Adding Risk Parity To A Portfolio

By | March 2, 2016

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We’re always trying to build a better mousetrap around here by adding non-correlated asset classes to our portfolio. While there is no “free lunch” in economics, true diversification is about as close as you’re ever going to get. And by “true diversification,” I mean adding assets to the portfolio that really do zig when the others zag. A portfolio of 100 stocks doesn’t offer much diversification benefit when the entire market rolls over. At any rate, Dr. Phillip Guerra and I have cooked up a suite of alternative portfolios based on the principles of risk parity. We’ve been running our Active Risk Parity Portfolio With 7% Annual Volatility Target live since September, and we’ve backtested it to 1996. The results aren’t too shabby, if I do say so myself. Average annual returns of 11.5% with a maximum drawdown of just 9.8% and a correlation to the stock market of just 0.24. Rather than target returns – which are impossible to know with any accuracy in advance – we target volatility. While volatility will also fluctuate over time, we find it to be more accurate to target, and also that it gives us a better handle on risk. The key to making money over time is first to avoid losing it. I don’t consider this a replacement for a traditional long stock portfolio. In fact, most of the money I manage is long-only and dividend-focused. But I certainly do consider this a nice addition to a traditional stock portfolio. With bonds not likely to offer much in the way of return anytime soon, you need viable alternatives for the “40” in the old 60/40 portfolio of stocks and bonds. A risk parity model can certainly fill that role. This article first appeared on Sizemore Insights as Adding Risk Parity to a Portfolio . Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Original Post Scalper1 News

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