Search found 580 matches

by EfficientInvestor
Thu Mar 09, 2023 2:30 pm
Forum: Investing - Theory, News & General
Topic: Kudos to Robert T on AQR's QSPIX Analysis
Replies: 55
Views: 6360

Re: Kudos to Robert T on AQR's QSPIX Analysis

The acid test of this and similar funds is whether or not over longer times periods that they can have better performance and better diversification characteristics than plain old boring Investment Grade Bonds. Well, yes but is QSPIX being used optimally in a 60/30/10 portfolio? The concept behind NXST (90% stock 60% bond) is that alternatives are often a drag on portfolio returns. So a 90/60 fund held at 66% weight would still leave you at 60% bonds 40% stocks with 33% room left for alternatives. And if we are evaluating simply on inflation protection, isn't Vanguard Commodity Strategy Fund Overview much better? But yeah, I agree longer time periods are kinda essential as inflation doesn't rear it's head so often so returns will be depend...
by EfficientInvestor
Mon Jan 30, 2023 1:49 pm
Forum: Investing - Theory, News & General
Topic: Lifecycle Investing - Leveraging when young
Replies: 1730
Views: 335543

Re: Lifecycle Investing - Leveraging when young

I looked at TIPS options and they seemed to have wide spread and high cost. If you find one I'd love to know. I did a little further digging today. Michael Ashton, the author of the paper I linked in my previous post, has a podcast dedicated to discussing inflation. It turns out that he was a market maker (actually the only market maker) of a short-lived CPI futures contract that was available for a brief time in 2004. He approached CME and ICE 10 years later with a new/improved contract spec that he thought made more sense (which is discussed in the paper previously linked) but they turned him down. The episode linked below discusses the history of inflation futures, including his own experience, that I think you would find interesting. h...
by EfficientInvestor
Mon Jan 30, 2023 9:55 am
Forum: Investing - Theory, News & General
Topic: Lifecycle Investing - Leveraging when young
Replies: 1730
Views: 335543

Re: Lifecycle Investing - Leveraging when young

How do you go about leveraging TIPS? I agree the portfolio is better, but it's more complicated. 2x, or near 2x leverage, is still going to outperform no leverage in all or nearly all scenarios. There are actually two holdings in my proposed portfolio that are difficult to leverage…TIPS and commodity producers. To solve the issue, you could just hold them both outright and lever everything else using futures or options. Futures are ideal operationally because they require less $ for the positions than options. You just have to monitor more closely due to potential margin calls since so much of your capital would be tied up in the TIPS and commodity producers position. All that said, there are options available on TIP. So you could free up ...
by EfficientInvestor
Mon Jan 30, 2023 7:37 am
Forum: Investing - Theory, News & General
Topic: Lifecycle Investing - Leveraging when young
Replies: 1730
Views: 335543

Re: Lifecycle Investing - Leveraging when young

How do you go about leveraging TIPS? I agree the portfolio is better, but it's more complicated. 2x, or near 2x leverage, is still going to outperform no leverage in all or nearly all scenarios. There are actually two holdings in my proposed portfolio that are difficult to leverage…TIPS and commodity producers. To solve the issue, you could just hold them both outright and lever everything else using futures or options. Futures are ideal operationally because they require less $ for the positions than options. You just have to monitor more closely due to potential margin calls since so much of your capital would be tied up in the TIPS and commodity producers position. All that said, there are options available on TIP. So you could free up ...
by EfficientInvestor
Mon Jan 30, 2023 7:24 am
Forum: Investing - Theory, News & General
Topic: Lifecycle Investing - Leveraging when young
Replies: 1730
Views: 335543

Re: Lifecycle Investing - Leveraging when young

If a risk parity portfolio is more efficient than a market cap weighted stock portfolio, then yes, people should be holding a combination of risk parity +/- bonds rather than the market portfolio +/- bonds. That would be true at all stages of life, whether or not they are leveraged. It's not specific to whether or not to leverage when young and how to glide down with age. It's more about what is the efficient portfolio to hold through all stages of life. To be clear, I don't think the risk parity portfolio is more efficient than the market portfolio. Just saying that the question of leveraging when young does not hinge on what's the efficient portfolio. When you say “market portfolio” I assume you are referring to all investable assets, no...
by EfficientInvestor
Sun Jan 29, 2023 10:23 pm
Forum: Investing - Theory, News & General
Topic: Lifecycle Investing - Leveraging when young
Replies: 1730
Views: 335543

