FinancialContent is the trusted provider of stock market information to the media industry.
June 03, 2012 at 01:03 AM EDT
Works if Small, Fails if Large
The Wall Street Journal had an article on risk control that had the attitude of “here are some silver bullets.” Ugh. When will journalists learn that there are no simple solutions to portfolio management? “Risk-allocation turns 50 years of portfolio theory on its head.” Ain’t true. Modern Portfolio Theory is garbage, but so is this. [...]

The Wall Street Journal had an article on risk control that had the attitude of “here are some silver bullets.”  Ugh.  When will journalists learn that there are no simple solutions to portfolio management?

“Risk-allocation turns 50 years of portfolio theory on its head.”

Ain’t true.  Modern Portfolio Theory is garbage, but so is this.  So volatility is more stable than returns.  Volatility can be up or down, and you want to buy volatile asset classes that have gotten trashed.  You won’t do it because you are scared, but that is part of why you aren’t a good investor.  Good investors make the “pain trades.”

Here’s the question to ask: What would happen if everybody did this?  Unlike share-weighted indexing, not all strategies can be applied by everyone at the same time.  I have written about risk parity before:

So long as there are few using the strategy, it may work well, but it will not scale because volatility does not match the proportion of assets available to be purchased.  The same is true of “risk control” and “risk budgeting” strategies.  They will be “flashes in the pan;” there is no necessary reason why they will work.  There is no such thing as risk, but there are risks.

Avoid faddish ideas as described in the WSJ article.  Far better to focus on what risks you face in the investment markets, and choose assets that will not be affected by those risks,or, might even benefit from them.

Using volatility as a guide to investing will fail if it gets large enough, and during bull markets, it will be forgotten.  Non-scalable strategies work if there is a barrier to entry, and there is no barrier here.  Thus I see no long term value in the strategies proposed.


Stock Market XML and JSON Data API provided by FinancialContent Services, Inc.
Nasdaq quotes delayed at least 15 minutes, all others at least 20 minutes.
Markets are closed on certain holidays. Stock Market Holiday List
By accessing this page, you agree to the following
Privacy Policy and Terms and Conditions.
Press Release Service provided by PRConnect.
Stock quotes supplied by Six Financial
Postage Rates Bots go here
   
Financial Widgets

Display market data, financial news or stock quotes - Learn More

Advertising Network

Advertise on FinancialContent's huge network - Learn More

Web Services

Power your internet and wireless applications - Learn More