Alternate title "Is It Me, Am I The Idiot?"
A short post today about risk parity which I don't think works in a fund wrapper. Risk parity seeks to equal out the risk taken by allocating to stocks and bonds by leveraging up the bond exposure to equal the risk of the equity allocation.
It's intellectually appealing but again, I've never seen it work in a fund. Someone please correct me. AQR had a risk parity mutual fund for years but it was liquidated last November. I checked in on that one regularly and it never seemed to be working.
There are very few funds that I can find these days. Wealth Front Risk Parity (WFRPX) is relatively long standing as is the Putnam PanAgora Risk Parity (PPROX). ETFs RPAR and UPAR have short track records and Fidelity launched FAPWX this summer.
Here's how some of them have done for the last few years versus Vanguard Balanced Index (VBAIX) which is a proxy for a 60/40 portfolio and the iShares Aggregate Bond ETF (AGG).
It's not clear to me why RPAR looks good above. Now year to date and you see RPAR did relatively poorly.
I wanted to run a back test in Portfoliovisualizer but wasn't sure what to compare to. The Wealthfront literature compares WFRPX to 60% All Country World Index (ACWI)/40% AGG. So I did that comparison as well as 60% in SPY instead of ACWI. Based on recent history, all world would be more favorable for Wealthfront even if domestic-only is inferior, long term diversification.
Here are the portfolios then.
And the results.
The CAGR for WFRPX is much worse and it has a higher standard deviation. It fell more during the Pandemic Crash of 2020 and has underperformed YTD.
Proponents of risk parity would not suggest risk parity as a one fund portfolio solution but I just can't see where the strategy brings anything to the table in a fund wrapper. I saw one comment in Return Stacking DIY Twitter talking about how UPAR had a great back test. All funds have a great back test.
It could be me missing something, I will continue to try to learn because of the intellectual appeal but I continue to be very underwhelmed.
4 comments:
Hi, Roger. I'm a DIY investor interested in new ways of approaching asset allocation for my portfolio. I follow most of the quants in this space. Return stacking and similar concepts have probably landed me on your blog.
I'm really drawn to your posts. I guess because they seem authentic and are to the point. It reminds me of how I might write if I were doing it for myself exclusively and really didn't care about what others might think.
I'm struck by your small following and the seemingly small level of engagement on your blog.
I also notice that there are no comments on your blog and it seems you have a small following on twitter. Content creation is not my interest or expertise, so I can't help you with that. Are comments blocked, or are you just not getting any comments? If you are not getting any comments, that is -- interesting.
I do have some feedback on your content and would also be very interested in hearing more about your investment ides. If you are interested in engaging, let me know.
Hi Max,
Thanks for your kind words. Nothing is blocked or whatever.
I started blogging in 2004 with a different URL and my blog was very popular and had a lot of engagement. I got a lot of press attention which led to a long gig also at thestreet.com, a huge following at Seeking Alpha and semi-regular appearances on CNBC.
In 2013/2014 I had a side gig with AdvisorShares, moved my blog content to their platform and while the financial opportunity was fantastic, it somehow zapped my following. The writing is fun so I will always do it but I'd welcome input from you, thank you. Feel free to DM on Twitter @randomroger. Thanks again.
I have been following you since around 2004. I am glad you got back on blogger to post more investment insights. I've been a do it yourselfor for about 30 years and can say it has never been harder to manage money than now or for that matter over the last few years. And it probably isn't going to get any easier any time soon. I am surprised that my account on blogger is still active or I probably would have commented on some of your stuff sooner.
@RS
Thanks for commenting and having read my stuff so far back!
The world feels like it's become more complex on just about every level, makes the task of portfolio management more challenging but I feel like we're all learning a ton of stuff. The roller coaster makes it tough sometimes but it is all so fascinating.
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