Risk Parity Investing Question about this week

You are not understanding "risk parity". You say you were expecting Gold to go up AS the market went down, which is totally wrong-thinking. That would mean that the 2 assets were strongly (just negatively) correlated. That would be horrible, and not at all what risk parity does. The assets within a risk parity portfolio are selected expressly for their NON-CORRELATION to each other... their completely INDEPENDENT behavior. It's these multiple, overlapping, random behaviors, that 1 or more assets are TYPICALLY doing "well" at any given time, to be tapped for income (or for rebalancing when overweight). And looking at trend lines minute-by-minute or within a day or such is just plain bonkers. ZOOM OUT. The Golden Ratio is awesome (and being FIREd for 5 years and my FI wife FIREing next year, we're effectively 100% Golden Ratio) for a number of reasons, that largely comes down to it having the highest Safe Withdrawal Rate. The blend of funds means, that, where a 100% Equity (Total Stock Market portfolio:

Total Stock Market Portfolio – Portfolio Charts

) can go down up to 50% or be down for over a decade, the Golden Ratio portfolio (

Golden Ratio Portfolio – Portfolio Charts

) is expected to only go down up to 20% and recover within about 3.3 years (take a look at the Performance charts for each, side by side, on a large screen). Yes, there is absolutely still volatility, but it is substantially less, while still growing at a decent clip.

Good question. Makes me wonder if the correlation formulas smooth themselves, or actually consider daily movement.

Can anyone help explain this to me? I'm new, and I want to understand!

Even the most pro of the pros don't understand what moves markets until they see the data and what happens. Treasury auction to satisfy US government debt need changing duration mix and/or undersubscribed? Day of common option contracts expiring and gyrating the amount of money in markets? Obscure political squeeze impacting physical delivery of 1/5 of all the world's supply of a crucial commodity?

Unless you have all the data (and maybe then some) you won't even have a clue as to what underlies price movements. After working at large firms with the best resource and data, I laugh when any talking heads start "explaining" what happened in markets.

As others have said, keep a very broad view, long time horizon, and don't lose your cool. Take the overall principles, and work on identifying what effectively amounts to noise.

Correlations reflect the relative behavior of two assets over a specific period of time. Having a correlation with some other asset very near zero means the asset can move in any direction relative to that other asset. Same direction, opposite direction or flat. So in reality, gold and managed futures did exactly that yesterday. When the market dipped, they shook their magic 8 ball and it said, "outlook not good". On another day under similar conditions, they could go up or hold steady.

Note too that correlations change depending on the time period you look at. Gold (GLD) has a 0.08 correlation (strongly uncorrelated) to the total market (VTSMX) since 12/1/2004. Screen shots from Portfolio Visualizer.

If you narrow your view to only since 2025, gold looks mildly negatively correlated (-0.30) to the total market.

Just like how you want to base your investment choices on as much historical data as you can get and not on recent performance, a correlation over a longer time period is more instructive of how an asset will behave than a correlation over a shorter time period.

I am continuously amused by FI folks with short term horizons. Timeframes of a day, week, month or year are subject to more randomness than decades. Drawing conclusions based on shorter term results is just guess work. Take a close look at the S&P 500 results from 1/1/2000 to 1/1/2010 (aka the lost decade). Control what you can control (expenses and diversification) and take the results where the come. You don't say what stage in your journey you are, but please recognize the risk parity portfolio strategy is targeted at decumulation not accumulation. The big picture is to trade off expected higher returns for lower variance while you are decumulating (aka spending down).

Look today, stocks up, gold up! Dollar down.

but Monday maybe gold and dollar go the same way. It’s not one for one as there are many factors that go into these markets. All the more to zoom out.

Great that you’re getting into risk parity, after analyzing all that was out there it’s what clearly makes sense.

I highly suggest creating a side brokerage account of $10k and running it as a full test case of your desired portfolio with doing withdrawals (transfer to another account). This helps so much with understanding the dynamics of rebalancing, withdrawals, and how it all works before you need it to. Frank walked through this on a bigger pockets episode.

Risk parity didn’t fail, zoom out a little. Markets are imperfect so daily fluctuations won’t match how you expect prices to rise and fall. But over months and years through the different macro environments, asset classes function in typical correlations to one another.

yesterday dollar went up so anything tied to the dollar went down. If you hold long term treasury those went up, so risk parity worked!

I can’t explain it eloquently, but alternative investments like gold etfs and managed futures have zero to minimal correlation to both stocks and bonds. So sometimes they go up together, sometimes go down together and sometimes move opposite of each other. Time is your friend here. There is a lot of movement in the market lately due to “AI bubble?”, the dollar fluctuating in value, and recessionary risks. Among other things as well. Risk parity portfolios are a long term, stay the course model.

Intermediate and long-term bonds are a part of your diversified portfolio for recessionary insurance, which is why they have held steady this week. People are skittish at the moment.

If you haven’t already, dive into portfoliocharts.com

, portfoliovisualizer.com, and testfol.io You can look at asset classes and sometimes your specific portfolio allocations to see how correlated your portfolio is. The websites have so much info to glean. Have fun!

Jenny