Risk Parity: When Stocks "Zig," What is the Best "Zag"?

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jolmscheid
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Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by jolmscheid »

Hello all. I see a lot of talk about risk parity and wanting to have an asset "zig" when another asset "zags." With stocks, the general consensus is to have a total bond holding that will hopefully offset when stocks when they are in a downturn. Is there a way to look at how a total bond fund would compare to say all Treasuries when stocks are going down?

I can see how total bond, treasuries, etc perform with a stock portfolio of different allocations in portfolio visualizer, but would be nice to see how total bond / treasuries perform only when stocks are in a downturn. Any thoughts/insight on this?
000
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by 000 »

You could look at portfolio visualizer on a monthly basis, e.g. from a month where stocks peaked to the start of the recovery.

You could use finviz.com to see how certain ETFs performed during the March crash. (I invest in some of these).
Last edited by 000 on Fri Jul 24, 2020 5:36 pm, edited 1 time in total.
000
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by 000 »

Personally I think there are no guaranteed Zags out there (other than Puts). I hold cash and gold for diversification from stock market risk. Maybe in the future some land too.
Last edited by 000 on Fri Jul 24, 2020 5:38 pm, edited 1 time in total.
DesertDiva
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by DesertDiva »

I adhere to my IPS and concern myself with other topics.
Silence Dogood
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by Silence Dogood »

Caution: Past correlation is not a guarantee of future correlation.
Last edited by Silence Dogood on Fri Jul 24, 2020 5:43 pm, edited 1 time in total.
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permport
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by permport »

Buy long Treasury bonds along with gold and cash.

You may also want to consider international assets, bitcoin, and silver, and factors in your equities.
Buy right and hold tight.
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by Broken Man 1999 »

I just hold bond funds. Granted they don't ZAG much, but then they also don't ZIG much either, especially high quality bonds/bond funds.

I do hold a bit of silver, both collectible, and bullion in the form of silver rounds..

Every now and then I buy 20-30 ozs of silver rounds. Maybe the grandchildren will find a use for them when I'm gone. If not, well, I'll be gone, so I won't care anyway.

Broken Man 1999
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Triple digit golfer
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by Triple digit golfer »

I use total bond. I don't care much about correlation. I want a ballast for stocks that will not zig when stocks zig. They don't have to zag.
KlangFool
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by KlangFool »

OP,

I hold both the total bond index fund and the Intermediate-Term Treasury Bond fund.

KlangFool
snailderby
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by snailderby »

I'm not sure if this answers your question, but...
During the 10 largest S&P 500 drawdowns in the period since the index began, Treasury bonds have outperformed the AGG index in eight of those 10 (see table below).
Source: https://www.advisorperspectives.com/art ... s-you-need
SantaClaraSurfer
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by SantaClaraSurfer »

Dunno.

I have three perspectives that may offer a vantage point.

1. Our 401(k)s are both three fund-based. Awesome perspective to see US Equities / Int'l Equities / Bonds slowly balancing and rebalancing. With bi-weekly contributions there is always new money. So, even in down periods...one is buying cheap. We stopped looking at the biggest 401(k), 100% in a Target Date Fund more than once a year.

2. Our Treasury Direct Account is the ultimate "doesn't Zig, doesn't Zag." Everything does exactly what it promised to do. Some of it is cooking on a 20 or even 30 year timeframe. Throw in one small pension (now long closed to contributions) and an ancient life insurance investment and there's always something cooking on the long, slow burner.

3. Our brokerage account is a mix of Long Term Equity and Bond Investing, Medium Term Savings, Short Term parking (Cash) and whatever small factors we've added to the mix. The ETF equities may pop up or down during the day. The bond mutual funds slowly come in after market close. The cash we're saving for college age children and vacations just sits there, like it's supposed to.

