The main folks that do have to worry about their portfolio are those who are about to retire, and those that have just retired, but there are strategies for that (against sequence of return risk):
There are a fair number of us not worried about the drop in our portfolio as much as we are worried that the current decisions will decrease the world's willingness to invest in American companies and markets permanently.
What if your hypothesis is that the fundamentals have changed?
So far, this is a minor stock correction coupled with unprecedented political uncertainty.
In my lifetime, there have been multiple -10+% single day drops, one -22%, and a bunch of -10% months. In that time though, no one has questioned the full faith and credit of the US government.
However now -- The Supreme Court had to take a case to rule that the government had to pay contracts that had already been delivered on. The Treasury has yoinked money from NY State over ACH because DOGE disagreed with the program. Musk and DOGE are trying to break departments so hard that there's no putting them back even with a court order. He's threatening Social Security, which has always been the third rail.
The trouble is that some form of stability and law is required for the sort of financial business that powers the US. There are other ways of being rich -- patronage, extractive, but that's not an engine that drives financialization and the ability to start business, get investments, and generally get some return back out of things. You lose the stability and the trustworthiness, the goose goes away, and there are no more golden eggs.
Yes, the market reaction so far has been very tame, considering that the stock market is supposed to be forward-looking, and there's another 4 (or at least 2) years of the same behavior, policies and politics we've had for just 7 weeks.
Extrapolate that 30 times out in the future, even leaving out feedback loops and nonlinear systems.
Not yet mentioned is that this is the first time the US is actively working against their allies, and it's not just the Europeans.
If - or when? - the US leaves NATO, the EU will finally have a big incentive to buy local. Right now the EU buys most of their arms from the US. Germany's 100 billion Euro special fund created at the beginning of the war in Ukraine mostly went to US purchases.
Here in Europe the sudden change with regards to Russia, and how they treated an ally that the US spent at least the last two decades actively building up (Ukraine military would have been quickly overrun in 2022 without all the work and support the US provided), there now is fear that when we really need it the US may do what they did with the Ukrainians.
It may not even be political, but it's no longer far-fetched to imagine that the US will demand major concessions and payback in order to resume support, ignoring any previous agreements, just because they can.
What still works in favor of the US is, at least here in Germany, our politicians. Just now, what did the new government - consisting of the two same old major parties that have ruled all the time since this country was created - concentrate on? Major fundamental changes? No! Immediately they went for useless spending for some of their clientele, and they only went for "borrowing a lot of money" instead of institutional changes. They may be concerned, but in the end they still refuse to move. Even the new trillion is again just a new special fund kind of setup instead of fundamental changes, and you can bet most of it will disappear in the major inefficiencies of our systems.
They have also always had a lot of problems creating a true alliance of European arms manufacturers, each country pushes their own interests with little regard for the rest.
However, should they finally wake up at least a little bit from their long fat slumber, many billions of reliable purchases from the US could disappear - plus the European arms makers will become much more competitive internationally too. Especially if more countries have doubts about the reliability of relying on the US for ongoing long-term support. That could be bad for the US arms industry from two fronts.
BY the way, I am much more mad at the Europeans, my own German government(s) especially, than at Trump. We did nothing for two decades, watching Russia prepare for war. To me it also makes perfect sense for the much more populous EU to deal with its own problems without having to ask a far away country. It's kind of like "regression towards the mean", no? The US only came to Europe because of some truly special events, but at least since the fall of the East Bloc there really is no reason. We were lucky because of all the momentum, it took the US a while to realize this (and some really bad wars). I consider the developments good for Europe in the end. We are forced to confront reality.
I just wish the Ukrainians would not have to pay such an enormous price for all those fuck-ups. Which includes a lot of actions to get Ukraine into NATO at some point (see https://en.wikipedia.org/wiki/Ukraine%E2%80%93NATO_relations) - and now when they really need it, and also because of all of that, the rug is pulled from under them.
