion has been obtained from, or is based on sources believed to be reliable, but its accuracy or completeness is not guaranteed and is subject to change without notice. The information should not be construed or interpreted as an offer or solicitation to purchase or sell a financial instrument or service. Any expressions or opinions reflect the views of the speakers and are not necessarily those of TPFG or its affiliates. TPFG does not provide tax or legal advice. Investors should consult their financial tax or legal professionals before investing. Past performance is not a guarantee of future results. All investments contain risks to include the total loss of invested principal. Diversification does not protect against the risk of loss.
Hey, everyone. Welcome back to Open Windows Investing with The Pacific Financial Group. I'm your host, Julie Mochan and if you listen to any of the other episodes of this podcast,
and I urge you to, if you haven't.
I talk a lot about In-plan advice and, using self-directed brokerage accounts to help your clients before they retire, you know, while they're still working. and all of the benefits that can come from having this conversations with your clients. And our prospects. But, here at TPFG, we do a couple of other things as well. even though we're sort of known for being, um, the SDBA champs of the United States.
We also have some other things that we do because we realize that that obviously you, um, there's not just qualified accounts in the universe. So one of the, , strategists that we work with, that's currently outside of the SDBA
product shelf Is someone who I had a great conversation with. He's the strategist for three of our model portfolios. Called Capital Defender TPFG Capital Defender. Available, not within the SDBA program, but if you have, uh, IRA accounts or are even taxable accounts, you might want to look at these models because they are doing extraordinarily well
in this crazy market that we're in. And Elio Chiarelli is here with me today. He's a strategist on these portfolios. So we have a growth model, moderate and moderate conservative. Anyway I sat down with Elio and he, blew my mind because he, he got his BS from the ag program here at Penn state university. Then went on to get his master's and his PhD, has a story. About, helping. farmers and, equating to how he manages money today that I am almost positive. I could probably guarantee you, you can't really use guarantee in this business very often, but.
I could probably guarantee you, you're not going to hear a story like this anywhere else. From another money manager, this is very, very, very different. So did I say very enough? It's very different. Anyway , Elio was kind enough. Sit down with me. Recently, and here is, uh, our friend Elio Chiarelli who, again, a strategist for our Capital Defender model portfolios. So here we go. Elio welcome to Windows! Julie, it's a pleasure
I know you're different.
What a lot of advisors and investors are used to. But if you could just get into how you got there. , I always like to , look at it this way, eleo. Like, what, what drives you? Like your purpose, right? That's kind of a heavy question.
Sorry, I loaded a lot into that .
No, that's good. I, I, I, um, No, I love that. I think it's a great kickoff into kind of my philosophy, um, ultimately how we got to where we are and how we manage money, because I think that's really important as a foundation. And so, I got started, in this business, from the agricultural side. was heavily involved in agriculture, grew up, on a farm outside of Pittsburgh, Pennsylvania. Moved to Florida, to get my graduate degrees in agriculture, food and resource economics, agricultural entrepreneurship. That's my background. Oh, wow. And so I, I started working with farmers and ranchers and growers.
Specifically on transitioning this family farm to the next generation. Right. There's this, this huge challenge in states like Florida. Uh, California, Texas, uh, and growing throughout the Midwest and other places where, farmers and ranchers and growers, they have, they, they have huge net worths, but couldn't buy a new truck if they wanted to, right?
Because their money is tied up in the land. and so that's what that makes transitioning the farm to the next generation a pretty good challenge. And that's how I really got started in this business about 15 years.
Interesting.
And you know, in that, in that time I came across this, uh, they had reserve accounts, right?
They'd have 500,000 or a million or 5 million or 10 million or whatever the farm size was in these reserve accounts. And they kept asking me, Hey, what, um, what can we do with this money? We, we wanted to grow, right? But, but at any given time we, we might need it, We. We might need half of it, or three quarters of it to buy a piece of land or put a crop in or, or replant a grove or whatever the case may be.
Right.
So like a short timeframe they could need it at any time. Yeah. So that's, yeah.
Well that's what's interesting is it was like this perpetual timeframe. A moment's notice, right? It was, it was,
hey, I need a tractor.
We wanna build generational wealth, uh, but I might need it tomorrow.