I would say the three above items are in aggregate, the best zag. We just keep pouring new money in. But to answer your question directly, I'd say (outside of a pension if you've got one) the best zag for us are I Bonds or EE Bonds. They follow a preset schedule. The opposite of stocks. They are predictable, knowable, and have a throw that lasts over a timeframe that is a sizable chunk of one lifetime.
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jolmscheid
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by jolmscheid »

snailderby wrote: Fri Jul 24, 2020 6:02 pm I'm not sure if this answers your question, but...
During the 10 largest S&P 500 drawdowns in the period since the index began, Treasury bonds have outperformed the AGG index in eight of those 10 (see table below).
Source: https://www.advisorperspectives.com/art ... s-you-need
This covers a lot of what I was looking for.
bberris
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by bberris »

This probably isn't what you had in mind, but short etf's are as close as you can get. Completely neutralize gains and losses. For example, SDS has a -1.00 correlation with VTI.
Some people (not me) advocate volatility bets as a proxy for shorting. For example, VXX pretty reliably runs inverse to the market. It's correlation coeffcient with VTI is -0.8. Not bad.
Last edited by bberris on Fri Jul 24, 2020 6:21 pm, edited 1 time in total.
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anon_investor
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by anon_investor »

You can look at the holding of a risk parity ETF like RPAR.

I think it uses treasuries and gold among other things.
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patrick013
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by patrick013 »

jolmscheid wrote: Fri Jul 24, 2020 5:28 pm
I can see how total bond, treasuries, etc perform with a stock portfolio of different allocations in portfolio visualizer, but would be nice to see how total bond / treasuries perform only when stocks are in a downturn. Any thoughts/insight on this?

viewtopic.php?f=10&t=297571&p=4893616&h ... 8#p4893616

You can always expect TRSY's to rise when stocks decline.
age in bonds, buy-and-hold, 10 year business cycle
grok87
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by grok87 »

Silence Dogood wrote: Fri Jul 24, 2020 5:42 pm Caution: Past correlation is not a guarantee of future correlation.
agree.

lately treasuries have been the "zag" to stocks zig. but back in the 70s/80s they weren't- it was a stagflationary environment with rising inflation and rising rates (treaasuries were losers) and poor real stock returns.

perhaps tips might work well in that sort of environment. we don't really know cuz they weren't around then. also maybe real estate- i.e. direct real estate not reits.
RIP Mr. Bogle.
000
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by 000 »

patrick013 wrote: Fri Jul 24, 2020 6:22 pm
jolmscheid wrote: Fri Jul 24, 2020 5:28 pm
I can see how total bond, treasuries, etc perform with a stock portfolio of different allocations in portfolio visualizer, but would be nice to see how total bond / treasuries perform only when stocks are in a downturn. Any thoughts/insight on this?

viewtopic.php?f=10&t=297571&p=4893616&h ... 8#p4893616

You can always expect TRSY's to rise when stocks decline.
I have to say I disagree, and think this is bad information. What if the next crisis is related to USD or the US Government's stability?
000
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by 000 »

grok87 wrote: Fri Jul 24, 2020 6:32 pm
Silence Dogood wrote: Fri Jul 24, 2020 5:42 pm Caution: Past correlation is not a guarantee of future correlation.
agree.

lately treasuries have been the "zag" to stocks zig. but back in the 70s/80s they weren't- it was a stagflationary environment with rising inflation and rising rates (treaasuries were losers) and poor real stock returns.
+1000

I've seen too many posts where people think the relationship between Treasury bonds and the stock market is some law written in stone.
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by KlangFool »

000 wrote: Fri Jul 24, 2020 6:40 pm
patrick013 wrote: Fri Jul 24, 2020 6:22 pm
jolmscheid wrote: Fri Jul 24, 2020 5:28 pm
I can see how total bond, treasuries, etc perform with a stock portfolio of different allocations in portfolio visualizer, but would be nice to see how total bond / treasuries perform only when stocks are in a downturn. Any thoughts/insight on this?

viewtopic.php?f=10&t=297571&p=4893616&h ... 8#p4893616

You can always expect TRSY's to rise when stocks decline.
I have to say I disagree, and think this is bad information. What if the next crisis is related to USD or the US Government's stability?
That is where the Gold/Silver comes in.