Re: Lifecycle Investing - Leveraging when young

Regarding the question of whether leverage is appropriate for a young investor... I'm of the opinion that a 200% stock portfolio is not appropriate for ANY investor. My opposition isn't due to the 30%+ volatility (even though that is outrageous for anyone to reasonably stomach from a psychological perspective). It is just a flat out horribly inefficient use of risk allotment. For instance... Let's assume the Sharpe ratio of a 100% total world stock portfolio is 0.45 and the standard deviation is 16%. This implies an excess average return above cash of 7.2%. However, at a standard deviation of 16%, the volatility drag (approximated by SD^2/2) is about 1.3% per year. So this results in an excess annualized return of 5.9%. Now let's assume you...
by EfficientInvestor
Thu Jan 26, 2023 9:38 pm
Forum: Investing - Theory, News & General
Topic: Lifecycle Investing - Leveraging when young
Replies: 1730
Views: 335543

Re: Lifecycle Investing - Leveraging when young

=== Now, the EfficientInvestor's approach to make the theta close to zero seems neat. But the difference of theta does not predict the time value change very well in the calendar spread case. Whether theta works better here or not, I'm not quite sure. https://www.bogleheads.org/forum/viewtopic.php?p=7032729#p7032729 Lots to unpack with this approach. The main idea that I am operating on is that the differences in theta decay between long term and short term options allow me to have protection on all holdings while only capping the upside of 25-35% of holdings. I view this as a tail hedging strategy and not an income strategy. The problem with other tail hedging strategies is that they are effectively just going long on puts and are just pa...
by EfficientInvestor
Sat Jan 21, 2023 11:38 am
Forum: Personal Investments
Topic: Windfall Investment Planning for Soft Retirement?
Replies: 27
Views: 2953

Re: Windfall Investment Planning for Soft Retirement?

If you plan on continuing to work for the company after the sale, can you do so as a 1099 contract employee and qualify for opening a solo 401k or SEP IRA? This way you could put up to $66k per year (in 2023) into the tax advantaged accounts. My current company has a 401K that I contribute to, but I am not sure about the acquiring company. If they have a 401K program, is there still a benefit of signing up as a 1099? However, if you already have a 401k for the company that allows you to do a mega backdoor roth conversion, then you could continue to use that alternative. I looked into doing a backdoor Roth conversion in 2022, and our CPA told us that, because we have a Rollover IRA, we couldn't participate due to dilution of the non-deducti...
by EfficientInvestor
Fri Jan 20, 2023 9:29 am
Forum: Personal Investments
Topic: Personal Investment Advice for 40-something dad
Replies: 15
Views: 2904

Re: Personal Investment Advice for 40-something dad

HUM has had a good run, but there is no guarantee that trend will continue. Consider the full history of the stock against the S&P 500 (link below). It has historically been much more volatile than the S&P 500 and had a maximum drawdown of 84% in the past. It has happened before...it could happen again. I would look to diversify as soon as possible. Whether you pay the tax now or later, you are paying long term capital gains rate either way. So there isn't a benefit in waiting if it's the same tax either way. https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2023&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualO...
by EfficientInvestor
Fri Jan 20, 2023 7:53 am
Forum: Personal Investments
Topic: Windfall Investment Planning for Soft Retirement?
Replies: 27
Views: 2953

Re: Windfall Investment Planning for Soft Retirement?

Another thing....if you are in the 35% tax bracket, that means you have a good income and can likely afford to max out your 401k, IRAs, HSAs, etc. Is there a reason you are not doing so?
by EfficientInvestor
Fri Jan 20, 2023 7:48 am
Forum: Personal Investments
Topic: Windfall Investment Planning for Soft Retirement?
Replies: 27
Views: 2953

Re: Windfall Investment Planning for Soft Retirement?

A couple other tax items come to mind: 1. Instead of superfunding the 529, you could spread it out so you can maximize the state tax deduction every year. The MN 529 plan website says you can either get a tax credit up to $500/yr or get an income deduction of up to $3k per year for married filing jointly. That's not much savings, but it's something. Here is a link to the plan's tax info: https://www.mnsaves.org/plan/details.shtml#details-10 2. In addition to figuring out how to execute the sale most tax efficiently, have you thought through how to get as much of the windfall into tax-advantaged accounts? If you plan on continuing to work for the company after the sale, can you do so as a 1099 contract employee and qualify for opening a solo...
by EfficientInvestor
Tue Jan 17, 2023 8:10 am
Forum: Personal Investments
Topic: Long term investment w/ leverage help
Replies: 20
Views: 2857

Re: Long term investment w/ leverage help

Was wondering to hear experts opinions and thoughts? Instead of a market-timing approach, have you considered utilizing diversification beyond stocks? For instance, consider a portfolio of 40% SSO, 40% PEDIX (extended duration treasuries), and 20% gold. Since Sep 2006, it would have had similar annualized returns to 100% SSO while maintaining slightly less volatility than 100% S&P 500. For the record, I am not recommending the portfolio. I am just trying to show how inefficient it would be to hold 100% SSO. It has been possible to achieve similar returns for much less risk through diversification. I'm also trying to show how inefficient it is to hold 100% unlevered stock. It has been possible to achieve better returns for slightly less...
by EfficientInvestor
Wed Dec 14, 2022 11:19 am
Forum: Personal Investments
Topic: Sold my long term tres.-- too risky!
Replies: 69
Views: 8491

Re: Sold my long term tres.-- too risky!