With the world watching, that too may be a factor for future US arms deals.
In addition, the world and Europe especially also depend on the US when it comes to software. The OS and Office 365 are ubiquitous. For the cloud we have alternatives and one could use those, it is much much harder for a business not to use US software.
If Europe becomes more self-reliant, we may see some movement here. It would not work bottom-up, but all the EU has to do is demand things at least for the public sector, piece by piece. This could create some certainty and cash-flow to create European software, and create a wide basis on which businesses could later build upon.
For the US, leaving Europe has a few risks. What is never mentioned are all those secondary effects of their NATO support and dominance: This way the US keeps a lid on too much European independence, and goes far beyond defense. If Trump and Musk think it's a no-brainer to give that up, well, as a European I support them. If we can't do anything with such a chance it's our own fault. This could be really good for Europe.
> What still works in favor of the US is, at least here in Germany, our politicians.
> BY the way, I am much more mad at the Europeans, my own German government(s) especially, than at Trump.
I would go even as far as saying that a significant part of German elites indirectly work for Russians or more generally they are part of the world corruption elite (and I don't mean AfD and BSW, I mean businesspeople and parts of CDU and SPD). Since the end of nuclear plants was announced around 2000, it was quite clear they will have to be replaced, and at least since 2009 (the first Russian gas stop) it was very clear Russia can't be trusted with the one thing (or anything else). But at every turn they managed to delay or destroy effective solutions and instead pushed for Nordstream 2 and so on. And the public let them do that.
Of course it can be much worse (I'm from Slovakia) but the past doesn't give me high hopes for the future.
> What if your hypothesis is that the fundamentals have changed?
There's been recent research on survivorship bias in market returns, especially with regards to the US:
> Using international data, we quantify the magnitude of survivorship bias in U.S. equity market performance, and find that it explains about one third of the equity risk premium in the past century. We model the subjective crash belief of an investor who infers the crash risk in the U.S.~by cross learning from other countries. The U.S. crash probability shows a persistent and widening divergence from the implied global average. We attribute the upward bias in the measured equity premium to crashes that did not occur in-sample and to positive shocks to valuations resulting from learning about the probability.
I'm Canadian, so I have a different home market, but that is correlated to the US economy (cf. tariffs), but my portfolio (TSX:VGRO) also has non-US/CA equities.
Buy a world index that's not over-weighted on the US or spread your money around region indices. Keep dollar-cost averaging. Stop believing you'll get more than 3-4% yearly returns above inflation. My only real strategy change as a European was to move my money to European ETF providers away from Vanguard and BlackRock because at this point you never know what the US government is going to cook up next, and to weigh more on Europe and Emerging Markets.
What are some good European ETF providers? Do you have to be physically within Europe to use them, or can you use them as long as you have an EU passport?
It's an ETF, so it boils down to whether you have access to a particular stock exchange. European brokers support trading on US stock exchanges, so I'm sure it works the other way around too. I use Amundi and Xtrackers because they have large fund sizes, low TER, and that's what's available at the brokers I use, though not all of my brokers have Amundi, for example. The availability outside the EU shouldn't be a problem, since most funds are also at the London Stock Exchange in either USD or GBP.
Of course you could have less, but then your initial withdrawal rates becomes quite low, and so you need a much large portfolio to begin with: this would mean much more saving and much less spending (i.e., enjoyment of life) during your working life.
Yes - to make a lot of money on the expense ratio.
I guess if you really didn't want to learn a damn thing about modern portfolio construction a taget date fund is your best bet. However, it is incredibly easy to buy 4-6 ETFs that give you the same thing at a lower cost. Yes, you have to do a little work to re-balance these funds, but that is also an advantage to this approach as you have control over the re-balancing and can do it in a way that is more tailored to your specific situation.
They are cheaper than most for sure, but still more than buying individual ETFs.