Um, okay, well that, so I, you know, I started scanning the world of investments and, and I thought, well, sure, we could come up with something that shouldn't be too much of a challenge and. Well turn turns out, that's a pretty big hurdle. Um, without tying up somebody's money, without, you know, the potential of being down in a market cycle or whatever the case may be, that that started to be a really big challenge.
And as interest rates began to fall, so again, I started 15 years ago as interest rates began to fall, that became harder and harder to do. And. About six years ago, we really started spanning the world of investment options. , I started doing a lot of research at the time, I'm, I'm getting my graduate degrees in, in agriculture, entrepreneurship, also taking economics courses, learning about different methodologies.
And I came across a strategy that really stuck out from the pack and it really stuck out from the pack by, it wasn't. A long only strategy. Um, and what I mean by that is most money managers, in our space, by their prospectus, they have to own, they have to be long, whatever it is they're doing.
So if you're a, if you're large cap growth fund, you have to always own large cap growth companies, right? If you're a, if you're a bond manager in the high yield space, You have to own high yield bonds. Like that's your, that's your mandate. And so I started getting into this, , space where I just thought, well, what if we don't have to be long only? What if we can go to the sideline if, if things aren't looking good, Right? And so that's what got me into, the defender strategy, the way we founded it, and we've modified it over the years. We'll certainly, certainly get to, So that's the, so that's the 30,000 foot view, , of what we've done ,
that was perfect. . ,
I guess one other thing I want to add to that is so in the world of economics, you have a lot of different economic foundations, Right? Our foundation is gonna be that of Austrian economics. . I'm gonna boil this down for, what Austrian economics is, or at least what it is to me.
What it is to me is in the philosophy behind what we do is a, it's a very long term approach. So we're gonna not be concerned with short term results because we know long-term success happens over time. And in Austrian economics, they talk about this concept of, the roundabout. You have this concept of, the conifer trees where, you know, they, they spend so many years just setting a tap root and really being a small little seedling.
But when the forest catches on fire and all the other trees burn up, then they then, You know, shoot for the sky, right? So that's the concept that we build all of our models off of, is that concept right there. Here's what I say, I'm not worried about hitting home runs. I'm not even trying to get you triples or doubles.
I just want to get you on base every single time. And the reason why that becomes important is going back to my farmers ranchers and growers, as long as I can keep 'em on base. Every single time, then they live another day and they're taking so much risk on the production side that they don't need me to take a whole bunch of risk on the money side.
but yet we still wanna get on base. And as long as they're okay with, continually hitting singles year after year after year, they'll be better having known us than not. That's the, underlying philosophy. and so I think that's really important for people to understand is I'm not worried about making you 40%.
I'm worried about losing you 40%. And so what that's called in the economics world is that's called tail risk. So if you think about a bell curve, right? You plot data on a bell curve. people are mostly familiar with that. You plot a bunch of data, most data's gonna fall within what they call a normal distribution.
And so if you take all the returns of the s and p 500, or the NASDAQ or the, or the Bond Ag Index or whatever, you take all the daily returns or monthly returns and you plot 'em over any period of time, that's more than a few years. And you'll find that it falls in this bell curve, right? Um, so within two standard deviations, 95% of all those returns are gonna fall right inside that bell curve.
But then if you think about the ends of the bell curve, so I. On the far right, which is called your right tail. What's that?
I say good times on the far right.
Yeah. So those are the, Okay, so nobody's upset if we make more money than we said we were going to.
Right? That's the right tail. Like I don't care about the right tail. Right. This is the far left that gets, you know, the, it's the left tail vortex. Right? It's, it's. , it's those three times or those four times, or those six times that fall outside that normal standard deviation. It's the, it's the, it's the 87 crash.
It's the 2001 crash. It's the 2008 recession and it's the March of 2020s that, that absolutely destroy wealth. and so most people in our business are gonna tell you.
Hey, we've allocated correctly, we've scored you from a risk tolerance perspective. Just hold tight. Things will come back Well, that works generally speaking. And if you were gonna ask me today, hey, is the stock market gonna be worth more 20 years from now than it is today?