Perhaps a more appropriate time frame that avoids any cherry-picking of yield curve performance is June 2003 - October 2022. One piece of context that remains is how the period mostly ended up with actual inflation below expectations. How future inflation ends up relative to expectations remains to be seen. While I'm somewhat inclined to agree with the market and presume that monitary policy may be able to achieve their economic goals, at times I'm simply wrong regarding expectations. Essentially the idea that a HFEA-style strategy, of stocks and long nominals, amounts to "risk parity" relies on the the period in question to some extent. As demonstrated, there's basically no efficiency bonus for such an approach in an inflationar...
by EfficientInvestor
Wed Dec 14, 2022 10:49 am
Forum: Personal Investments
Topic: Sold my long term tres.-- too risky!
Replies: 69
Views: 8491

Re: Sold my long term tres.-- too risky!

The amount of performance chasing inspiration offered through a forum named after John Bogle impresses. While anyone is welcome to consider a January 2001 backtest relevant to personal considerations, it probably makes sense to communicate how the entire yield curve at that time was higher than current rates. Basically current relavency might include negative future rates, which so far the US has communicated an intent to avoid. It looks like the original HFEA post was 2019. William Bernstein basically has suggested that a higher CAGR may be reason enough to consider how a strategy could potentially underperform in the future. Since the situation discussed in this thread reportedly concerns less than a month, the further encouragement for ...
by EfficientInvestor
Wed Dec 14, 2022 9:06 am
Forum: Personal Investments
Topic: Sold my long term tres.-- too risky!
Replies: 69
Views: 8491

Re: Sold my long term tres.-- too risky!

The riskiness/volatility of long term treasuries (LTT) is a feature, not a bug. You just have to understand it, accept it, and craft an investment policy accordingly. When comparing LTTs against total bond market and TIPS over the last 20+ years, LTTs have been the most volatile (by a wide margin), have had the worst efficiency of return (lowest Sharpe Ratio), and have experienced a 40% drawdown. When considering it in isolation and comparing against other bond alternatives, I think anyone would agree it appears too risky and does not look appealing. Backtest: https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=1&timePeriod=4&startYear=1972&firstMonth=1&endYear=2022&lastMonth=12&calendarA...
by EfficientInvestor
Mon Dec 05, 2022 9:12 am
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

nisiprius wrote: Mon Dec 05, 2022 7:59 am Is "risk parity" anything more than active management with a motto?
There is nothing active about the approach I described in the OP. Perhaps I should change the title of the thread to "Passive Risk Parity Construction Framework".

At its core, risk parity is about allocating your portfolio based on risk instead of the standard approach of allocating based on dollars. Allocation based on risk can be done in a passive or active manner in the same way that the standard approach can be done in a passive or active manner.
by EfficientInvestor
Sat Dec 03, 2022 12:18 pm
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

I hope this helps with the discussion. I appreciate the detail. However, one of my main intents with this thread is to show that there are very simple ways to implement risk parity concepts without the use of leverage. So I would say the use of LETFs and momentum strategies are outside the intent of the thread for those reasons. That being said, I would encourage you to compare your active strategy in your taxable account against a more buy and hold strategy for the purpose of avoiding taxable events and complexity. I would also recommend other leveraged products like the WisdomTree Efficient Core funds (NTSX, etc.) or UPAR. These products don’t have the volatility drag associated with daily leverage reset and they have lower expense ratio...
by EfficientInvestor
Sat Dec 03, 2022 12:11 pm
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

Why should I care the the risk is spread evenly? Suppose my portfolio is US stocks and short-term treasuries. Risk parity for VTI and VGSH as examples would be 7% VTI 93% VGSH. What is interesting about that portfolio? Most investors would prefer a mix based on their maximum expected loss in a severe market downturn. If risk parity does not generate good 2-asset-class portfolios, why should adding asset classes improve it? You should care that risk is spread evenly because that is your best chance at harnessing efficiency that can come with diversification. Instead of using short term treasuries, you either need to leverage the treasuries or use longer duration treasuries. I’d say that stocks and longer term treasuries make a pretty good 2...
by EfficientInvestor
Fri Dec 02, 2022 9:33 pm
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