Here are 4 common funds that are used in risk parity portfolios:
VTI = .03%
VXUS = .06%
VGLT = .03%
GLDM = .1%
(edit) I am not arguing that that investing in TDFs is inferior solely due to expense ratio cost - the biggest issue is that they lock you in to a specific allocation and re-balancing strategy that might not align with your specific situation.
> They are cheaper than most for sure, but still more than buying individual ETFs.
At some point you are being penny-wise, pound-foolish: saving even 10bps (0.10%) on a $1e6 portfolio is saving $1000 dollars per year on management fees. If that kind of difference makes or breaks your retirement plans you have bigger problems (and most regular folks don't have that kind of portfolio, so the savings would be even smaller).
but once you're <50bps, there are probably more important factors (like behaviour stuff: not panicking, actually putting money away monthly/regularly (especially in an automated fashion)).
Just saving the time-cost / hassling of rebalancing is worth something, and probably worth the fees you pay for an all-in-one / asset allocation solution.
TBH that last 0.05% doesn't matter much. Over a generous 40 year time it would be a <2% difference. It's not like moving from a 2% mutual fund to a 0.1% ETF.
Yeah you can definitely optimize better, but depending on your allocation you're still going to be fairly close to that 0.08% ratio on the average.
For most people, it probably makes more sense to recommend something like a vanguard target fund, so that they don't have to think too much about it or remember to rebalance as they near retirement (or actively choose not to rebalance b/c the market is currently good and then get walloped by a crash).
Anecdotally, DCA is a worse strategy when you’re doing it on the way down. Market sentiment is important. Buying on the way up is more important, and so is selling on the way down. Take profits when you can, and buy back in when the sentiment improves. It’s a better strategy than investing while the market continues to drop.
While dollar cost averaging and index investing are solid strategies, this article overlooks an important consideration: the Realistic Rate of Return (RoR) needed for retirement planning. Yes, US markets historically recover (lately that notion seems to be challenged more often than not), but timing matters significantly.
What happens if someone's retirement coincides with a market crash? Younger investors have time on their side for recovery, but as retirement approaches, blindly following market-based strategies without carefully considering your required rate of return could be problematic. Age-appropriate risk management becomes increasingly important as your investment horizon shortens.
Bob also picked the best stock market to invest in. He would have done a lot worse investing in any other stock market. It's not surprising he did well, he picked the winner.
What are the chances the US is going to have the best stock market over the next 50 years? It's possible, but doesn't seem likely.
Sure, but the lesson is that the big story is what matters, way more than detailed RoR calculations. Bob made huge mistakes, but even then compounding was the stronger force and he ended up ahead.
The story makes it sounds like he's guaranteed to end up ahead. That's not true. For instance if he was investing in Germany starting before WW1 and invested at the peaks Bob would be massively underwater.
The bob scenario is educational, but isn't relevant here. The reason why bob is still fine is that the crashes all happen during the accumulation phase. What you don't want is a crash right as you retire, causing you to rapidly liquidate a much larger portion of your savings than expected.
You liquidate rapidly if the market is way down. If you are planning on withdrawing ~4% of your stating portfolio annually to pay your expenses, the market tanking by 50% means you are now consuming 8% annually.
In the accumulation phase the value of your equities is likely to return. You never end up selling anything. But in the retirement phase you liquidate in order to pay your expenses. If you end up liquidating down too far there won't be enough future growth to cover your retirement needs.
Market crashes right after retirement are very dangerous for retirees.
> Age-appropriate risk management becomes increasingly important as your investment horizon shortens.
As you appear closer to retirement, make sure you invest in Bonds or other fixed income. It won't beat inflation but it will prevent you from draw-downs exactly when the market is down.
Call me crazy, but since the DOGE hatchet-wielding started, I've redeemed all my US bonds. I just don't have confidence that the people needed to keep TreasuryDirect running will still have their jobs if/when I need to redeem them in the future.
> Call me crazy, but since the DOGE hatchet-wielding started, I've redeemed all my US bonds.
