CapitalTime
Articles on investing and capital management, with a quantitative focus.
New All Time High in PRP
2023-12-15
My PRP asset allocation reached a new all time high this month. This finally ends a rather long (nearly 2 year) period where the portfolio was "under-water", or below its previous high.
Risk parity approaches aim to reduce volatility and drawdowns (% declines from peaks). Historical back-tests also show an improvement in the duration of the under-water period. The hope is that risk parity will provide a smoother ride than 100% stocks or 60/40.
I thought it would be interesting to review the two recent market corrections to see how my PRP approach compares to a low-fee 60/40 balanced fund. The XBAL fund used in this comparison shares many of the same holdings as my risk parity allocation.
2020 crash/correction
The very sharp (fast) pandemic crash:
| Portfolio | Drawdown | Months under-water |
|---|---|---|
| XBAL (iShares 60/40 fund) | -21% | 5.8 |
| Permanent Risk Parity (PRP) | -14% | 1.8 |
PRP did very well during the 2020 crash. The drawdown was significantly milder than XBAL, and the recovery was blazingly fast. In just 1.8 months, the PRP made new all-time highs!
2022-2023 correction
The more gradual, but persistent, decline in stocks and bonds:
| Portfolio | Drawdown | Months under-water |
|---|---|---|
| XBAL (iShares 60/40 fund) | -16% | 23.8 and counting |
| Permanent Risk Parity (PRP) | -13% | 23.4 |
The drawdowns were more similar in this correction, but still milder for PRP. Additionally, PRP was the first portfolio to attain a new all time high. XBAL (like most other balanced funds) is still under-water.
— Jem Berkes