Why should I care the the risk is spread evenly? Suppose my portfolio is US stocks and short-term treasuries. Risk parity for VTI and VGSH as examples would be 7% VTI 93% VGSH. What is interesting about that portfolio? Most investors would prefer a mix based on their maximum expected loss in a severe market downturn. If risk parity does not generate good 2-asset-class portfolios, why should adding asset classes improve it? You should care that risk is spread evenly because that is your best chance at harnessing efficiency that can come with diversification. Instead of using short term treasuries, you either need to leverage the treasuries or use longer duration treasuries. I’d say that stocks and longer term treasuries make a pretty good 2...
by EfficientInvestor
Fri Dec 02, 2022 3:30 pm
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

You can, if you like, observe that the risk parity funds have done better less poorly than Balanced Index over the last year or so. But it hasn't yet been enough to make up for what happened during the decade before. I don't understand the appeal. The appeal is that you can spread your risk more evenly across assets. Consider this risk decomposition chart below that can be found in the final backtest of my OP. https://i.imgur.com/qI2RgUZ.png A 60/40 fund has over 95% of its risk coming from stocks. That is great in the 2010's, but what about other decades? It's easy to write articles that trash on risk parity when the stock market is on a tear like during the 2010s. What would the headlines have said during the 2000s when things look more ...
by EfficientInvestor
Fri Dec 02, 2022 11:10 am
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

I like this explanation. For me, I view risk parity as the starting point. Then, if you have reason to believe that one of the assets you are holding will have a higher risk-adjusted return than another asset, you can lean towards holding more of that asset. Doing so is an attempt to move from a risk parity portfolio to a max Sharpe ratio portfolio. It's important to keep in mind that looking at the risk adjusted return / Sharpe of assets in isolation is largely meaningless. What matters is risk/return of the total portfolio. If the investor has the goal of maximizing Sharpe, holding a bunch of high Sharpe assets in a portfolio together will probably not accomplish this. It is not a given that adding an asset with higher expected risk-adju...
by EfficientInvestor
Fri Dec 02, 2022 9:35 am
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

So unless you want to hand-wave in a general sort of way and say "MPT and risk parity both support diversification," I don't think they're the same concept. The risk parity portfolio is an optimization within the mean variance framework. When we solve for the risk parity portfolio we are applying the constraint that each asset must contribute equally to the portfolios variance, and it is a mathematical property of the risk parity portfolio that it will fall on the minimum variance frontier. The maximum Sharpe ratio portfolio and minimum variance / tangency portfolio are also optimizations within the mean variance framework, we are just solving for different variables. For the max Sharpe portfolio we are optimizing to maximize exp...
by EfficientInvestor
Fri Dec 02, 2022 5:50 am
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

Northern Flicker wrote: Thu Dec 01, 2022 11:02 pm Nonetheless, sample correlations between gold and treasuries have increased over time, moderately positive the last 30 years:

https://www.portfoliovisualizer.com/ass ... &months=36

In the 1970's there was price overhang from dropping the gold standard. Gold has exhibited interest rate sensitivity, which has been a source of positive outcome sample correlation with treasuries and TIPS.
Well even if it has a 0.2-0.3 correlation instead of a 0.1 correlation, I would still consider that relatively non-correlated in an amount that offers a decent diversification benefit.
by EfficientInvestor
Thu Dec 01, 2022 9:51 pm
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

I also expect gold to have around a zero correlation with stocks and bonds going forward as it has had over the last 50 years. Gold has had moderate, positive sample correlations with USD-denominated bonds in many historical samples. I see no reason to view it as uncorrelated with bonds. Example: https://www.portfoliovisualizer.com/asset-correlations?s=y&symbols=GLD+VFITX+VAIPX&timePeriod=2&tradingDays=60&months=36 Since 1972 it has had an average correlation of 0.09 with 5 year treasuries. https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=1&timePeriod=4&startYear=1972&firstMonth=1&endYear=2022&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=100...
by EfficientInvestor
Thu Dec 01, 2022 11:00 am
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

It's quite likely you're putting your thumb on the scale pretty heavily with these assumptions. Well we either need to assume that assets have equal risk-adjusted returns over time or we need to assume that they do not. Or we can assume that "risk-adjusted returns" are immeasurable, inconsistent, highly variable, and inestimable. In any case, assuming a +1.5% or +2.0% real return for gold will undoubtedly lead to a relatively high gold allocation. I don't think such a high estimate is justifiable. So you don't agree that the annualized (geometric) return of gold will keep up with inflation over time? I would rather assume a commodity will keep up with inflation over time than actively assume that it will be less than inflation. T...
by EfficientInvestor
Thu Dec 01, 2022 10:44 am
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

