July 29, 2026 – I’ve written several posts in the “How to Lie with Personal Finance” series, all dealing with common misconceptions and, well, sometimes outright lies in the personal finance world: General Personal Finance Lies, Homeownership Lies, and Diversfiction Lies. Today I collected a set of lies for another interesting topic. Recently, I’ve heard and read a lot about an ostensibly innovative asset allocation strategy, Risk Parity, and its advantages, especially for retirees. Among some of the purported benefits are lower volatility, less stock market exposure, and higher sustainable withdrawal rates. The rationale for the superiority of this asset allocation is that it covers all the bases and hedges against different economic regimes, i.e., high growth vs. low growth and high inflation vs. low inflation. Some folks claim you can raise your safe withdrawal rate from 4% to 5% if you use Risk Parity in your retirement portfolio. So, why haven’t I proclaimed victory over Sequence of Return Risk yet? Mainly because there is a lot of hype, false advertising, and misunderstandings about Risk Parity. Here are several reasons to be skeptical…
1: Risk Parity is no Super-Secret Hedge Fund Weapon
As a former finance professional, I laughed out loud when I heard that Risk Parity is being sold as some super-secret weapon that only elite hedge fund tycoons like Bridgewater’s Ray Dalio figured out. At least that’s what Tony Robbins insinuates in his book “MONEY Master the Game: 7 Simple Steps to Financial Freedom.” If you don’t want to buy the book, here’s a short summary. Tony Robbins sells Risk Parity as having extracted the secret sauce from one of the famous hedge fund tycoons, and he’s now letting us in on this financial superweapon. That’s a bunch of hooey! Every finance student will learn about Risk Parity in Finance 101. It’s like someone asked the Ferrari chairman what the secret to building great cars is, and he responds, “A combustion engine and four wheels.” While Ferraris certainly have four wheels and a combustion engine (except for that ugly new electric Ferrari Luce that looks like a Volvo), the chairman didn’t really give away any proprietary information about their engines, transmissions, aerodynamics, design, etc. Only the most useless generic information that will certainly not give you a heads-up. Of course, Tony Robbins still runs with this and beats the drum (literally and figuratively) about Risk Parity.
In the FIRE/Personal Finance community, we got our friend Frank Vasquez, who touts Risk Parity as a brilliant and innovative way to think about diversification on his Risk Parity Podcast and on several guest appearances on other podcasts. He’s made that point on Bigger Pockets, Forget About Money, ChooseFI, Afford Anything, and likely more podcasts. But that’s all mostly bogus. Quite the opposite: naive Risk Parity relies solely on the variance-covariance matrix and will not cut it in the highly competitive field of asset management and high finance. Truly competent asset managers will consider risk and expected return estimates to trade off risk versus return; more on that below.
Most importantly, while Risk Parity may be one ingredient in Bridgewater’s hedge fund, you don’t grow your hedge fund empire to Bridgewater’s size with only Risk Parity principles. Hedge funds are all bout alpha, not some static strategic asset allocation that anyone can replicate. You don’t need 1,300 employees (as of the most recent 2025 estimate, according to Wikipedia) to run something as trivial as Risk Parity, which any intelligent college student with basic Python or MATLAB skills can calculate on their home computer. Put differently, a Risk Parity strategy is only as good as the underlying returns. If you feed in a bunch of zero expected return streams into Risk Parity, you still have zero expected returns. Risk reduction is useless if the returns are not there. Of course, Bridgewater has all the know-how to squeeze additional alpha out of the financial market, whether through market timing, stock picking, sector rotation, etc., to add enough extra returns to Risk Parity to make it competitive. If you implement the “dumb” Risk Parity model floating around on the interwebs, you get subpar results.