KlangFool
000
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by 000 »

KlangFool wrote: Fri Jul 24, 2020 6:42 pm
000 wrote: Fri Jul 24, 2020 6:40 pm
patrick013 wrote: Fri Jul 24, 2020 6:22 pm
jolmscheid wrote: Fri Jul 24, 2020 5:28 pm
I can see how total bond, treasuries, etc perform with a stock portfolio of different allocations in portfolio visualizer, but would be nice to see how total bond / treasuries perform only when stocks are in a downturn. Any thoughts/insight on this?

viewtopic.php?f=10&t=297571&p=4893616&h ... 8#p4893616

You can always expect TRSY's to rise when stocks decline.
I have to say I disagree, and think this is bad information. What if the next crisis is related to USD or the US Government's stability?
That is where the Gold/Silver comes in.

KlangFool
Yes, I agree.
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patrick013
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by patrick013 »

000 wrote: Fri Jul 24, 2020 6:40 pm
patrick013 wrote: Fri Jul 24, 2020 6:22 pm
jolmscheid wrote: Fri Jul 24, 2020 5:28 pm
I can see how total bond, treasuries, etc perform with a stock portfolio of different allocations in portfolio visualizer, but would be nice to see how total bond / treasuries perform only when stocks are in a downturn. Any thoughts/insight on this?

viewtopic.php?f=10&t=297571&p=4893616&h ... 8#p4893616

You can always expect TRSY's to rise when stocks decline.
I have to say I disagree, and think this is bad information. What if the next crisis is related to USD or the US Government's stability?
When stocks decline money moves out of stocks. The safest place is govt bonds (TRSY's).

When stocks recover money moves from govt bonds back to stocks for the equity premium
that may be available. Economists have been watching this happen for centuries.

If you disagree invest in Euro's or something. I don't know. :sharebeer

Gold, silver, currency in the freezer ? I suppose.
age in bonds, buy-and-hold, 10 year business cycle
000
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by 000 »

patrick013 wrote: Fri Jul 24, 2020 6:54 pm When stocks decline money moves out of stocks.
Agreed.
patrick013 wrote: Fri Jul 24, 2020 6:54 pm The safest place is govt bonds (TRSY's).
This was the part with which I took issue. In a future crisis, the money may go somewhere else.
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by KlangFool »

patrick013 wrote: Fri Jul 24, 2020 6:54 pm
000 wrote: Fri Jul 24, 2020 6:40 pm
patrick013 wrote: Fri Jul 24, 2020 6:22 pm
jolmscheid wrote: Fri Jul 24, 2020 5:28 pm
I can see how total bond, treasuries, etc perform with a stock portfolio of different allocations in portfolio visualizer, but would be nice to see how total bond / treasuries perform only when stocks are in a downturn. Any thoughts/insight on this?

viewtopic.php?f=10&t=297571&p=4893616&h ... 8#p4893616

You can always expect TRSY's to rise when stocks decline.
I have to say I disagree, and think this is bad information. What if the next crisis is related to USD or the US Government's stability?
When stocks decline money moves out of stocks. The safest place is govt bonds (TRSY's).

When stocks recover money moves from govt bonds back to stocks for the equity premium
that may be available. Economists have been watching this happen for centuries.

If you disagree invest in Euro's or something. I don't know. :sharebeer

Gold, silver, currency in the freezer ? I suppose.
And, there is nothing to have all of the above.

Stock, bond, CASH, and Gold/Silver.

