All Weather Portfolio: Risk Parity Allocation
Earlier this year I launched an “All-Weather” ETF Portfolio. The initial launch of the portfolio provided a static allocation to 8 ETFs and was inspired by Ray Dalio of Bridgewater Associates.
I have added two dynamic allocations to the All-Weather portfolio spreadsheet. The first is an unleveraged risk-parity asset allocation. The allocations for each ETF are updated daily based on the trailing 20-day volatility of each ETF as calculated using adjusted closing prices. The allocation to each ETF is calculated by taking the inverse of its trailing 20-day volatility and then calculating the percent each ETF contributes to the sum of all the inverse volatilities (for an example of the calculation please visit the spreadsheet). Bottom line: the lower trailing volatility an ETF has relative to the other ETFs in the portfolio, the higher its allocation.
The allocations as of last Friday’s close are below. The 20-day volatility is listed along with the static allocation I proposed in January. While the allocations update daily, I do not personally check the allocations daily nor do I endorse checking allocations daily. The spreadsheet and calculations were created to allow for maximum flexibility; hence, the daily updates:
| Name | Symbol | Original Static Allocation | Historic 20-Day Volatility of ETF | Risk Parity Weighting |
| Vanguard Total Stock Market | VTI | 18.75% | 12.85% | 5.11% |
| PowerShares DB Commodity Index Tracking Fund | DBC | 7.25% | 7.01% | 9.38% |
| SPDR Gold Trust | GLD | 7.25% | 14.23% | 4.62% |
| iShares iBoxx $ High Yield Corporate Bond Fund | HYG | 6.50% | 3.60% | 18.27% |
| iShares Emerging Markets USD Bond ETF | EMB | 14.50% | 4.44% | 14.80% |
| iShares Barclays TIPS Bond Fund | TIP | 20.75% | 4.51% | 14.57% |
| iShares Barclays 20+ Year Treasury Bond ETF | TLT | 12.50% | 12.42% | 5.29% |
| iShares Barclays Aggregate Bond Fund | AGG | 12.50% | 2.35% | 27.96% |
Stay tuned this week for details on the second dynamic allocation tool, the “minimum correlation” weightings!
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2013-03-04 02:46:51
Source: http://www.scottsinvestments.com/2013/03/04/all-weather-portfolio-risk-parity-allocation/
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Whistler Blowers, Insiders
I had a look at your spreadsheet. Well you are not using a risk parity strategy at all. You are just weighting the ETFs inverse to their overall volatility! That has nothing to do with a risk parity approach or with the concept Ray Dalio of Bridgewater Associates is applying!