Also, the timing is peculiar. Risk parity was all the rage twenty years ago in the mid-2000s because we were living in the “Goldilocks” economy where all major asset classes were doing well in the Post-Dot-Com-Crash era, and a Risk Parity portfolio garnered quite attractive returns. Then, the global financial crisis struck; equities took a nosedive, and the commodity bubble burst around the same time. In fact, the bellwether GSCI commodity index is still about 50% below its peak in nominal terms (and the GSG ETF more than that). Adjusted for inflation, the picture is even bleaker. Recently, the decade-long bond bull market came to an abrupt end with the inflation shock of 2022 and the swift Federal Reserve rate hikes. So, Risk Parity fell out of favor. A simple Stock/bond portfolio would have given you all the diversification you needed. I worked in institutional asset management until 2018, and Risk Parity was a non-entity at that time. But hey, this is the perfect time to drop a new old asset management catch phrase on the naive and gullible retail investor, after the smart money has long ago said goodbye. The Dunning-Kruger financial influencers are ready to spread this nonsense!
Side Note: What exactly is Risk Parity?
A standard exercise in basic finance and portfolio management is to calculate the risk contributions of different portions of a portfolio. It’s an easy application of elementary statistics and matrix algebra. The contribution has a pretty neat and intuitive interpretation, and we can derive it in two different ways: the absolute contribution to the portfolio variance and the marginal contribution to the portfolio risk, which both give you the same result. I put together a brief technical note in PDF format and posted it here.
Let’s go through a simple numerical example with just two asset classes, stocks and bonds. Assume stocks and bonds have annualized standard deviations of 16% and 6%, respectively, and a correlation of 0.10. If we plot the marginal risk contribution of equities as a function of the equity weight, we notice something peculiar. Of course, a 100% equity portfolio should have 100% risk coming from equities. But adding bonds, and even substantial percentages of bonds, to the portfolio hardly makes any dent in the equity contribution. The curve is almost flat between 60% and 100% equity weight. Even a 60/40 portfolio still has more than 90% of its risk coming from stocks. What’s going on here? This is an artifact of how we aggregate variances: even though equities have a standard deviation of “only” about 16/6=2.67 times the bond standard deviation, the equity variance is 7.1x the bond variance (=2.67 squared!), so equities will always dominate the risk attribution in a stock/bond portfolio, unless you vastly overweight bonds. Thus, in this example, you’d need to go down to roughly a 27% equities and 73% bond portfolio to equalize the risk contribution and achieve Risk Parity.
But alas, this chart above is really only a cheap party trick. It could be abused by charlatans to tell me that something needs to be done about the massive equity risk in my portfolio, when it really doesn’t. Rational and honest investors will instead look at the risk budgeting math the following way. In the chart below, let’s plot the actual portfolio risk (standard deviation) as a function of the equity weight and then also add the equity contribution (i.e., multiply the blue line by the percentage contribution in the previous chart). A 60/40 portfolio has only about 10% annualized risk, roughly 37% less than the 100% equity portfolio. So, diversification with 40% bonds lowered your risk by almost exactly that number. True, as a percentage of that reduced risk, equities still contribute 92% of the risk, but the risk is certainly much lower than before. Bonds helped with diversification much more than what a gullible retail investor would have deduced from the previous chart.
The danger of Risk Parity is that you apply too much diversification, by moving out of high-return equities and into low-return bonds and commodities. Diversification then becomes Di-WORSE-fication. Also, leverage doesn’t help, more on that later in item #7!
For the record, though, I generally like the idea of hedging against different economic risks, but the performance in practice, for the average retail investor without the advanced toolkit of Ray Dalio’s hedge fund, is disappointing; more on that later.
2: Risk Parity is rife with “Hindsight Bias”
My fraud sensors go off whenever someone mentions a new portfolio allocation innovation. Then, I always ask myself, “Did you optimize this portfolio with knowledge unavailable at the beginning of the simulation period or with the benefit of hindsight?” That is certainly the case with some (or all?) of the various Risk Parity approaches floating around. The Hindsight Bias in Risk Parity portfolios is visible in at least two dimensions: 1) what asset classes to include, and 2) what weights we pick for those asset classes. Then I ask myself how this new strategy performed “out-of-sample,” i.e., did the outperformance continue when we exposed this new portfolio to subsequent return patterns? Most of the time, the results are disappointing.