Well, yeah, generally speaking I would agree with that. But what about if you're an investor in 2000, and you needed your money in 2010, how'd that lost decade feel? Well, it was a pretty rough ride, but you still have the same amount of money in the end. and that's not very, And so what becomes a challenge that I learned with my farmers ranchers and growers is that, when they need the money matters and for people accumulating wealth for retirement that matters.
Like I get that Warren Buffet is claimed as to be this awesome investor, but he, but Berkshire Hathaway has a forever timeframe, he can hold onto a company for 35 years. Right. But you might wanna retire next year , or in five years, or in seven years or whatever it is. Right? And once you start, you transition from the accumulation phase over to the distribution phase, that compounding interests that helped you on the way.
Will negatively change your life on the way down. and so what we do is we choose to defend those assets. That's why we call it Capital Defender. We're not necessarily worried about quarter results. We have a long term outlook, but at any given time, We don't want you to be down double digits.
Right? Um, and for our history of running it, that has always, held true. Now, just because something has never happened doesn't mean it can't. We absolutely understood we are investing, right? It's not a guarantee. but everything we deploy has that mandate. How do I earn an eight to 10% rate of return on an annual basis without ever being down double digit?
that's our mandate. And that's kind of the, the foundation and the key of. What we do and how we run the strategy. Hopefully that's helpful.
Well, I was not ready for how you got from. Pennsylvania. Ag degree. To Florida. a master's PhD then managing money for farmers, ranchers and growers.
Austrian economics.
tactical management, as opposed to just strategic and then. How, how do we get from farmers, ranchers and growers to. what I know capital defender as is for another huge subset of, of the American culture and the American workforce. And, uh, Yeah take me there Yeah, no doubt. No doubt.
We started working with, uh, first responders, right? Because the strategy and the story. That worked so well on the agriculture side all of a sudden was the exact strategy that high risk employees needed
It applied?
Yes. The same applies. Yeah,
the same applies. And think of it like this, first responders again, they take so much risk on their job side. They come outta the academy, they get a SOP, manual, standard operating procedure manual. They're rookies. They're, they're followed around.
They need to learn all these rules. How do I do this? How do I do that? How do I make sure we do this correctly and do that correctly? And they're learning all this. And then they get, they get more advanced in their career and they get confident. Uh, but all the time they're trying to manage risk on a daily basis.
And then when it comes to their finances, they either listen to their, the person sitting in the cubicle next to 'em, or they listen to their cousin's, brother, sister, or they just. , guess Yeah. Quite off time to, And they don't have time to do anything. Right. And so first responders are unique because they can retire early, right?
They can retire at 50, not 59. And so the good news is, is they can retire early. Well, the bad news is, is they can retire early, which means they might actually have to draw from their assets for a much longer timeframe than the average person. and so again, it goes back to this, how do. Use my assets to, so I don't have to do what I've done for 20 years or 30 years or whatever it is, but yet not be down in the double digit range, especially when I'm taking a distribution.
And so we've been able to grow capital defender, especially with the TPFG partnership for first responders, leaps and bounds, because we're doing the right thing. For the right people, for the right reasons. And defender is literally defending the money of those that defend America.
And it's an awesome story for advisors to take and use it with those audiences, uh, in that way because it matters. And we know behind the scenes we have the same philosophy. Risk first, how do I live another day? And. Don't just be long only and give me the story of, we'll just hang on. Yeah. We'll take what the markets give us, right?
Yeah. And again, it could work for, I mean, obviously I'm biased towards it, right? I think it could work for anybody. Um, Oh, certainly it, it works for, it works for those individuals really.
I think they have just been through like, uh, the last couple of years have just been so tough on first responders, uh, physically and psychologically in this country. the fact that they could have something like this, like someone who's has that much passion about making things work on the retirement side for them is really.
Spectacular. I, I love that story. and I should say this, these models, are they, tax managed or are they for qualified only?
So we use 'em for both. They're certainly gonna be most efficient inside of a qualified account, however, In a non-qualified account, if you're avoiding large losses in the markets, I would argue to be okay with paying the taxes because you're not negative.
But I get that there's different situations, different circumstances. Clients are sensitive to, you know, taxable accounts. What, what really the challenge where the challenge comes there. And we saw this exactly in 2021. Into 2022. This is where the challenge can occur is 2021 was probably the largest capital gain distribution year from ETFs, mutual funds, uh, managed accounts.
