CapitalTime

Articles on investing and capital management, with a quantitative focus.


#prp - Permanent Risk Parity (how I invest)

PRP Response to Market Crash

2020-03-09


Today saw historic moves in the stock market. The S&P 500 declined 7.6% and Canada's TSX fell an incredible 10.3%. This absolutely was a stock market crash.

In this post, I will discuss how my PRP model portfolio responded to the crash. The model portfolio is an ideal ETF-based portfolio that I track for benchmarking purposes. My own investments are very similar, though not identical, to the model portfolio.

PRP was down 1.6% today, which is actually pretty good: this is a milder decline than most balanced funds (which fell 4% to 5%).

Why was today's movement in PRP so mild? Let's look at the individual pieces that make up the PRP:

Gold turned out to be especially useful to Canadian investors today because of the sharp drop in CAD. While gold was virtually unchanged on a USD basis, it was up 2% when priced in CAD.

These constituents are combined according to their weights in PRP. However, as with any portfolio, the weights shift around over time depending on how the assets perform. PRP benefited from already being slightly underweight stocks heading into today's crash. This was due to the declines in stocks leading up to today, and the fact that I only rebalance PRP once a year.

Note that if PRP was rebalanced more often, such as monthly, today's drop would have been worse.

The net result was -1.6% which, in my opinion, is a pretty good outcome for one of the worst days in Canadian market history. One of the goals of PRP and risk parity in general is to reduce market volatility by using superior diversification.

Jem Berkes