Are 60:40 And Risk Parity Funds Doomed? (And The Two Weeks Gold Bulls Like To Forget)

Are 60:40 And Risk Parity Funds Doomed? (And The Two Weeks Gold Bulls Like To Forget)

Are 60:40 and risk parity funds "doomed"? It's a question worth considering in a world where bond yields don't have much further to fall. In addition to the reduced scope for yields to go lower, the market's sensitivity to monetary policy communications prima facie raises the odds of "tantrum"-like events in fixed income. That could mean that the bond allocation of multi-asset portfolios has become a source of considerable risk. In March, for example, turmoil in the Treasury market catalyzed m
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9 thoughts on “Are 60:40 And Risk Parity Funds Doomed? (And The Two Weeks Gold Bulls Like To Forget)

  1. I do this for a living. One asset class not mentioned is cash or near cash. Secondly there is spread fixed income product lacking much credit risk- agency mbs, although it has a negative correlation to interest rate delta. Finally gold miners can be substituted for gold in an equity allocation to diversify risk rather than buying gold outright. A commodity fund could be bought with a screen to eliminate backwardized commodities so the loss on calendar spreads can be eliminated. Such funds are around and have reasonable fees. Finally one could reduce equity and US Treasrury allocation and invest in spread product such as corporate credit, convertible bonds, municipal bonds, abs etc. as long as your time horizon is longer than a month. It won’t shield you from a March event but over a slightly longer period of time it should add diversification and smoothe longer term volatility. The 60/40 is not dead but allocations at the micro level will have to be adjusted to maximize risk adjusted return.

    1. In March, municipal bonds were the only holdings I panic-sold. I just didn’t understand that those bonds (in my case the fund MUB) could fall apart so drastically. It was a mistake of course. The government swept in to bail out munis along with everything else.
      Will they behave differently next time? As you say, “as long as your time horizon is longer than a month.”

      I like the diversity of options you mention anyway. But, convertible bonds don’t seem worth the risk/trouble for a retail investor. Maybe I’m wrong. But, asset-backed securities, on the other hand, seem like decent diversifiers. I’ll look into those!

  2. Interesting perspective. My own preference as an ordinary “punter” is to focus on keeping my risk low and my current income steady through diversification. Right now I am pretty much bang on the efficient frontier with 20% equities, 10% cash with a bit of gold, and 70% individual fixed income assets and funds. My current cash distributions run 4.2% and beta is right on 0.5x versus the S&P. At 75, growth is the gravy that funds philanthropy and gifts to my kids. Others make more than me, someone always does, but I have what I need and most of what I might want so the fact that multi-asset diversification still works is just fine with me. By the way, Doctor, I thank you for your regular updates on asset cross-correlations and multi asset-diversification. That’s like comfort food to me.

  3. A year ago, I wouldn’t have imagined gold would be talked about so much as an “asset class” on Heisenberg Report. Still, the bias is there. “gold can lose its luster in a hurry”. There’s been a long term bias towards bonds in a panic, but I would suggest in this money printing environment that bonds could lose their luster in a hurry. I’m not suggesting a total replacement, but you’ve got to consider an alternative.

  4. If only some of the institutional money is diversified in to gold, then gold and silver still have a long way to go. It is also way too simple to say that gold is just a lump of metal and bonds with negative rates represent something more valuable. The proof is in eating the pudding and the value of the lump of metal is increasing for multiple reasons.

  5. For some time now, when asked by (non-finance) relatives I have recommended a base portfolio of some variation of 50% TLT, 40% SPY and 10% GLD. It has given a good return, whilst being less risky than more well known alternatives, eg 60:40. I am not really a gold fan in the abstract – I can see no great explanation as to why it is a good asset, but it has proven to add to the portfolio in practice. This combination has smaller volatility and drawdown’s than the alternatives and despite criticism’s has held up well. Each asset brings something different to the table.

  6. The real inflation adjusted return since the 1980 high for gold is something in the range of -30%. For the SPX it is 2000% +. So either this is a fantastic chance to own gold or it is always a rubbish asset, aka a pet rock

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