Investments and Pensions Europe
It is often said that long-term investors can rely on equity returns since they can withstand short-term periods of underperformance and still survive to realize the benefits in the long-term. In this article, the authors contend that in the past 40 years stocks have had no better risk-adjusted returns than bonds or commodities (and if you study the narrower, but longer data histories since the 1920s, risk-adjusted returns on equities actually have been slightly lower than bonds).
Regardless of whether or not an investor believes they have a long or short investment horizon, this empirical observation leads to a surprising fact: not only would a risk-diversified portfolio managed to similar risk levels have had more muted drawdowns than the traditional, equity-dominated portfolio, it also would have had higher returns. That is, despite the conventional wisdom, in the long run an equity-oriented portfolio did not deliver the highest returns, and certainly not the highest risk-adjusted returns.
The benefits of risk parity should not, however, be oversold. As we have demonstrated, Sharpe Ratios of risk parity portfolios should be a bit higher than that of traditional allocations, but investors should not expect steadily higher returns.
The authors write that risk parity is not a “silver bullet,” but say they believe that within the larger context of a traditional allocation, it is a useful strategy that raises portfolio risk-adjusted return while reducing concentration in equities.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.