Any followers of the whole risk parity theory?  
Considering it for one pre-tax account but feel like I'm not sold on it.

Your reply is cryptic and vague to me.  

How: Apparently there are a bunch of risk parity ETFs created in the last year or three to make the basics of it trivially simple.  Lots(all?) of them are leveraged to some degree.  

Much simpler: Even if you go all in on the theory and experience smaller losses during the zombie apocalypse than 100% stocks experience, the rebound after the fact will also be smaller and/or take longer.  


The worst market periods of my adult life were 2001 and 2008 - both of those recovered completely in under 4 years.  But that 4 years only matters if you invested 100% of your money at the exact peak prior to the crashes - normal (responsible) people invest continuously over their adult lives and continue investing during a crash, therefore their cost isn't the same as the exact peak just before the crashes.  If you had been regularly contributing to your savings then your costs were spread out at well below the peaks immediately prior to the crash and your recovery time was significantly less than the 3-4 years.  In my case, I had been saving for a couple years leading up to 2008 and my all-stock 401k was only negative for less than a year.  

So while a strategy such as risk parity could've damped the loss, had my contributions kept going into the risk parity theory then my recovery time would've also been longer and the recovery smaller.  
This correlates with my understanding of risk parity - that it is a means to reduce volatility and therefore reduce the unpredictability of the future value of your investments.  

I guess my question is that, while I believe it works as intended, what age does it become a "good" idea?  I would never consider it if I was 30, but I'm late 40s and not sure it's what is best for me right now.  If the market crashes right before I plan to quit working (early 50s) then in the worst case I can simply work a bit longer to make up the difference.  

Anybody else have anything to add?

I've got about a page and a half I almost typed out. I'll come back to it if you're interested :)

Perspective, I am 48 and everyday my goal is to increase our net worth to reach our Financial Freedom number so wife and I look at the system in it's entirety, not just investing. We're gunning hard for 7 more years.

I’m listening….

Almost same age and no way I’m working until 60. I’m looking more for experiences as opposed to how.  Ie. “Did it and it worked well” or whatever.  

Still listening.....

I agree that risk parity generally will reduce the uncertainty of outcomes at the cost of returns.  
My hesitance comes from seeing some of the dud investments that common risk parity approaches require you to invest in.  

In my case, I'm looking to quit working relatively early(definitely under 10 years, maybe under 5 years) and well before social security age.  
If the economy were to crash overnight I would have no issue simply working an extra year or two to make up losses - I save a significant fraction of my pay so working(and saving) a year or two through a downturn would be lucrative for me.  

My question is: Is the reduced uncertainty of outcomes work the risk of lower returns given my relatively short timeframe and given that I can delay retiring a year or two if necessary?

Attached File

If you are/were a full time trader competing with full resources, yes a strategy like that might work. But most of us are working folks who are educating ourselves.

There are too many cliches to try and stick with for a strategy in the market. It seems every academy has a theory and every trader has a cliche:
Buy and hold
Dead cat bounce
Let your winners run, sell the losers
Rebalance
Cant time the market
Buy the dip
Insert your own flavor of the talking head cliché.

At a certain point, it’s all contradictory and just noise to generate revenue for the analysts, brokers and traders.


Disregarding all the distractions, we should focus on simplifiying and staying the course.
80% of our energy should be focused on making money in our careers by increasing our value, spot bonuses, raises.
10% of our energy monitoring spending plan/budget to not let it rise as income rises
10% reading, educating and making purchases for the long game of 7-10 years or likewise.

We (working folks) can’t compete at a high level against the professionals with teams of folks with various buying/selling strategies out there such as options, calls, sells and various strategies that sound great in a vacuum.

It’s easier to dollar cost average plow into S&P500 funds, pick a few winners and let them run for the long game. There is no “play money”. We’re playing for keeps making every single dollar count.

Ages
52-55: Still full time or part time employed but eyeing an exit sooner rather than later
Goal is hitting the Freedom Number within 18 months of 55 +/-
1)Focusing on paying off the house
2)Prepare the first bucket of the three bucket strategy.
3)Fully understand current spending plan, historical data and sketching out spending plan at 55 or hitting the freedom number

55-59.5: Sunsetted career, not working, or working but having fun in the game
1)Finish setting up “3 Bucket strategy”
a.Start focusing on the first bucket and understanding tax implications
2)Tapping bridge accounts.
Composed of individual stocks and S&P500 mutual funds


59.5-62: Enjoying Life
3)  Tapping various retirement accounts
Evaluate based on tax implications for future Required Minimum Distributions (RMDS).
ROTH accounts and Traditional accounts
4)Use bridge account sparingly
5)Filling up Bucket “2” as needed
6)Evaluate taking Social at 62+

62+

1) I'll be taking Social security as soon as it's an option
2) Tapping various retirement accounts
 Evaluate based on tax implications for future Required Minimum Distributions (RMDS).
  ROTH accounts and Traditional accounts
3)Use bridge account sparingly
4)Filling up Bucket “2” as needed


70+,
1)Tapping RMD’s as needed and required
2)Setting up future money for future generations or giving



Hence why our play is heavy S&P500 funds and winners which we are letting run for the next 7+ years. I don’t have the time, energy and distraction to try and constantly move money around for an edge. We’ve got ~1,750 days until my freedom number so I invest my energy in the 80% of what I can control to maximize the machine.

The 3 Bucket Strategy completely trumps the 4% rule due to 1 thing: emotion vs volatility!

ymmv but as an engineer, discipline is our strength. over thinking things can be a weakness too.

I am disappoint, giant post with no information about risk parity investing.  This despite it being driven by data which an engineer might find more desirable.

LOL check yourself and manage your expectations as i'll give you my perspective with a dumbed down version of an answer that's also a stonewall.

1) it's bulllshit created in a vacuum and only a sucker would go down that path.
2) i'll stack up most S&P500 based portfolios against a part time worker who uses an estoric model all day. To the point of risk parity investing being negative EV in the log game.

out.

I believe it will do what it was intended to do: reduce the variability of returns at the potential cost of absolute returns.  

As for accepting lower returns in exchange for predictability…. people do this every day with all manner of investments.  Buying a CD, a bond, an annuity, or putting cash in your dresser drawer (all guaranteed but probably lower returns than other options) doesn’t make you a sucker.  

I don’t think you’d be a sucker to do it, but I’m not confident that it is worth it for me right now.  
I also wish people could be objective in here and not get their feelings hurt!

I finally got around to asking my second favorite AI about risk parity investing.  I am having a problem seeing the advantage over what I am doing right now.  I examined a mutual fund that is supposing to practice this.  It has only been around a little over 3 years, comparing it to SPY I don't see a huge advantage.  (Not fair, as 3 years isn't long enough time to tell much).  What am I missing?  Or, am I not missing anything?

Again, the purpose is to provide more predictable results at the expense of maximum results.  

What you’re missing is that it isn’t intended to beat the markets all the time (and nobody claims that it does).  

I don't think I missed that.  The chart of the fund I looked at not only didn't beat SPY, at one point it had a noticeably more severe drawdown.  Kind of hard to see any advantage to that.  I can see choosing some thing with less performance, but also less volatility.  I can't see choosing some thing with less performance and more volatility.