If I can get 30-40 basis points of improvement for every diversifying asset I add, then I'm looking at a 1% improvement after I have added a few. But you are giving up the expected returns of stock or bonds to replace it with an asset that you expect will return 0% real. You forgo the expected positive real returns of stocks and bonds in favor of 0% real return in the hope of eking out a couple of basis points of diversification benefit I should clarify that my long-term geometric (annualized) return assumption for gold is the rate of inflation (0% real return). However, my expected arithmetic (average) return assumption is something higher than that to account for volatility decay. So if inflation is going to average 2.5% over the next 10...
by EfficientInvestor
Thu Dec 01, 2022 9:19 am
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

If I can get 30-40 basis points of improvement for every diversifying asset I add, then I'm looking at a 1% improvement after I have added a few. But you are giving up the expected returns of stock or bonds to replace it with an asset that you expect will return 0% real. You forgo the expected positive real returns of stocks and bonds in favor of 0% real return in the hope of eking out a couple of basis points of diversification benefit I should clarify that my long-term geometric (annualized) return assumption for gold is the rate of inflation (0% real return). However, my expected arithmetic (average) return assumption is something higher than that to account for volatility decay. So if inflation is going to average 2.5% over the next 10...
by EfficientInvestor
Thu Dec 01, 2022 8:42 am
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

The "golden smile". Obviously gold's held its value against inflation for a long time (the cost of an average house in gold hasn't changed much in 1,200 years). IMHO, most forms of "look at a graph and squint" analysis reveal little more than what the viewer WISHES they saw in the data. Virtually every attempt at rigorous analysis concludes that gold is a pretty terrible "inflation hedge" over investment horizons that matter to individual investors. At gold it is a mild form of currency hedge for the dominant fiat currency, but for an investor with a globally diversified stock and bond portfolio the marginal expected benefit of adding gold to the mix is extremely weak. For me, I don't look at gold and assume i...
by EfficientInvestor
Wed Nov 30, 2022 3:17 pm
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

This backtest will be constrained by the available data of PRAIX, which goes back to Dec 2001. I could take the Long-term TIPS data back to 1997 by creating a proxy using PRRIX, but I'll leave that off at the moment to avoid confusion. If interested, the substitute for 60% PRAIX would be: 60% PRRIX, -60% VFITX, 60% VUSTX. I like it. But obviously to pour some cold water on things, I think the absolute minimum market data you need to get something that has any chance of being generalisable is 50 years, back to 1972. It's the only way to get at least one block of each of the basic environments – and investors who didn't do that with stock/bond portfolios would've been surprised by what happened this year. Obviously a problem with TIPS, but f...
by EfficientInvestor
Wed Nov 30, 2022 3:02 pm
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

I agree that risk parity can mean many things to many people. For a Boglehead, I think it should be viewed using the concepts laid out in my OP and with the following concepts in mind: - The market is generally efficient. Not just among stocks but among all assets. Therefore, the efficiency of return of any asset going forward should not be assumed to be more or less efficient than another. - Given this efficiency, I don't know which asset (stocks, commodities, TIPS, gold, or bonds) will perform best on a risk-adjusted basis going forward and I should try to spread my risk as equally as I can across the assets. The four quadrant concept laid out in the post is a good way to think about this. - If the risk-adjusted return of assets is assum...
by EfficientInvestor
Wed Nov 30, 2022 2:47 pm
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

I agree that risk parity can mean many things to many people. For a Boglehead, I think it should be viewed using the concepts laid out in my OP and with the following concepts in mind: - The market is generally efficient. Not just among stocks but among all assets. Therefore, the efficiency of return of any asset going forward should not be assumed to be more or less efficient than another. - Given this efficiency, I don't know which asset (stocks, commodities, TIPS, gold, or bonds) will perform best on a risk-adjusted basis going forward and I should try to spread my risk as equally as I can across the assets. The four quadrant concept laid out in the post is a good way to think about this. - If the risk-adjusted return of assets is assume...
by EfficientInvestor
Wed Nov 30, 2022 2:30 pm
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

EfficientInvestor - you and I have similar interest. My version of a (unlevered) risk parity portfolio was in this thread with the final portfolio being at the bottom of the first post: https://www.bogleheads.org/forum/viewtopic.php?t=206028 It was pretty cool that while I was doing that, I was getting some help from a former Bridgewater employee (dm's, not in the thread). I won't comment further - just sharing that cause I thought you might be interested. Nice. I took a look at your allocations and they seem to pair up fairly well with what I have concluded in this post. Below is a comparison. I took some liberties swapping out some of your ETFs for mutual funds that have been around a little longer. I couldn't find a good substitute for ...
by EfficientInvestor
Wed Nov 30, 2022 1:25 pm
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