Not crazy given the incompetence in American political leadership.
BUT, if US treasuries default, your savings accounts, agency, municipal, state, international bonds, stocks - all will fail immediately.
Your literal checking account is backed by treasuries under the hood by the bank. Widespread bank runs will be likely. And even if you are at the front of the line in a run, you will not be able to withdraw $100k in actual dollar bills because banks don't have them in vaults like the old days.
What I'm hedging against is the possibility that technical issues at TreasuryDirect, and ensuing uproar, will temporarily prevent me from redeeming bonds at a time when I cannot afford to wait for a resolution.
maybe I am wrong but I view this as a very separate scenario from the US formally stating that it will default, which I agree would cause problems I'm in no way prepared for.
What did you have nothing but TBills, TIPS? Not quite sure what you have where you could just sell them. But, ya, bit silly as your money is still in USD. Nothing is happening to US bonds or there are bigger problems and all your investments are at risk.
I think this is an under appreciated comment. Almost all of our market data is predicated on a US government that places a huge emphasis on repaying its debts.
The current government is full of people who think it's clever, rather than short-sighted, to fuck people over.
It's not a joke that our credit ratings as a nation are slipping. It's real risk that those federal bonds may stop paying out.
It's actually improved a lot since I started using it in 2016, but yes. Your session breaks if you use your browser's "Back" button. It used to require you to enter your password by clicking around on an on-page keyboard, I would always open dev tools, "edit as HTML" the read-only password input and paste the password right in from my password manager.
Sure. Of course, if anyone had described what DOGE is doing 1 year ago, they would have been similarly dismissed. I wouldn't say what I am doing is "panicking" or "irrational", I would just say I'm hedging against turbulence that may well prove temporary but which might come at a bad time for me personally.
Even a high-yield savings account should beat inflation on average. Such account has an interest rate similar to the Fed rate which is set to be above the expected inflation in normal economic conditions when the Fed is neither supporting nor slowing the economy.
You should always have 2-3 years of runway in cash or other safe liquid savings (CDs, Bonds) as you get older (6 months minimum when you’re in 20s and 30s). You shouldn’t be really relying on selling assets to pay your monthly bills.
> You should always have 2-3 years of runway in cash or other safe liquid savings (CDs, Bonds) as you get older (6 months minimum when you’re in 20s and 30s).
Just before and just after retirement it's considered a good idea to go bond heavy to help mitigate sequence of returns risk:
Doesn't that assume that you're sitting on a pile of cash already and deciding how to invest it? That's not the situation for working class investors who didn't inherit a lump sum or win the lottery.
The optimal strategy for most retirement savers is "invest it as you get it" which is basically dollar cost averaging except in the rare cases when a pile of cash falls in your lap.
Yes. That's usually how the term is defined. You have a lump amount to invest and you invest it over a period of time.
Meaning shifts, and now the term is also being used in web forums to describe the investment strategy of "in each paycheck, invest a bit of money." This creates confusion.
surely as retirement approaches, you should be taking money out of your investments so that you can either live off those (and traditional savings interest) or investing in safer things like real estate?
Hm, interesting article but I wish they had included global data as well. For example, stock market crashes in Japan and other countries. As I understand it, Japan still hasn't quite recovered from its crash more than 30 years ago.
The US stock market has been an outlier for the last 150 years. Predicting that the US stock market will be an outlier for the next 150 years seems unlikely. A better predictor is likely global stock market performance, which leads to a much less rosy prediction.
> Though they varied in length and severity, the market always recovered and went on to new highs.
Not in Japan it didn't. If you bought a Nikkei 225 index in December 1989, your returns are negative to this day (apart from a very brief breakeven in 2024): that's 35 years and counting of the market not recovering and going on to new highs. And Japan's experience is probably going to become the norm rather than the exception, now that everwhere else is catching up to it demographically.
"The market always goes up in the long run" was an adage for a world of steady population and productivity growth, which is not the world we have now.