For example, the All-Weather, aka All-Seasons, portfolio suffers from this hindsight bias. Tony Robbins unapologetically admits that the All-Weather strategy was optimized by examining the 1984 to 2013 time span and tailoring the returns to what worked best then. The Golden Butterfly portfolio has also existed since the early 2010s. It probably originated from the PortfolioCharts site, which uses data starting in 1970. The Golden Butterfly weights also seem to work well over the 1970s to early 2010s time span, but then sputter noticeably once people went from the benefit of hindsight to putting actual money at stake in a real portfolio.
But, alas, once people popularized those new portfolio weights, the returns didn’t look so great anymore when you go from the benefit of hindsight to putting actual money on the line. Let me demonstrate that with the All Weather portfolio: I’ll calculate the returns between 1984 and 2013, then compare how you’d have done since then (Dec 31, 2013 to June 30, 2026). Also, for completeness, I’ll throw in the return stats for pre-1984 and the entire horizon. And quite impressively, the All Weather portfolio blew everything else out of the water during 1984-2013. It had a Sharpe Ratio of 0.71 and close to 7% returns with only 8% volatility. That’s roughly the same return as the S&P fetched over the entire period, but with half the equity risk. I’m very impressed! But alas, since this amazing portfolio made the rounds on YahooFinance, the performance has been lackluster, significantly trailing the 75/25 and 60/40 portfolios since 2013. The average return was only 3.29% above inflation, and the Sharpe Ratio was very weak.
I find this recent All Weather performance quite astonishing because we did observe all of the economic regimes: high growth and low growth, i.e., one of the longest economic expansions on record up to the pandemic. Then a deep recession in 2020 and a slowdown in 2022. Likewise with inflation: We’ve had low and stable inflation and high inflation. Specifically, the two equity bear markets covered both bases, i.e., a demand shock with disinflation during the pandemic in 2020 and an inflation spike and rapid FOMC policy rate hike in 2022-2023. Even in this ideal testing ground for the Risk Parity approach, the venerable old 60/40 portfolio mopped the floor with the All-Weather portfolio. The 75/25 did even better. It’s peak-time hindsight bias: the overfitted portfolio that did so well with the benefit of hindsight sputters when you run it “out of sample.”
Also noteworthy: Over the entire 155-year time span from 1871 to 2026, the All Weather strategy is just mediocre, both in total returns (CPI+4.16%, almost a full two percentage points behind the 75/25) and in risk-adjusted returns: 0.29 Sharpe vs. 0.33 Sharpe for the 60/40 and 75/25 simple stock/bond portfolios. Also, All-Weather didn’t perform that well in the 1871-1983 era. How would an investor in 1984 have known that All-Weather would do so well over the subsequent 30 years? Without a time machine, nobody in the 1980s would have found this appealing.
3: Most Risk Parity strategies posted on the web aren’t really Risk Parity at all
The asset allocations that are often sold as Risk Parity aren’t Risk Parity in the mathematical sense at all. Risk Parity means the marginal contribution to the overall portfolio standard deviation is equal across all asset classes, as described in the section above. None of the allocations I’ve seen satisfy that criterion. For example, in the table below, I calculate the 120-month (4/2016-3/2026) risk attribution for several Risk Parity strategies. None of the purported RP strategies spread their risk equally across the asset classes. The All Weather portfolio comes close to 33% equity risk attribution, but bonds (57%) are well above the target, while commodities (7.4%) are below one third, no doubt a result of hindsight bias (see item 2 above) because riding the duration bet since the early 1980s was so much more lucrative than volatile commodities in the 1984-2013 window. Likewise, the Golden Butterfly and Golden Ratio portfolios have around two-thirds of their risk come from equities, but only around 16-19% from bonds, 11-17% from commodities, and -1% for the DBMF (trend-following) ETF. That’s not a typo; a risk contribution can indeed be negative.
Another giveaway that all these strategies are Risk Parity in name only is that their portfolio weights never seem to change. And I am not talking about occasionally replacing one ETF with another. The asset class weights should move substantially because the variance-covariance (VCV) matrix used to calculate those weights changes over time, both due to variances and covariances/correlations. For example, the chart below shows the risk parity portfolio weights calculated from a 120-month rolling VCV, using the three assets S&P 500, Long-Term Treasury Bonds, and Commodities (mimicked through SPY, TLT, GSG ETF returns and simulations before actual returns start). The weights are all over the place, unlike the completely static allocations recommended by risk parity fans. In fact, there is some financial research (Moreira, A. and Muir, T. (2017), Volatility-Managed Portfolios. The Journal of Finance, 72: 1611-1644. https://doi.org/10.1111/jofi.12513) that shows that dynamically shifting asset weights in response to volatility changes can generate more attractive return profiles. But that potential all goes out the window if you force the portfolio weights to stay constant over time, as done in the fake-Risk-Parity portfolio marketed on the web.