De-leveraging 50/50 stock/gold volatility to your 'risk parity' = 22% cash, 39% in each of stock and gold. Revising your PV link third asset allocation to risk adjusted equal weightings PV https://i.postimg.cc/zBkTB0Pt/r.png ... and similar outcomes (risk/reward). But that can be leveraged - for free, at least by 1 / 0.78 = 28% Thanks for the comment. I'm not quite sure what you are trying to get at though. Stocks and gold were the two best performing assets over the time period, so it's not surprising that a stock/gold portfolio did better than the risk parity portfolio over the time period. There is no way of knowing if stocks and gold will be the winners going forward so I would prefer to continue to hold the other assets in addition to...
by EfficientInvestor
Wed Nov 30, 2022 1:22 pm
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Re: Risk Parity Portfolio Construction Framework

I think for us individual investors, we can serve ourselves well by keeping risk parity in mind, moving our portfolios in the direction of risk parity, but not necessarily going hard core with leveraged less risky assets. Many of us are somewhere in the neighborhood of a 60/40 portfolio, where the portfolio has 85-90% of its risk wrapped up in a single factor, market beta. Any portfolio move away from market beta dominance is a move towards risk parity. A strong first step in this direction is to increase tilt to size and value, decrease overall equity allocation, increase allocation to safe bonds. Dave Permanent portfolio can be looked at too. It has the added benefit of being simple to manage, and doesn't use the more complex leveraged f...
by EfficientInvestor
Tue Nov 29, 2022 9:06 am
Forum: Investing - Theory, News & General
Topic: Passive Risk Parity Portfolio Construction Framework (without Leverage)
Replies: 101
Views: 8600

Passive Risk Parity Portfolio Construction Framework (without Leverage)

I never go to the non-US investor page and I'm reposting this (original post here: https://www.bogleheads.org/forum/viewtopic.php?p=6984129#p6984129 ) in the event there are others like me that don't typically go to that page either. A question was posed about the downsides of risk parity. The following is my response in which I addressed my thoughts about the downside and also laid out a framework for risk parity that I think makes a lot of sense and avoids the use of leverage that often comes with the discussion around risk parity: I'm just now seeing this thread for the first time and wanted to chime in. I think the downside is mostly behavioral. The math dictates that a more diversified portfolio should be more efficient over time. Risk...
by EfficientInvestor
Tue Nov 29, 2022 8:52 am
Forum: Non-US Investing
Topic: Risk Parity as a multi-decade adventure?
Replies: 61
Views: 9352

Re: Risk Parity as a multi-decade adventure?

Perhaps the right question to ask, for those who do multi asset portfolios, is this: What's the downside to giving this a go? Say with no leverage, then maybe 120%. Maybe it will become obvious only sophisticated institutions can pull RP off at some point? I'm just now seeing this thread for the first time and wanted to chime in. I think the downside is mostly behavioral. The math dictates that a more diversified portfolio should be more efficient over time. Risk parity is attempting to take advantage of this mathematical advantage. However, the path of a risk parity portfolio is not very correlated to the "normal" path of a stock-based portfolio. So you have to be willing to ignore the "normal" path and just focus on y...
by EfficientInvestor
Wed Oct 19, 2022 11:30 am
Forum: Investing - Theory, News & General
Topic: Lifecycle Investing - Leveraging when young
Replies: 1730
Views: 335543

Re: Lifecycle Investing - Leveraging when young

Am I missing something? Does anyone else use SPY LEAPS and how do they do this? Would love more details from EfficientInvestor on what exactly he does? Lots to unpack with this approach. The main idea that I am operating on is that the differences in theta decay between long term and short term options allow me to have protection on all holdings while only capping the upside of 25-35% of holdings. I view this as a tail hedging strategy and not an income strategy. The problem with other tail hedging strategies is that they are effectively just going long on puts and are just paying out lots of premium over time. The idea with this is to have a similar hedge in place but to be theta (premium) neutral over time. I usually like to go at least ...
by EfficientInvestor
Mon Jul 18, 2022 4:46 pm
Forum: Investing - Theory, News & General
Topic: Commodities never belonged in your portfolio
Replies: 253
Views: 22012

