The Mindsets of Risk Parity

Part of understanding Risk Parity as an investment approach is understanding if it aligns  with an individual investor’s goals, personality, and habits. Here are three mindsets it is important to have as you pursue learning about RP and possibly implementing it for real.

Risk Parity is not for everybody, and it is good to know that going in. I offer in the following posts a couple of ways to tell if Risk Parity aligns with you. I call these “mindsets” because I want to emphasize that they are ways to look at investment choices, rather than rules for portfolios.

When thinking of Risk Parity investing, the three mindsets are:

  1. It’s about the recipe, not just the ingredients – Pay attention to how the parts of a portfolio work together as a whole.
  2. ‘Country and Western Diversification’ is not enough – Aim for true diversification across a broad range of asset classes
  3. Have a portfolio like a decathlete – prepare for a variety of economic conditions and not just fit for one.

One other note: you’ll notice that I use some convoluted metaphors to make my points. In writing this, I’m leaning on the skills I use in my day job of teaching 8th Grade: the use of analogies to help 14 year-olds understand concepts and events. These will seem like a bit of a stretch, but the important thing is whether they stick!