Of course, I’m not saying that “risk non-parity” in Frank’s Risk Parity portfolios is a huge problem. Quite the opposite, it’s not a bug; it’s likely a feature because some of the asset return results would have looked even worse if you had insisted on strict Risk Parity weights. Specifically, because the Golden Butterfly and Golden Ratio portfolios still maintain a decent equity allocation (40-42% weight), they will perform reasonably well. The fact that the All Weather portfolio has a risk contribution of only 35% from equities creates a huge drag in my retirement withdrawal simulations. More on that later.
Thus, a better, more appropriate label for these strategies should then be “Risk Budget(ed)” or “Risk Aware” or “Risk-Managed” strategies, rather than Risk Parity. That’s because Risk Parity is a mathematically well-defined term and none of the strategies satisfy this very unambiguous condition. The fact that Risk Parity fans don’t know or don’t want to know this is a red flag. I would not trust my money or my readers’ money to advice from this “finger painting” corner of the personal finance community.
4: Risk Parity fans ignore and/or misunderstand their own principles
Isn’t it peculiar that the Risk Parity proponents lecture the rest of us about proper risk budgeting, but then don’t even realize that they put their own portfolios together without much thought about risk budgeting. Take, for example, Frank Vasquez’s Golden Ratio portfolio. Frank wants to allocate 42% to equities, which I find a bit lean, but so be it. He likes to allocate this to both large-cap growth and small-cap value, and he then picks 21% each. That seems ad hoc. The VIOV fund now accounts for 37.2% of the portfolio risk, while the VUG only accounts for 33.1%. Wouldn’t it have been more appropriate to use risk parity in the equity bucket, i.e., allocate a bit more to VUG than VIOV to account for the different volatility levels?
The same story, only more extreme, is present in the Golden Butterfly portfolio. Here too, 20% each goes to large-cap blend and Small-Cap Value. But the risk contributions are 28.6% for large-cap and 37.4% for the much more volatile small-cap fund. Is this intentional? Why do you want more risk budget on the VIOV? And if you thought things couldn’t get worse, the All Weather portfolio takes the cake with two such inconsistencies: First, both gold and commodities get 7.5% of the portfolio weight, but gold adds much more to the portfolio risk (5.8%) than commodities (1.6%), and that doesn’t even count the fact that part of the commodity index includes gold, so get even more gols risk through the backdoor. We find a similar mismatch in the bond portion: Long-term bonds account for 48.5% of the risk, but intermediate bonds only 8.5%.
So, not only do the across-asset-class risk budgets deviate wildly from Risk Parity, but even the within-asset-class risk budgeting is completely ad hoc. It’s like they pull these portfolio weights out of their nose, risk budgeting and Risk Parity principles be damned. Either the inventors of these Risk Parity strategies are so thick that they didn’t notice it, or they knew but were too lazy or incompetent to properly calculate the weights according to Risk Parity principles – you be the judge.
Side note: all these results clearly depend on the return window you use for the calculation of the VCV. Quantitatively, the results will differ if you use a different horizon, different VCV construction methods (e.g., exponentially-weighted moving average, GARCH, TGARCH, etc.), but qualitatively, they all produce similar inconsistencies.