Re: Commodities never belonged in your portfolio

All assets have a certain expectation of future economic growth and inflation baked into the current price. As actual economic growth and inflation play out against those expectations, assets adjust accordingly. Stocks tend to do well when growth is higher than expected and inflation is lower than expected. Treasury bonds tend to do well when growth and inflation are lower than expected. TIPS and gold tend to do well when growth is lower than expected and inflation is higher than expected. And lastly, commodities tend to do well when growth is higher than expected and inflation is higher than expected. It is good to have exposure to each of the 4 potential economic environments, because you never know which will occur next. Therefore, I wou...
by EfficientInvestor
Thu Jul 14, 2022 10:30 am
Forum: Investing - Theory, News & General
Topic: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory
Replies: 2998
Views: 518561

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

OK but look at the strikes with delta near 1... strike of 70 has a price where the strike plus price is 2 or 3 dollars more than the current price of tlt. Yes you save interest but you miss out on dividends that are more than the interest. So that means there is 3 or 4 dollars of extrinsic value on a call with a strike of 70? That seems very high to me. The put is only worth a dollar. It's a little tricky to analyze this given the wide spread of pricing at the 70 strike. That being said...the current mid price of the call at the 70 strike is 46.85. Based on the current TLT price of 115.83, this would impute an intrinsic value of 45.83 and an extrinsic value of 1.02. The put at the 70 strike currently has a mid price of 1.02. So based on cu...
by EfficientInvestor
Wed Jul 13, 2022 4:14 pm
Forum: Investing - Theory, News & General
Topic: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory
Replies: 2998
Views: 518561

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

When I have looked they have been extremely expensive. Like you lose 3-4% on something that is expected to yield 1-2%. The expected return is quite net negative. What was the price and strike of the option and the price of tlt at the time you paid? JAN 19, 2024 100.00 CALL Purchased around $19 average. Right now at $21.12. TLT today $115.24 Delta 0.77 in IBKR & 0.8707 in Merrill I was getting sick of ZN and ZF futures losses in IRA account. Still hold a few.. So based on today's pricing, if you purchased today you would lose $6 if the price of tlt did not go up. TLT has to go up in price $6 just for you to break even. That seems very very expensive. If you buy tlt directly with margin or with futures, if the price of tlt goes up $6 you...
by EfficientInvestor
Wed Jul 13, 2022 1:33 pm
Forum: Investing - Theory, News & General
Topic: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory
Replies: 2998
Views: 518561

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Bought some TLT LEAP options instead of ZN Futures. Like the downside insurance of the LEAP options. Duration is different, costly than Futures, but going this for now. What are your thoughts? When I have looked they have been extremely expensive. Like you lose 3-4% on something that is expected to yield 1-2%. The expected return is quite net negative. What was the price and strike of the option and the price of tlt at the time you paid? JAN 19, 2024 100.00 CALL Purchased around $19 average. Right now at $21.12. TLT today $115.24 Delta 0.77 in IBKR & 0.8707 in Merrill I was getting sick of ZN and ZF futures losses in IRA account. Still hold a few.. So based on today's pricing, if you purchased today you would lose $6 if the price of tl...
by EfficientInvestor
Thu Jun 16, 2022 7:55 am
Forum: Investing - Theory, News & General
Topic: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory
Replies: 2998
Views: 518561

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Sounds like a complex strategy. How do you know that you still earn a term premium (if that is your goal as you are on the mHFEA thread), after you pay the cost of the put options? If your idea is to hedge against rising interest rates with the put options (I'm just speculating), than it sounds like you are implementing a hedge to the hedge - where the first hedge is the treasuries exposure to hedge against stock market crashes, and the treasury put options would hedge the treasuries against rising rates. Am I seeing this correctly? When interest rates don't rise a lot, then you would pay a performance drag with the put options. Did you backtest this whole thing and compare to a simpler strategy without options? Or to a simple stock/bond s...
by EfficientInvestor
Wed Jun 15, 2022 3:05 pm
Forum: Investing - Theory, News & General
Topic: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory
Replies: 2998
Views: 518561

Re: Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Are some of using TLT LEAP options vs treasury futures? Surely Treasury futures are much more liquid, but inside an IRA it get so hard to rebalance with a drawdown. Is there ITT options that one has used? I use options on TLT and I have used treasury futures. Either product can help you get the nominal exposure you are targeting. The big difference though is that futures are just providing the leverage whereas options provide leverage while also providing insurance. So you have to determine whether you want insurance in addition to the leverage. TLT is the only treasury etf I trade options on due to limited liquidity in other durations such as SHY and IEF. If I want to buy exposure at the shorter end of the yield curve but still want the d...
by EfficientInvestor
Thu May 05, 2022 10:35 am
Forum: Personal Investments
Topic: Levered AWP review
Replies: 7
Views: 794

Re: Levered AWP review

Have you considered just holding 100% RPAR so you don’t have to worry taxable events every time you rebalance?
by EfficientInvestor
Sun Apr 24, 2022 5:13 pm
Forum: Investing - Theory, News & General
Topic: The Tobin Two-Fund Portfolio
Replies: 24
Views: 5710