I mean, we saw, we saw huge capital gains distributions because the markets were so strong in 2021. Right? Right. Then when do you get your tax. Well, you don't get it in 2021. You get it in 2022, right? So now you're having to pay taxes on an account that's down because 2022 obviously has been, has been negative.
So whether you paid your taxes in April or you deferred 'em until September, you're paying taxes from a decreased account. So where defender is not as, bad Is I'm paying from, I'm paying taxes on gains from an account that's not down double digits. Now, With that said, qualified is still the most efficient, but I wanted to throw that out there. ,
I appreciate that a lot because I was literally, just explaining to someone the other day about, customers or end clients paying taxes on funds that threw off capital gains, but they're down and then they come after their advisors with pitch forks like exactly what's going on.
Exactly.
Ugh,, taxes, um, Elio, the real quick, who are the first responders out there in the workforce? You know, Do you define a first responder could you
So your high risk employees are classified as police, fire, ems, air traffic controllers, and now, uh, in many states nurses, um, really? Yeah. So, and that becomes an important distinction, right? Because. Especially on the pension side, , when you're a high risk employee, you get a different pension factor, so, a pension factor may be of like three versus one and a half. So if you work 30 years, you get, you know, times three, uh, you get 90% right of your, Yep. Of your, say your highest three or your highest five years. If you only have a factor of 1.5, then. You don't get 90%, you only get 51% or whatever it is. The other thing that I think is really important, and this is another kind of philosophy piece, when I was doing my research, at the University of Florida, I studied, uh, I studied entrepreneurs, , and I tried to come up with a, , a theory that. Helped me understand what made people successful. And what I found was, a really interesting, Kind of philosophy that fit exactly into the way I was managing money for ag and natural resources. It fits exactly into the way we manage money for first responders and defender, and it fits into why we are so passionate about what we do.
It's this concept called hardiness.
So wait, say that again.
It's a concept called hardiness.
Oh, hardiness, okay. Got it.
Yep. Hard. So here's the, nuts and bolts. If, if change, ambiguity and unknown, if those things bring you energy, you are hardy. If they bring you fear, you are less hardy.
in the investment world, there's a, a really popular, guy in the hedge world that that hedges out investments. wrote a book called Antifragile, his name is Naim Taleb. Anybody that likes to read, uh, it's a great book. the first two-thirds of the book is awesome. The last third, he gets into these little, uh, personal vendetta against different things, which are kind of weird, but first two-thirds of the book.
Awesome. But it ties into this concept of anti fragility and hardiness, and this is what it is. Change, ambiguity and unknown. You know, energy and fear like I talked about, but if we coin it into the finance business, anti-fragility is this: how do I benefit from chaos? Most money management models are gonna give you what the market gives you, but what if, What if we can design a portfolio that actually benefits when chaos happens in the markets, what if we can be positive in March of 2020 instead of negative? And the reality is, is we can, but we don't know when those events are gonna happen. And if anybody tells you they do, they're just lying or they're just really naive. And crazy things happen more often than we're willing to admit.
And in the investment world, We call those the tail hedges, going back to that bell curve. Right? Right. And I wanna have these tail hedges in place because when crazy things happen, I wanna benefit from the crazy that's anti fragility, that's looking at things being hardy, and that's how we build Capital Defender.
is it perfect. No, it's not perfect, but it gives us a fighting chance that in chaos we have a chance to either not lose nearly as much money as the market, or maybe in a really good scenario we can break even. Or in a really crazy event, maybe we'll actually make money. And so if I were to ask the average investor or.
Do you think the next 10 years are gonna be calm, or do you think the next 10 years are gonna be crazy if we're being honest? My slant is, I think it's gonna be pretty crazy. And so
I think most people would say the same thing. ?
Yeah. So how do we, how do we benefit from the crazy, It's called anti fragility.
or in, , psychology sometimes they call it grit. but that's our philosophy. That's the underlying premise of what we do. Um, and it came from, that research I did on successful entrepreneurs, which stemmed into working with farmers and ranchers and growers and now first responders and running , this model.
