A Platinum member sent the following summary of an article and asked me to comment. Note that my response is framed in the context of constructing portfolios through the use of a strategic asset allocation plan. The Dashboard of the Curie Portfolio, posted this morning, is an example. The second part is tied to future performance forecasts using software, Quantext Portfolio Planner (QPP). Here is the article or a summary brief.
While there is no question about the difficulties of investing in equities during the first 12 years of this century, there are reasons for the difficulties. Tax cuts, two wars, unpaid prescription drug plan, housing bust, misuse of derivative, etc. all combined to work against long-term investors. Did Risk Parity work over the last decade. Yes, but that does not mean it will work again.
The above article sounds as if the author wants to combine both strategic asset allocation and risk parity as a way to put together portfolios. To a large degree, that is what we are doing here at ITA Wealth Management. In outline form, here is what we do.
1) Develop a Strategic Asset Allocation plan for each portfolio. The allocations from portfolio to portfolio do not vary all that much. All are skewed toward the value side of the investing spectrum. This is in keeping with academic research.
2) We look at long-term market trends through the use of Delta Factor analysis and Bullish Percent Indicators. Search these terms on this blog for more information and examples. Using the laws of probability, we attempt to stay on the right side of market trends. While this is not a perfect system, it does provide a slight edge toward being successful while reducing portfolio risk.
3) While the portfolios are not built around the concept of Risk Parity, we do make a strong effort to reduce portfolio, particularly in five portfolios, by employing the ITA Risk Reduction (ITARR) model. This is a slight modification of the Faber-Richardson risk reduction model as explained in their Ivy Portfolio book.
I found the third paragraph to be both confusing and contradictory. It read as if the writer did not know which side of the fence made the most sense. Do I think Risk-Parity will work over the next 12 years as it did over the last 12? In a word – No. With interest rates as low as they are, the laws of probability are not with bonds. For this reason, I’m sticking with building portfolios through a thoughtful asset allocation plan and I prefer to control portfolio risk by using the ITA Risk Reduction model.