Only if you were 100% JP equities without any diversification: if you had some (20%?) bonds (and rebalanced), or had an international equities (and rebalanced), you were probably fine.
> Using Portfolio Charts withdrawal rates calculator, which uses data going back to 1970, a Japanese investor (experiencing Japanese inflation and spending Yen) with a 60% allocation to Japanese stock and 40% allocation to intermediate-term Treasuries had a 30 safe withdrawal rate of 3.2%.
Even the (S&P 500) had ten years of zero returns, and the only thing that would given a US domestic investor positive results was a bond component (and rebalancing):
Real interest rates in Japan were zero or negative for pretty much all of that same 35-year period, so bonds wouldn't have helped you either. And "you were up if you bought international equities" kind of proves my point: if Japan is the harbinger for the rest of the world, there will be no more "always up" markets to flee to.
> Real interest rates in Japan were zero or negative for pretty much all of that same 35-year period, so bonds wouldn't have helped you either.
The main thing that bonds would have helped with was in the 1980s: by regularly rebalancing to (say) 80/20 you would have taken profits off the table regularly. Further taking that (e.g.) 80% equities and putting and putting some in ex-JP/in-US would have further helped.
Even for US investors the data/research suggests some international exposure leads to better results:
Further, it looks like even in the US it hasn't been "the US market" that has done well, but rather tech specifically:
> Looking at this data, there are two distinct periods of extended U.S. outperformance—the late 1990s and today. And what do these two periods have in common? The rise of U.S. technology stocks. Bespoke Investment Group recently created this chart illustrating this phenomenon:
> Now that the U.S. technology sector makes up over 30% of the S&P 500 (as it did back in 2000), this begs the question: Is U.S. outperformance just a technological fad?
One of the mistakes that people make is not understanding that people tend towards solutions that are sold as "counter-intuitive" or "smart" because they are largely unable to independent decisions. And financial markets will respond and move in the direction of maximum pain (governments can pump trillions into the market to support them but, eventually, as has happened in Europe and now the US...they run out of taxpayer's money because this destroys productivity). Easy decisions don't exist.
ETFs are a better technology (marginally, they don't solve the issues of open-end funds) but they are primarily a psychological product, not a financial one.
For years I've been reading commentators tell me that QE completely and permanently changed the nature of valuations in US markets. Now, perhaps, we'll finally get to see whether that's actually true or not.
If they're right, no sweat. If they're wrong, a recession will trigger a substantial downward revaluation of assets. For a picture of what that might look like, I suggest reading John Hussman's market commentaries, available free online.
1. 1929 Crash & Great Depression
2. Lost Decade (Dot-Com Bust & Global Financial Crisis)
3. Inflation, Vietnam, & Watergate
4. WWI & Influenza
5. Great Depression & WWII
Regarding the Great Depression (#1,4,5). The story that is often overlook according to the historians I have read is how the lack of a Federal Reserve and FDIC contributed to the Great Depression. As there was no Federal Reserve, little regulation, and no FDIC deposit insurance... when banks failed all of their customers became financially penniless. The reason why many of those banks failed was that they were at the "edge" already due to farmers taking out massive loans during WWI as American grain was in demand and when the war ended, many of those loans went bad. When the stock market crashed, that was the straw that broke the camel's back. If we had a Federal Reserve and FDIC back then, many of those issues could have been prevented.
#3 was a combination of the Arab Oil shocks and the Vietnam War dragging down the economy.
#2 is still a mystery to me. I don't understand how a speculative bubble was allowed to develop including the mortgage backed securities nonsense could trigger a decade long recession. I assume it was due to the repeal of https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_legisla...?
SP500 is down like 8% from the ATH, which BTW was less than 3 weeks ago. People need a little perspective. I lived through the GFC and the Dotcom bust, this is nothing (so far).