KlangFool
MotoTrojan
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by MotoTrojan »

jolmscheid wrote: Fri Jul 24, 2020 5:28 pm I can see how total bond, treasuries, etc perform with a stock portfolio of different allocations in portfolio visualizer, but would be nice to see how total bond / treasuries perform only when stocks are in a downturn. Any thoughts/insight on this?
I won't comment on the future, but for comparing the past there is no need to isolate the downturns; comparing max drawdown, standard deviation (volatility) and Sharpe ratio is all you need to see which zag'd the best.
bberris
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by bberris »

patrick013 wrote: Fri Jul 24, 2020 6:22 pm
jolmscheid wrote: Fri Jul 24, 2020 5:28 pm
I can see how total bond, treasuries, etc perform with a stock portfolio of different allocations in portfolio visualizer, but would be nice to see how total bond / treasuries perform only when stocks are in a downturn. Any thoughts/insight on this?

viewtopic.php?f=10&t=297571&p=4893616&h ... 8#p4893616

You can always expect TRSY's to rise when stocks decline.
The correlation of VTI and TBT (20 yr treasuries) is -0.50. That's a long way from always, but the tendency is there.
Ferdinand2014
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by Ferdinand2014 »

Historically long term U.S. treasury bonds. Correlations can and will change however.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
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patrick013
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by patrick013 »

bberris wrote: Fri Jul 24, 2020 7:55 pm
patrick013 wrote: Fri Jul 24, 2020 6:22 pm
jolmscheid wrote: Fri Jul 24, 2020 5:28 pm
I can see how total bond, treasuries, etc perform with a stock portfolio of different allocations in portfolio visualizer, but would be nice to see how total bond / treasuries perform only when stocks are in a downturn. Any thoughts/insight on this?

viewtopic.php?f=10&t=297571&p=4893616&h ... 8#p4893616

You can always expect TRSY's to rise when stocks decline.


The correlation of VTI and TBT (20 yr treasuries) is -0.50. That's a long way from always, but the tendency is there.
Well look at the charts. Right now it's a better time to sell than buy
whether stocks go down. Gains don't stay put when prices may decline.
age in bonds, buy-and-hold, 10 year business cycle
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by KyleAAA »

Long term treasuries. Or intermediate term treasuries. Defintiely not total bond.
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by NoRegret »

bberris wrote: Fri Jul 24, 2020 7:55 pm
patrick013 wrote: Fri Jul 24, 2020 6:22 pm
jolmscheid wrote: Fri Jul 24, 2020 5:28 pm
I can see how total bond, treasuries, etc perform with a stock portfolio of different allocations in portfolio visualizer, but would be nice to see how total bond / treasuries perform only when stocks are in a downturn. Any thoughts/insight on this?

viewtopic.php?f=10&t=297571&p=4893616&h ... 8#p4893616

You can always expect TRSY's to rise when stocks decline.
The correlation of VTI and TBT (20 yr treasuries) is -0.50. That's a long way from always, but the tendency is there.
Do you mean TLT? TBT is leveraged short.
Market timer targeting long term cycles -- aiming for several key decisions per asset class per decade
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Brianmcg321
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by Brianmcg321 »

permport wrote: Fri Jul 24, 2020 5:42 pm Buy long Treasury bonds along with gold and cash.

You may also want to consider international assets, bitcoin, and silver, and factors in your equities.
This.

OP, read up on the Permanent Portfolio.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
000
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by 000 »

Brianmcg321 wrote: Sat Jul 25, 2020 1:12 pm
permport wrote: Fri Jul 24, 2020 5:42 pm Buy long Treasury bonds along with gold and cash.

You may also want to consider international assets, bitcoin, and silver, and factors in your equities.
This.

OP, read up on the Permanent Portfolio.
+1
Topic Author
jolmscheid
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Re: Risk Parity: When Stocks "Zig," What is the Best "Zag"?

Post by jolmscheid »

Brianmcg321 wrote: Sat Jul 25, 2020 1:12 pm
permport wrote: Fri Jul 24, 2020 5:42 pm Buy long Treasury bonds along with gold and cash.

You may also want to consider international assets, bitcoin, and silver, and factors in your equities.
This.

OP, read up on the Permanent Portfolio.
Good to know. The permanent portfolio then is an example of risk parity?
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