Financial times: Wealthfront's experiment in risk parity has a rocky start

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pcsrini
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Financial times: Wealthfront's experiment in risk parity has a rocky start

Post by pcsrini »

"Welcome to the magic world of backtesting, where a retroactive application of a strategy to past markets always seems to yield fantastic results, in theory."

https://ftalphaville.ft.com/2018/05/17/ ... cky-start/
123
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Re: Financial times: Wealthfront's experiment in risk parity has a rocky start

Post by 123 »

pcsrini wrote: Fri May 18, 2018 6:24 pm "Welcome to the magic world of backtesting, where a retroactive application of a strategy to past markets always seems to yield fantastic results, in theory."

https://ftalphaville.ft.com/2018/05/17/ ... cky-start/
Access to the article requires a registration process, but it is apparently free.
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pcsrini
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Re: Financial times: Wealthfront's experiment in risk parity has a rocky start

Post by pcsrini »

Thanks. A google search for the article seems to allow reading it without registration.
afan
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Re: Financial times: Wealthfront's experiment in risk parity has a rocky start

Post by afan »

A couple of months is so short a time for comparing these funds that it is pointless. Get back to this in 10 years or so.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
grok87
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Re: Financial times: Wealthfront's experiment in risk parity has a rocky start

Post by grok87 »

wrote: As a result, the risk budget of the portfolio is not concentrated in equities, but spread more evenly across other asset classes.
Any time you hear the phrases "risk budget" and "volatility target" you should run far far away.

Risk budget: risk is not something you can budget for. It is wild and free and unpredictable. It is something that happens to you not something you control. The phrase risk budget makes is sounds like stocks, bonds, and other marketable securities are well behaved things whose behavior will fit neatly into ones accounting ledger. They are not.

Volatility target: the idea behind volatility targeting is that if the market starts misbehaving and things get volatile you will adjust your portfolio to bring it back to its target volatility. The problem is that historically increased volatility is usually associated with market downturns.

For example for stocks a standard measure of risk is the VIX. When stocks sell off the VIX usually spikes. So you end up selling into market downturns. And of course others following similar strategies will do the same. So it has the potential to crease a death spiral. It reminds me of the role of Portfolio insurance in the 1987 crash:
https://www.nytimes.com/2012/10/19/busi ... treet.html
https://www.marketwatch.com/story/heres ... 2017-10-16
RIP Mr. Bogle.
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permport
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Re: Financial times: Wealthfront's experiment in risk parity has a rocky start

Post by permport »

afan wrote: Fri May 18, 2018 7:11 pm A couple of months is so short a time for comparing these funds that it is pointless. Get back to this in 10 years or so.
I tend to agree with this. How many people on this forum would just throw their hands up in the air and abandon the Three Fund Portfolio just because it had a few losing months?
Buy right and hold tight.
AlohaJoe
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Re: Financial times: Wealthfront's experiment in risk parity has a rocky start

Post by AlohaJoe »

afan wrote: Fri May 18, 2018 7:11 pm A couple of months is so short a time for comparing these funds that it is pointless. Get back to this in 10 years or so.
In the article's defense, Wealthfront were the ones who claimed their strategy delivered superior results over short time frames. They had a table showing that over 6 and a half years (2011 to 2017) it would have returned 3.9% more than AQR's similar strategy.

It also isn't exactly a small difference in live results. Wealthfront is trailing by 5.3%. For someone who was enticed by their marketing that's a 3.9+5.3 = 9.2% gap in marketed performance. A nearly 10% performance shortfall, even over a short period of time, at the very least makes you question why Wealthfront made the comparison to AQR in the first place.
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pcsrini
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Re: Financial times: Wealthfront's experiment in risk parity has a rocky start

Post by pcsrini »

Jason Zweig in the WSJ: When Your Investing Robot Has a Mind of Its Own

https://blogs.wsj.com/moneybeat/2018/05 ... f-its-own/
Freefun
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Re: Financial times: Wealthfront's experiment in risk parity has a rocky start

Post by Freefun »

pcsrini wrote: Sat May 19, 2018 1:13 pm Jason Zweig in the WSJ: When Your Investing Robot Has a Mind of Its Own

https://blogs.wsj.com/moneybeat/2018/05 ... f-its-own/
I don't understand how many people buy an investment that "will need to earn better than 2% a year just to break even."
Remember when you wanted what you currently have?
Always passive
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Re: Financial times: Wealthfront's experiment in risk parity has a rocky start