Re: The Tobin Two-Fund Portfolio

Thank you EfficientInvestor for the insightful post on UPAR and its relevance to Tobin's separation theorem. This is a fascinating discussion, UPAR is highly interesting product especially in terms of access to leverage and internal rebalancing (without the daily rebalancing volatility drag of 3x ETFs as seen in HFEA). I have been following Alex Shahidi's Quarterly Reviews of RPAR ETF performance and their strategy seems to be highly robust in different growth/inflation regimes. Commodity producers and Gold allocation are the primary aspects which I don't fully understand, especially in terms of expected returns. Looking forward to reading Alex Shahidi's Risk Parity book. Thanks for the post. Based on what you’ve said here, I think you wil...
by EfficientInvestor
Tue Apr 19, 2022 10:42 am
Forum: Personal Investments
Topic: Another bond thread
Replies: 14
Views: 1364

Re: Another bond thread

I would say that the recent dip in bonds is a feature and not a bug. It all goes back to the idea that the only free lunch in investing is diversification. If you want a chance at that free lunch, you need to own something other than stocks (e.g. bonds). If you only own bonds/fixed income that are ultra-safe, then you don't get the diversification benefit...you only get dilution of your portfolio volatility. If you truly want to achieve the diversification benefit, you need to actually take risk on the bond side. However, you also have to be prepared to lose money on the bond side in exchange for taking on that risk, which is what has happened this past year. If it weren't for times like these where bonds are doing poorly, we wouldn't have ...
by EfficientInvestor
Mon Apr 18, 2022 10:48 am
Forum: Personal Investments
Topic: Please critique my proposed portfolio and thought process - modified HFEA for $1m windfall
Replies: 54
Views: 6175

Re: Please critique my proposed portfolio and thought process - modified HFEA for $1m windfall

I think you're right that just buying UPAR and keeping that as my baseline portfolio makes sense. Ideally I'd love to do what UPAR does just with higher leverage - ideally something closer to 3x vs the 1.7x UPAR has. However, I'm just not sure how to execute that using futures. Is there any place you can recommend that I read up on how to do this? Can you leverage all the asset classes involved here? I have read the book, twice actually, and I'm convinced enough that I want to make this my primary investment approach. Thank you for chiming in here as I think you're the first in the thread who actually is implementing something similar. What sort of leverage do you use for your implementation? This will be in a "holding company" a...
by EfficientInvestor
Wed Mar 30, 2022 1:16 pm
Forum: Personal Investments
Topic: Variable Annuity Thoughts/Suggestions (Inherited @ 30 years old)
Replies: 8
Views: 811

Re: Variable Annuity Thoughts/Suggestions (Inherited @ 30 years old)

Are you already maxing out all pre-tax retirement accounts and Health Savings Accounts each year for your savings? If not, you could increase your contributions and max everything out and withdraw the corresponding amount each year from the annuity. That way the income from the annuity and the deductions from the savings cancel out. You could then draw out additional funds beyond that and max out Roth IRAs. You could also see if you are able to do after-tax contributions to your workplace plans and increase savings there as well so that any money you take out of the tax shelter of the annuity goes back into the tax shelter of the Roth (after paying tax of course). As Chardo points out, it probably doesn't make sense to do any more withdraw ...
by EfficientInvestor
Sun Mar 27, 2022 5:17 pm
Forum: Personal Investments
Topic: Why Bonds in my portfolio?
Replies: 79
Views: 8888

Re: Why Bonds in my portfolio?

Dr. Paul wrote: Sun Mar 27, 2022 3:07 pm EI, I'm not at all familiar with this concept. Let me do some research. Thanks
Sure thing. Here is a good white paper that covers the basics of risk parity pretty well:

https://www.cmegroup.com/education/file ... 013-06.pdf
by EfficientInvestor
Sun Mar 27, 2022 2:46 pm
Forum: Personal Investments
Topic: Why Bonds in my portfolio?
Replies: 79
Views: 8888

Re: Why Bonds in my portfolio?

The short answer to “why bonds in my portfolio” for you and any investor is because diversification is the only free lunch in investing. As you pointed out yourself in your backtests, the more diversified portfolios have more efficiency of return (higher Sharpe ratio, aka higher return per risk taken). The problem you have, like many, is that you have a risk tolerance/capacity higher than that of the more diversified portfolio. So you are willing to give up some portfolio efficiency in exchange for more potential return. For me, this is where a risk parity portfolio really makes sense. With a risk parity approach, you are able to maintain a more diversified portfolio AND maintain a risk profile in line with your risk tolerance/capacity. Ins...