5: Risk Parity looks unattractive for retirees
Frank Vasquez proposes a 5%+ safe withdrawal rate due to the purported improved diversification of Risk Parity. I disagree wtith that claim and recently wrote about this topic in my Safe Withdrawal Rate Series, Part 64. Risk Parity alone produces mostly disappointing results in safe withdrawal rate simulations for early retirees. You can improve the results significantly if you add Small-Cap Value stocks. But then any improvement in retirement safety is not due to Risk Parity, but only because of the stock-picking alpha inherent in the Fama-French SMB and HML factors. Actually, a simple 75/25 portfolio with a mild SCV bias would have easily outperformed the Risk Parity + SCV portfolio. So even if you’re truly convinced that the Small-Cap Value style comes back into fashion, you’d be better off skipping the Risk Parity method and rather implementing SCV into your simple 75/25 portfolio. From the retirement safety perspective, the Risk Parity really faces a catch-22: If SCV works, you should do 75/25 + SCV rather than Risk Parity. If SCV doesn’t work, the simulation results look worse than under the traditional 75/25 portfolio.
But just for the record: I showed in my post last year (Part 63) that mixing in a momentum strategy can improve the SWR simulation results. Only 10% is a bit too lean, but 50% momentum and the remaining half in the S&P 500 had very impressive results. But again, no Risk Parity is necessary to achieve that.
6: Recent Risk Parity returns look disappointing
I have a very simple rule: if you want to show me your portfolio allocation expertise, don’t bother showing me simulated returns of how your portfolio would have done in the past. I can top that by pretending I had invested in Nvidia ten years ago, which could have easily afforded me a 20+% safe withdrawal rate. If you deviate in any way from a very generic allocation like 60/40 or 75/25, only actual live returns matter. So, I looked at the returns of the eight strategies that Frank Vasquez posts on his site Risk Parity Radio. For the longest time, he published his live strategy returns in table format. The last time I saw detailed returns was in early 2025, and I was able to screenshot the monthly returns between July 2020 and February 2025.
But Frank has since discontinued that transparency, likely due to disappointing results. So, I took Frank’s returns up to 2/2025 and added the simulated returns via the testfol.io links he provided. One other major assumption: Since the Levered Golden Ratio started a year later, I backfill the first twelve months with the testfolio simulations, so that all strategies have the same starting point. I ignore the OPTRA strategy because that one only started in 2024. So I am left with seven Risk Parity strategies. I also ignore the partial month of 7/2020 and start the simulations on 7/31/2020. I also construct my 75/25 and 60/40 portfolios. For people who are interested, I posted the return data on Google Sheets; please see here. Please note that this sheet is read-only for you.
Here are the return stats:
- The Risk Parity portfolios look disappointing in the time period that Frank actually traded them with his own money. In all relevant stats, they often significantly lag the venerable 75/25 portfolio.
- The Golden Butterfly and Golden Ratio portfolios did OK, though even they still slightly lag the 75/25 in almost all stats: Lower return, lower Sharpe, longer drawdown. Admittedly, the Golden Butterfly portfolio beats the 60/40 and 75/25 in one single stat: it had a 23.92% drawdown, instead of 24.68% and 25.87% in the 60/40 and 75/25, respectively.
- Contrary to the narrative of better risk budgeting and more diversification, the Golden Ratio and RP Ultimate portfolios have equity betas similar to a 60/40 portfolio. So, you’re not at all shielded from equity volatility.
- The other five Risk Parity portfolios are all a complete clown show:
- All Seasons, Accelerated Permanent Portfolio, and Aggressive 50-50 still have not recovered from the 2022 bear market. Their drawdown is still ongoing, and this is just the buy-and-hold portfolio; taking into account withdrawals, the results are worse.
- The Sharpe Ratio of these five Risk Parity portfolios ranges from -0.10 to 0.28, which is pathetic considering that we captured two bull markets and only one shallow bear market, not even a recession!
- The volatility and drawdowns of the Accelerated PP and Aggressive 50-50 are terrible.
- The leveraged Risk Parity portfolios (Accelerated PP, Aggressive 50-50, and Leveraged Golden Ratio) all have volatilities and S&P 500 betas higher than the 75/25 portfolio. So much for building “resilient retirement portfolios.”
- If we model 5% annualized withdrawals, the 60/40 and 75/25 portfolios do much better than the Risk Parity portfolios. Six years into retirement, only the Golden Butterfly and Golden Ratio portfolios hold up reasonably well. The worst disaster is the Aggressive 50-50 portfolio, which now has lost 52% of its initial value (CPI-adjusted). If you keep up 5% withdrawals, you will run out of money well before the 30-year mark. I doubt you will even make it to the 15-year mark.