So you kind of mentioned in the beginning, you know, what's, what's your passion, what's your story? And, and Julie, that's it right there is I wanna, I wanna bring. I guess here's the other piece. If you have, if, if you have 10, 20, 40, 50, 80, a hundred million dollars to invest, there's people all over the investment management space that are gonna bring you all kinds of strategies and hedges and do all kinds of cool, unique custom work for you.
If you have a half a million dollars, they're not interested. and that's the really unfortunate part about our business and what our passion is, is this. We wanna bring that really good strategy of smoothing the investment curve, hedging against the crazy, We wanna bring it down market for advisors and retail folks to use.
Whether you have a hundred or 200 or 500 or a million or $3 million to invest, we wanna bring it to you. In a way that you can understand and in a way that you can, you can really, feel comfortable with what we're doing and how we're doing it. The only trade off that we're going to, ask is that you can't have FOMO.
Fear of missing out. Right.
I was gonna mention that because it always shows up, right? it's like, uh, it's like the evil jealousy monster. Fomo. Right? It shows up every time.
Yes. And people are always gonna tell you about their wins, but they're never gonna tell you about their.
And in 2020 when the markets are up 28% and our strategy is up 13, a little over 13, people are gonna look at it. Um, and they're gonna say, Eh, well, that was okay. Right? Nobody's, nobody's upset, but, Well, it wasn't 28, right? You didn't do what the market did, you so just own the indexes, own the markets, but year to date, when your average balanced model is down, When your bonds are down 20, when your 10 year treasuries are down 19, when your Nasdaq is down, you know, 30 and we're down single digits now you've actually protected wealth because now I don't have to earn 30 to get right.
Or or or 40 or 50 to get back to even, I just have to earn 10 or eight again. Right. And so Going back to the Austrian example, you have to look at this from a long-term perspective, and you have to look at it from a perspective of I want to smooth the curve. I want to continue to get on base and hit singles, and I don't want to be down double digits.
At any given point because I might need to draw from that money, or I might emotionally not be able to handle that. And then I'm gonna make negative decisions I'm gonna make, I'm gonna sell when I should not be selling. Um, and so that's the trade off
which is the biggest, always the biggest issue advisors have is, is that psychology of the investor just, Yeah. So that's jumping out and screwing everything up yeah. Things that gain from disorder. I looked it up while you were talking. That's, uh, I'll back link that too. That's that's amazing.
Yes, I would, I would recommend anybody, uh, read that book. It's a good one. It's a good, again, the first two thirds ..
Um,, really quickly. As far as you, talking about being defensive like, explain just a little bit if you don't mind, about what type of underlying investments are in the models, or are you using options to hedge, you know, what, what are your, what are your strategies?
Yeah, so absolutely. What I think is important to understand, and then we'll talk specific details about the strategy, is that I don't believe diversification happens through Asset classes.
There's people fainting all around me.
Yeah, exactly. Modern portfolio theory and all the economists and the money managers and all the fund companies, they just, they hate when I say that, and I've been on panels where I said that, and you can, you could hear the audible gasp, but you just don't, Year to date is a perfect example of that.
Um, what Asset class. diversified you. Year to date, gold is down. Commodities are, uh, pretty good. That diversified you a little bit. Real estate's down, small caps, large caps, mid-caps, bonds, investment grade, treasure, it's all down. Uh, commodities is the only thing that wasn't. And so the, the idea here is that Asset classes don't give you diversification.
We believe that strategies give you diversification. And so the way we've built Defender is this. We have a core model that accesses the Asset classes in this way. We are not market timers. We are not trying to pick the top and pick the bottom, find the peak, find the valley. That's not what we're doing. We're not trying to time the market.
We're simply scoring momentum of the 12 top Asset classes. And we're doing that over one year on a monthly basis. We invest in the top six with the most momentum, you never with with momentum. Momentum has gotta change before you take action.
So you're never gonna pick the, you're never gonna get out at the peak and you're never gonna get in at the valley. Sure. Right. But you're gonna,
That's almost impossible to do. Luck would have you doing that, maybe.
Exactly. But what we are gonna do is we're gonna give you the greatest chance of success.
Uh, quarter in and quarter out, how we access those classes in the model are the lowest cost, cheapest, most efficient ETF we can grab. So, you know, for example, s and p 500, we use the s p lg, right? It's, it's literally very similar to the S P Y, except I think it's a basis or 0.2 cheaper, right? So we find the most efficient, cheapest ETF we can find to access the different Asset classes.