Post by Always passive »

permport wrote: Fri May 18, 2018 10:02 pm
afan wrote: Fri May 18, 2018 7:11 pm A couple of months is so short a time for comparing these funds that it is pointless. Get back to this in 10 years or so.
I tend to agree with this. How many people on this forum would just throw their hands up in the air and abandon the Three Fund Portfolio just because it had a few losing months?
I agree with your comments, but how long is enough? To a human being, 10 years to decide if the investment is or is not producing the expected results is an eternity, specially if you are already invested in it.
lack_ey
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Re: Financial times: Wealthfront's experiment in risk parity has a rocky start

Post by lack_ey »

AlohaJoe wrote: Fri May 18, 2018 10:37 pm
afan wrote: Fri May 18, 2018 7:11 pm A couple of months is so short a time for comparing these funds that it is pointless. Get back to this in 10 years or so.
In the article's defense, Wealthfront were the ones who claimed their strategy delivered superior results over short time frames. They had a table showing that over 6 and a half years (2011 to 2017) it would have returned 3.9% more than AQR's similar strategy.

It also isn't exactly a small difference in live results. Wealthfront is trailing by 5.3%. For someone who was enticed by their marketing that's a 3.9+5.3 = 9.2% gap in marketed performance. A nearly 10% performance shortfall, even over a short period of time, at the very least makes you question why Wealthfront made the comparison to AQR in the first place.
That's kind of weirdly mixing a non-annualized fractional year return difference with an annualized figure, huh? I get the point, though.


Anyway, what's Wealthfront got? Like the white paper, U.S. stocks, ex-U.S. developed stocks, EM stocks, energy stocks, REITs, EM bonds, U.S. investment-grade bonds, leveraged significantly? A lot of those categories haven't been so hot since February. And what do you know, commodities futures were up. Seems like mostly bad luck as to the underperformance compared to standard allocations and other risk parity funds, though I don't think their approach makes the most sense.
stlutz
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Re: Financial times: Wealthfront's experiment in risk parity has a rocky start

Post by stlutz »

Vanguard Life Strategy Moderate Growth outperformed both WF and the AQR fund for this. Meaningless but fun to note this this is of course Bogleheads.
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Re: Financial times: Wealthfront's experiment in risk parity has a rocky start

Post by solobuildingblogs »

I read Jason Zweig’s article linked above in yesterday’s WSJ. The last sentence said something like, even if you have a roboadvisor you still need to keep a watch on what they’re doing. The 2% “fee” expense is not included when wealthfront advertises their costs. The article states up to 20% of what is Invested with wealthfront might be in this fund.

Personally I keep it simple with the three fund portfolio at 0.05% expense ratios and rebalance according to how the Vanguard 2050 is allocated. This seems to have worked very well for me.

Beware the roboadvisor...
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matjen
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Re: Financial times: Wealthfront's experiment in risk parity has a rocky start

Post by matjen »

Cliff Asness was told about the performance difference between Wealthfront and AQR and here was his response:
I never gloat over short term performance. It always bites you in the you know what! Particularly when the victory is “less bad” (though markets are down over this period, and it’s a long only product, so that’s not weird).
A man is rich in proportion to the number of things he can afford to let alone.
afan
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Re: Financial times: Wealthfront's experiment in risk parity has a rocky start

Post by afan »

Always passive wrote: Sat May 19, 2018 2:50 pm
permport wrote: Fri May 18, 2018 10:02 pm
afan wrote: Fri May 18, 2018 7:11 pm A couple of months is so short a time for comparing these funds that it is pointless. Get back to this in 10 years or so.
I tend to agree with this. How many people on this forum would just throw their hands up in the air and abandon the Three Fund Portfolio just because it had a few losing months?
I agree with your comments, but how long is enough? To a human being, 10 years to decide if the investment is or is not producing the expected results is an eternity, specially if you are already invested in it.
Then don't invest in something that lacks a meaningful track record.

Ten years is on the very short end of the time one might consider enough.

It is a question of sample size. The more volatile the investment, the newer the approach, or the fewer similar efforts already in existence, the larger a sample one needs to get an idea of performance.

Like many hot new investment ideas the rational way to respond is "Interesting. If they survive that long in 20 years I will check the performance of the group of funds with long records. If they look useful at that point maybe I will consider investing. Given the record of hot new ideas, odds are that these will fade into obscurity long before that and there will be no longer term results for such funds. In the meantime, there is nothing forcing me to consider them now."
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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