In the chart below, I plot the drawdowns over time: CPI-adjusted returns, but only buy-and-hold, no withdrawals yet! The 60/40, 75/25, Golden Ratio, Golden Butterfly, and All Seasons all had a similar drawdown in 2022, almost down to the %. But the Risk Parity portfolios took longer to recover. As mentioned above, the All Seasons portfolio is still underwater from the 2022 bear market. The more adventurous Risk Parity portfolios fared even worse. For example, the Aggressive 50-50 had a 60+% drawdown and is still more than 35% below the peak. I just hope no one used this garbage portfolio in their own retirement.
Drawdowns look even worse if you model the Risk Parity portfolios with regular monthly withdrawals. Here are the portfolio values over time if you had retired in late July 2020. Only the 75/25 portfolio recovered from the drawdown. 60/40, Golden Butterfly and Golden Ratio also still look OK, but most other portfolios are seriously damaged and will likely run out of money unless the current bull market continues indefinitely.
Risk Parity fans might object that the last six years are not really a representative sample. I agree with that, but not in a way they will like. In these 72 months we’ve experienced most of the 4/2020-12/2021 bull market, an entire bear market 1/2022-10/2022, and the subsequent amazing bull market since the October 2022 trough. So, we’ve seen more than one full market cycle. If anything is not representative, it’s that Risk Parity performs so poorly over a slightly biased sample with essentially two bull markets and only one shallow, garden-variety bear market without a recession. Wait until you run this in retirement and you actually experience five bull markets and five bear markets. You will likely do a lot worse!
Also, the bear market, which was inflationary and certainly took a toll on the simple stock/bond portfolios, should have catapulted the Risk Parity portfolios ahead of the 60/40 and 75/25. But Risk Parity sputtered, despite purportedly hedging against all the different macroeconomic risks. If your exotic Risk Parity portfolio gets clobbered during such calm times, wait until we go through the next bear market! Can you imagine how the 3x leveraged equity ETFs do if we ever were to go through a repeat of the dot-com crash?
So, long story short, I understand why Frank Vasquez needed to take down his live sample portfolio return stats. They are such an unmitigated disaster that now he only links to the testfol.io simulated results that start with the backfilled data (mostly in January 2000). But his live returns are atrocious. Especially considering that he wants to withdraw not 5% but 6%-8% of some of his now-decimated portfolios, he will face the difficult decision when he wants to retire (pardon the pun) some of the underperforming portfolios on his blog. Unsavory financial actors sometimes play this game, i.e., start multiple sample portfolios and run them for a few years. Then quietly retire the ones that performed poorly and market their financial prowess with the one or two that did well. But Frank is really zero for seven in his sample.
Most importantly, stay away from all of the exotic Risk Parity portfolios peddled by Frank, especially the ones involving leveraged ETFs.
7: Risk Parity portfolios are inefficient
Risk Parity’s inefficiency doesn’t come only from some of the terrible ETF choices, like expensive leveraged ETFs with a lot of churning and transaction costs (UPRO, TMF, UDOW, UTSL, etc.) or overpriced and underperforming trend-following ETFs (e.g. KMLM, DBMF, etc.). There is another way in which Risk Parity violates fundamental financial principles. Because we consider only the variance-covariance (VCV) matrix in portfolio construction and ignore expected returns, we are bound to overweight low-return assets and underweight high-return assets. The effect of this assumption is that with almost mathematical precision, Risk Parity portfolios must be inefficient.
In fact, one can prove mathematically that a Risk Parity portfolio lies on the efficient frontier if and only if all assets have the same Sharpe Ratio and all correlations are equal. This is not the case in the real world. Equity ETFs have much higher Sharpe Ratios than commodity funds. Correlations are very different across asset classes: likely negative between commodities and bonds and slightly positive between equities and commodities. Because the necessary and sufficient condition for efficiency is violated in all practical applications, we can be assured that Risk Parity is mathematically, certifiably inefficient.