Stock markets go to zero. Capitalism is disruptive and politically unpopular (the US pumps technology into the rest of the world and the US is still the exception, other countries know it works...they just don't care). Even in the US, which is the best case, you have had decades of underperformance. A 50% dip that fixes itself quickly is nothing, the US is the best case of the best case.
Btw, the original article also misses everything relevant about humans operate. During Covid, one of the FT economics columnists, a person who still makes a very healthy living from giving advice about human behaviour said that he sold his stocks, the volatility was too much, there were problems in his personal life, etc. Wiped out decades of gains in an afternoon (and was happy about it). Herding is going to, eventually, result in an almighty fallout. Risk-adjusted return from equities was already low...and this was before all barriers to entry were removed.
It's a fair point. And even short of "going to zero" the Nikkei didn't recover its 1989 high until last year. 35 years is a long time to get back to breakeven.
And most world indexes that sell funds based on historical returns do not factor in those going to zero events (for example, Austro-Hungary had one of the biggest stock markets in the world...until it didn't).
And capital freedom is itself extremely contingent historically. The reason why, for example, returns in the 40/50s were high in the US was because you couldn't take your money out of the country and the government told everyone to buy govt securities to pay for the war.
And what if you need to retire during those 35 years...these studies always look at infinite time periods, the human life is not infinite.
Issues on issues. Your financial knowledge has to only limited to the US after 1981 to not understand any of these points...but lots of people are making a ton of money selling this stuff.
This exploratory federal reserve article argues that much of the recent (i.e. 1989-2019) gains were categorically the result of corporate tax cuts. Perhaps one way of examining the new DOGE initiative.
Tangential question, as I am not an economist and don't pretend to understand any of this: what would happen if the stock market didn't recover? (Surely, it could happen? Past performance is no guarantee of future results.)
The economy would effectively collapse, and I imagine our currency would be mostly worthless. People would withdraw what they could from bank accounts, which wouldn't be able to produce all the funds, so FDIC insurance would kick in, effectively printing money, but the economy has collapsed anyway?
^ That's just my intuitive speculation. I can't really grasp the scenario of stocks never recovering. Anyone with some education/background have a good explanation? (Not sure I want to trust AI with this question.)
I doubt the economy will collapse but you will see massive layoffs.
Many of the wealthiest people of the US officially have zero income and pay zero taxes. They learned they want to be paid in stocks and stock options. When they need cash, they found it was easy to get loans using their stocks as collateral. In other words, if the stock market permanently tanks, it will affect the top 0.1% and prevent them from doing their current tax avoidance scheme.
For most people, they will probably get laid off, as corporations' seemingly only answer to a falling stock price is to reduce get head count. In Japan's case with their stock market in the toilet for the past thirty years, it led to a bi-furcated economy. The lucky with regular jobs with full benefits; the unlucky with gig jobs with no benefits.
Stocks represent ownership of companies and assets so at some point they become a bargain as you are buying assets and profit income cheap. For dividend investors permanently low prices would be good. They are quite expensive at the moment though.
Ya I think the past it felt as if the US was sharing in a global recession. This time it feels self inflicted and US Hegemony may be a thing of the past. If the dollar is no longer the world's reserve currency, I'm not sure how easily we'll be able to recover...
I really don't understand the subtitle, and the argument implied, which countless people make. Do they really believe new things can't happen?
"This thing has lasted for X years so it can't fail now". Wha...? I mean, maybe it will not fail, but not for the reason that it has lasted this much. Everything has an end, and things not observed before do happen.
If anything, what we can learn from the last... any period really, is that something unexpected will happen.
Wait a minute... The S&P 500 just started spiking back up about 20 minutes ago. It's still down 2.46% for the day -- but that's a much smaller number than the drops reported this morning.
Maybe the real question is: What have we learned from the last 150 minutes?
People say not to time it but if you took your profits December ish you’re probably much happier than if you had lost everything since then and reset to 6-12m ago unless you’re playing the short. There is a premium on mental health and market volatility.
