watchnerd wrote: ↑Thu Mar 19, 2020 8:08 pm
GRP wrote: ↑Thu Mar 19, 2020 6:36 pm
watchnerd wrote: ↑Thu Mar 19, 2020 6:28 pm
PP's concept of risk parity matching conflates capital allocation with risk contribution, which isn't accurate.
That's not true.
Yeah, it is. Do a risk regression on it.
No, it's not true. The underlying assets have volatilities that are constantly changing. For instance, a 30 year long treasury at 3% is way more volatile than it is at 10%. So any strategy that always wanted to have equal risk contribution would necessarily involve a dynamic rather than static allocation. But that is simply too much to ask of everyday investors, and it's certainly not in keeping with the simplicity preached on this forum.
So, the volatility matching may not be perfect, but it wasn't intended to be. It's not because Browne conflated capital allocation with risk contribution. Quite the opposite. It's because Browne recognized that we are collectively ignorant about what the future brings. It's because these forecasting games and excessive complications tend to lead to really bad outcomes.
Investors need simple solutions, and that was Browne's brilliance. That's why the PP is 25% each in all 4 assets. So you can set it up and move on with your life and not think about it.
What happens when you try to toy with modeling, convoluted solutions, and excessive mathematization? You get outcomes like Long-Term Capital Management.
There is also an opportunity cost to that kind superfluous over-complication. Instead of going out and enjoying day to day life, and not having to think about your portfolio, you end up accumulating thousands of posts on a place called the Bogleheads forum.
I am no longer posting on the Bogleheads forum. I am still frequenting www.gyroscopicinvesting.com if you'd like to reach me. Thanks!