Let’s look at the following numerical example to quantify this inefficiency. Assume we take as our asset universe the equity funds SPY (S&P 500 = large-cap blend), VIOV (Small-Cap Value), and VUG (large-cap growth), SHY (T-bills), IEF (intermediate Treasury), TLT (Long-term Treasury), GLD (gold), and GSG (commodities). I use the 10-year backward-looking risk matrix and assume the following (nominal) expected returns going forward:
- Equities: SPY=9%, VUG=8.5%, VIOV=10%. Essentially, assume 2% inflation, 7% equity returns for the S&P 500, a little higher for small-cap value, and a little lower for large-cap growth.
- Fixed Income: T-bills = 4%, intermediate bonds = 4.5% and long-term bonds = 5%.
- Commodities: both GSG and gold at 4.5%, so about 2.5% real return.
Let’s plot the efficient frontier and also the expected returns and risk of different portfolios. For the Risk Parity portfolio, I assume 1/3 of the risk budget coming from equities (thus, 1/9 shares from each of the equity funds), 1/3 of the risk coming from fixed income (1/6 each from IEF and TLT), and 1/3 of the risk coming from commodities (1/6 each from GSG and GLD). Notice that this portfolio skipped the T-bill fund. I also include one “Risk Parity w/SHY” portfolio, which will spread the fixed income portion equally among the SHY, IEF, and TLT funds, but even though SHY only has 1/9 of the risk budget, it gets more than 50% of the weight under Risk Parity, due to the low volatility of the T-bill return series. Not a very sensible portfolio; please take that with a grain of salt. In any case, here’s the efficient frontier chart; see below:
- The Risk Parity portfolios (both actual risk parity and the two so-called risk parity portfolios) lie significantly inside the efficient frontier, i.e., they generate inefficient allocations. In other words, we could have found allocations with lower risk and/or higher expected returns. This is an artifact of ignoring expected returns and only focusing on risk.
- Also noteworthy: the risk parity portfolios all have relatively low expected returns. Not surprising because the equity portion is so low. What’s worse, though, is that even the risk-adjusted return (Sharpe Ratio) is also low. So, if Risk Parity proponents now try to use leverage to increase the expected return (e.g., four of Frank’s portfolios: Accelerated Permanent, Aggressive 50-50, Levered Golden Ratio, and OPTRA), you only lever up the inefficiency, especially when using the expensive levered ETFs like UPRO, TMF, etc.
- I also plot the efficient frontier when only using the S&P 50o and intermediate bonds. True, that’s not exactly efficient, but it doesn’t matter because at the spot of the 75/25 portfolio, we’re still really near the overall efficient frontier.
Ignoring expected returns and potentially reserving too much space in your portfolio for assets with low average returns makes Risk Parity a suboptimal investment. So, let’s repeat everybody: Risk Parity is an inefficient portfolio allocation method.
8: We don’t have enough uncorrelated assets!
The ultimate dream of financial professionals is to find uncorrelated return sources and then use them to build ever more impressive and efficient portfolio return stats. If you could find 100 uncorrelated return streams, each with a Sharpe Ratio of 0.5, then an optimally weighted portfolio would fetch a Sharpe Ratio of 0.5 times the square root of uncorrelated assets, i.e., 5.0. What’s not to like about that? The sad state of the world is that most retail investors are really stuck with two, maybe three major asset classes that are worthwhile feeding into a Risk Parity process. Number 1 and 2 are equities and bonds, respectively, with decent Sharpe Ratios, about 0.3-0.4 in equities and 0.2-0.3 in bonds. For very technically astute and experienced investors, I recommend trading the volatility premium; see my options trading landing page.
But beyond that, as a retail investor, you quickly run out of options (pun intended). A long time ago, you could have used some stock-picking flavors (small-cap, value, momentum, quality, etc.) as additional factors. However, they became so popularized that any reliable outperformance is now arbitraged away. Commodities in general, and gold in particular, come to mind, but they both have high volatility and low average returns. Both commodities in general and gold in particular have occasional decade-long drawdowns. For example, gold had a real, CPI-adjusted drawdown between 1980 and 2024 (536 months, almost 45 years), with a peak-to-bottom fall of 83%. Commodities have certainly rallied recently, but make no mistake: Commodities peaked in 2008 and have been in an 18-year drawdown, with a peak-to-trough drop of 89%. Despite the recent rally, commodities are still almost 70% below the 2008 peak today. So, commodities in general and gold in particular don’t exude much confidence. I’m fine with my 75/25 portfolio and supplementing that with my options trading alpha!