For commodities, for example, we use one that doesn't spit off K one s because advisors, CPAs, and clients hate K ones, right? So we, so we, we find the ETFs that are the most efficient, cheapest, lowest, uh, possible way to access those Asset classes. And we invest in the top six. Now, the, the amount that we put in those top six is equal across the board.
But is dependent upon the number of overall positive and negative categories. So if you have 12 positive categories out of 12, we're a hundred percent invested. If you have six out of 12 positive categories, then we might be 50% invested. And if you have no positive categories or only one positive category, then we're out.
I mean, that's just, that's. That's just the way, that's the way we do it. So that's, that's it. It's that simple. It's, we call that the core, right? Yeah. And so that's a strategy. Now what we do is we add another strategy to that, which is also risk on risk off. we access that through, another fund that we have in the model, they do risk off risk on, same as we do with the same mandate.
Except they use completely different signals. They don't use momentum. They use relative strength. They use counter trend, overbought, oversold. You know, they use other signals in their model and they don't scale it like we do. It's either a hundred percent in or a hundred percent out. So that's another strategy Then.
We add a third strategy to it, which is our general market exposure with put options on it. So it's general s and p 500 exposure with, with layered put options. Yeah. that roll every month or two. so the account doesn't actually hold the options. They hold them in the fund so that, you know, a client doesn't need an options agreement.
They don't have to be a, a sophisticated investor or anything like that. Yeah. Gotcha. Very simple. and then the final piece is, is really the fourth strategy, which is volatility. We, have a volatility ETF in there that's harvests volatility along the way. that spits off a pretty nice yield while it's harvesting that volatility.
But it also has call options on the VIX deep, deep two, 300% out of the money call options on the VIX, which is our left tail. That's the thing that's gonna really benefit when things get bad. Um, and the only time that position is gonna be really, really, really up is when everything else is really, really, really down
And so, you know, it's the, it's the day that when that kicks in is the day that, you know, that's the March of 2020, right? It's the day where the market loses 15 to 20% in say, a week, or two. Or maybe hits the triggers on a day down, five stops for 20 minutes down, another five stops for the day. Right? That's when that strategy is gonna be beneficial.
And so through the diversification of those strategies, we actually are what we believe to be diversified because we don't just own asset classes, we own things that act differently. Remember things that benefit from disorder. And so that's kind of the, easiest way I can explain what we do and, how we do it.
and so you're collecting a premium. also, for your investors, when you're using those options and they're protecting you, in extremes, it's great.
Right? Right. And again, we're not actually writing options in the account.
we're counting on the strategy to do that in terms of the different, the funds that we're using
You did say that.
We have to use what we have to use to, to reach the most folks, but to the,
to help the most people who don't have absolutely as much, uh, assets to invest.
Right. Exactly. remember, what we're trying to do is we're trying to offer a strategy that is really only available to, the ultra, ultra wealthy down to, a market that really anybody can use.
Yeah.
I see the thread that runs through everything.
I know where your passion comes from and where it's going. I want to have you back on soon because I, um, have a lot of things I'd love to talk to you about.
Julie, it's been a pleasure as always, if there's anything I can do to help, just let me know. All right. I think you did enough for, for one day, , you've done enough.
All right. Thank you. Take care. Thanks. Take care..
Important Disclosure: This podcast recording has been prepared and made available by The Pacific Financial Group, Inc., also known as TPFG, a Registered Investment Adviser (RIA) offering advisory services. Information in this podcast is to be used for informational purposes only. The information contained herein, including any expressions of opinion has been obtained from, or is based on sources believed to be reliable, but its accuracy or completeness is not guaranteed and is subject to change without notice. The information should not be construed or interpreted as an offer or solicitation to purchase or sell a financial instrument or service. Any expressions or opinions reflect the views of the speakers and are not necessarily those of TPFG or its affiliates. TPFG does not provide tax or legal advice. Investors should consult their financial tax or legal professionals before investing. Past performance is not a guarantee of future results. All investments contain risks to include the total loss of invested principal. Diversification does not protect against the risk of loss.