If you took profits in December you would have watched the market continue to climb and it’s entirely possible instead of tanking right now it could have kept going and you’d just be watching it everyday go up and up.
Don’t time the market unless you know something others don’t. Just don’t.
>There is a premium on mental health and market volatility.
I find that, as soon as I pick up the crystal ball and try to play the prediction game, my mental health suffers greatly. What helps my stress levels the most is to have a portfolio that is well diversified (e.g. a risk parity style portfolio) and stay the course because the portfolio has elements that go up when equities go down.
At the end of the day, the markets can be blatantly irrational (see TSLA) for wildly variable time spans - this means that market timing is inherently gambling. Gambling with your retirement portfolio is incredibly stressful.
Risk parity got obliterated a few years ago. Risk limits were breached multiple times over on these strategies.
Thinking that you are taking a safe option is a lie you tell yourself when you want to take the lazy option: just copying what you read in some book. It isn't safe, risk-party isn't diversification, you are still gambling.
Btw, this was predictable too...the idea that bonds/equities wouldn't be correlated was clearly historically contingent based on the very recent past. It was very clear that massive financial stimulus significantly increased the risk of equities/bonds correlation going to one, it was a topic considered throughout the 2010s when people were trying to sell these funds and trying to devise ways to generate negative correlation. The problem was that lots of people were moving a lot of product based on this correlation continuing.
It sounds to me like you are specifically calling out the one crash where equities and bonds both went down at the same time? And that you are saying because this happened, we are now in totally uncharted territory where nothing from the past can be assumed to happen in the future?
No, I am saying that the correlation between equities and bonds is not constant. You need a correlation forecast to weight the portfolio correctly. The problem was the herding behaviour that happened before.
I worked in the industry at the time, we dealt with one of the biggest RP providers in my country that eventually blew up because their vol/corr forecasting was bunk and they made huge hiring mistakes because, like you, the execs thought it wasn't a directional strategy...they lost 95% of their AUM and everyone got fired, 100% of the team, gone. The timeline was very clear: rates fall, people ask how does this work with zero rates, providers say corr is holding up, it starts going wrong but then EU brings in negative rates...big bail out for the boys..., people then ask how it works with -2% rates, providers say corr is holding up, no bail out, they begin loading up on duration, numbers stack up on paper, equities skyrocketing, more duration, if rates go up then big trouble...but the Fed is in control...then rates go up, and it is over. Risk limits breached 3-4x over. I remember seeing funds that had 5-7% annual vol targets dropping 25-30% in six months.
No, it isn't. The principle is that you lever up to create components that are equal in vol...that is the "parity" in risk parity, you lever/delever to create equal-risk assets (it is actually more simple than this: because equities have poor risk-adjusted returns due to leverage limits then risk-parity was effectively increasing bond allocations and reducing equity allocation, that was it). Diversification is an outcome if you have forecast vol and correlation correctly, if you have not then it is not some magic way to increase your returns.
Yes, but that is totally irrelevant to this discussion. It is just some guff that they use to sell funds to idiots.
Again, this is a directional strategy. The firms that make money have both vol and correlation forecasting models that work. It is not magic, it is just a way to portfolio weight...which requires good inputs.
I don't think the problem is the paper losses so far. The problem is the entire social contract...or I don't know what to call it -- governmental contract? Financial world contract? Is on fire.
US giving up its place after 80 years so the gerontocracy can still feel relevant and in charge is a black swan event. We’ll correct to 30% of current value and trade sideways for 20 years.
Regular people talking about making money while giving up the world order? Rofl. You’re not in the club! Carlin already told you that.
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
And for those who want to sit on the sidelines, that's usually not a good idea:
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
The main folks that do have to worry about their portfolio are those who are about to retire, and those that have just retired, but there are strategies for that (against sequence of return risk):
* https://www.kitces.com/blog/managing-portfolio-size-effect-w...