Of course, the Risk Parity crowd will show you portfolios with numerous additional ETFs, say, preferred shares, high-yield bonds, international stocks, emerging market stocks, REITs, China A shares, etc., but these aren’t exactly uncorrelated assets. They are simply combinations of your existing asset classes. For example, preferred shares are a mix of stock and fixed income returns, and not at all a new uncorrelated asset class (pro tip: check their performance during the Global Financial Crisis!). Emerging markets are a mix of equities and commodity exposure. So, recycling existing financial risk factors and throwing in ever more low-quality, high-expense exotic ETFs with low expected returns will not help the Risk Parity cause; it will only make the low-expected-return problem even worse.
Conclusions
The general idea of Risk Parity isn’t completely bad; I’ve occasionally found it useful in intra-asset-class allocation decisions, e.g., allocating a certain percentage to various equity styles, all with very similar Sharpe Ratios and correlations, where the Risk Parity method is very close to efficient. But most investors should stay away from it.
Risk parity can potentially do the most damage to folks still accumulating because your equity allocation will likely be too meek. Most young investors will do best with a 100% equity portfolio: they should actually embrace volatility and use the occasional deep drawdowns to dollar-cost average, i.e., use Sequence of Returns Risk to their advantage. That’s what I did in my personal accumulation history; in the roughly 18 years of my high-earning career at the Federal Reserve and on Wall Street between 2000 and 2018, the S&P 500 performed below average (about 3.2% if adjusted for inflation and including dividends), but by keeping up with regular investments during the steep drawdowns in 2002/3 and 2008/9, I vastly improved my investment results, buying the dips.
For retirees, not all risk parity portfolios will be that bad. Especially over shorter horizons, say 30 years, some of the Risk Parity portfolios fared all right. The Golden Butterfly and Golden Section portfolios would have performed about as well as a 75/25 portfolio in the standard Bengen or Trinity study, i.e., a 30-year horizon and zero final asset value if you simulate the returns with the best-case scenario with historical Fama-French factor returns. That said, even in this scenario, with very unrealistic expectations that the small-cap-value outperformance could repeat itself again, a 5% withdrawal rate would seem too aggressive. And once you scale back the unrealistic assumptions about the small-cap value premium, you’re back to roughly the same safe withdrawal rate as with a simple 75/25 portfolio.
Intriguingly, the “OG” Risk Parity portfolio, i.e., All Weather/All Seasons, as popularized by Ray Dalio and Tony Robbins, and likely the closest you can get to the mathematical Risk Parity weights, would have performed quite poorly in every arena: over both the 30-year and 50-year retirement horizon in long-term simulations, as well as in live returns on Frank’s webpage. It’s the stereotypical throwing-out-the-baby-with-the-bathwater issue, i.e., you reduce short-term volatility, but you replace it with the long-term risk of running out of money due to poor average real returns. The All Seasons portfolio hasn’t even recovered from the 2022 bear market!
In my opinion, Risk Parity is a useless concept unleashed on unsuspecting, naive retail investors hungry for financial and technical buzzwords. Stay away from it and simplify your portfolio. 100% stocks is all you need while accumulating, and 75/25 is likely all you need in retirement. That portfolio has been the most robust and reliable portfolio in retirement for the last 150 years. Most complications beyond that simple portfolio will be a crapshoot in the best case and a drag on your retirement safety in the worst case. For the record, I do recommend an options trading overlay to the technically skilled investors, as described in the series on that topic, but it’s not necessary for the typical investor.
Do I believe I will convince Frank or some of the other Risk Parity true believers? Probably not, because they painted themselves into a corner. Frank called his podcast “Risk Parity Radio,” so I don’t think he’s going to walk back anytime soon. He falls into the “foolish consistency” trap he likes to point out so often. But maybe I can save a few unsuspecting investors from the foolish finance trap that is Risk Parity.
Thanks for stopping by today! I’m looking forward to your comments and suggestions below!
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