[wintermutestwin]

>There is a premium on mental health and market volatility.

I find that, as soon as I pick up the crystal ball and try to play the prediction game, my mental health suffers greatly. What helps my stress levels the most is to have a portfolio that is well diversified (e.g. a risk parity style portfolio) and stay the course because the portfolio has elements that go up when equities go down.

At the end of the day, the markets can be blatantly irrational (see TSLA) for wildly variable time spans - this means that market timing is inherently gambling. Gambling with your retirement portfolio is incredibly stressful.

[skippyboxedhero]

Risk parity got obliterated a few years ago. Risk limits were breached multiple times over on these strategies.

Thinking that you are taking a safe option is a lie you tell yourself when you want to take the lazy option: just copying what you read in some book. It isn't safe, risk-party isn't diversification, you are still gambling.

Btw, this was predictable too...the idea that bonds/equities wouldn't be correlated was clearly historically contingent based on the very recent past. It was very clear that massive financial stimulus significantly increased the risk of equities/bonds correlation going to one, it was a topic considered throughout the 2010s when people were trying to sell these funds and trying to devise ways to generate negative correlation. The problem was that lots of people were moving a lot of product based on this correlation continuing.

[wintermutestwin]

It sounds to me like you are specifically calling out the one crash where equities and bonds both went down at the same time? And that you are saying because this happened, we are now in totally uncharted territory where nothing from the past can be assumed to happen in the future?

>risk-party isn't diversification

??? Diversification is the underlying principle behind a risk parity portfolio. https://www.portfoliovisualizer.com/asset-correlations?s=y&s...

You do realize that a risk parity portfolio is made up of other allocations than stocks/bonds?

[skippyboxedhero]

No, I am saying that the correlation between equities and bonds is not constant. You need a correlation forecast to weight the portfolio correctly. The problem was the herding behaviour that happened before.

I worked in the industry at the time, we dealt with one of the biggest RP providers in my country that eventually blew up because their vol/corr forecasting was bunk and they made huge hiring mistakes because, like you, the execs thought it wasn't a directional strategy...they lost 95% of their AUM and everyone got fired, 100% of the team, gone. The timeline was very clear: rates fall, people ask how does this work with zero rates, providers say corr is holding up, it starts going wrong but then EU brings in negative rates...big bail out for the boys..., people then ask how it works with -2% rates, providers say corr is holding up, no bail out, they begin loading up on duration, numbers stack up on paper, equities skyrocketing, more duration, if rates go up then big trouble...but the Fed is in control...then rates go up, and it is over. Risk limits breached 3-4x over. I remember seeing funds that had 5-7% annual vol targets dropping 25-30% in six months.

No, it isn't. The principle is that you lever up to create components that are equal in vol...that is the "parity" in risk parity, you lever/delever to create equal-risk assets (it is actually more simple than this: because equities have poor risk-adjusted returns due to leverage limits then risk-parity was effectively increasing bond allocations and reducing equity allocation, that was it). Diversification is an outcome if you have forecast vol and correlation correctly, if you have not then it is not some magic way to increase your returns.

Yes, but that is totally irrelevant to this discussion. It is just some guff that they use to sell funds to idiots.

Again, this is a directional strategy. The firms that make money have both vol and correlation forecasting models that work. It is not magic, it is just a way to portfolio weight...which requires good inputs.