Author Topic: New Wealthfront tool: Risk Parity - Is it worth it?  (Read 1255 times)

justostash

  • 5 O'Clock Shadow
  • *
  • Posts: 22
New Wealthfront tool: Risk Parity - Is it worth it?
« on: February 07, 2018, 04:26:02 PM »
I just got notified that Wealthfront is adding a new tool called 'Risk Parity' to its offerings. They are automatically activating this tool for all Passive Plus users. It is expected to increase total fee by 0.08%. How nice of them. You can, of course, opt-out.  So they are creating a special mutual fund (that has a 0.5% expense ratio). And then they make that mutual fund 20% of your portfolio.  This really sounds fishy to me.  I thought their whole point was using low fee index funds, or no-fee direct indexing.

Maybe on this thread, let's not get into the discussion of whether robo investment in general is worth it :).  Let's assume it's a generally ok thing to do and just evaluate this Risk Parity deal.

Here is their marketing speak:
Quote
Introducing Risk Parity
Today, we’re excited to announce the launch of Risk Parity, the newest addition to our PassivePlus® suite of time-tested, rules-based investment strategies.

Pioneered by Bridgewater Associates, the largest hedge fund in the world, risk parity investment strategies are predominantly available to institutional investors (e.g., endowments, pensions, insurance companies, etc.). By balancing your risk more intelligently, Risk Parity aims to increase your after fee risk-adjusted returns in a wide range of market environments. Learn more about Risk Parity.
What you should know:
• To implement Risk Parity, we’ll add a Wealthfront-managed risk parity mutual fund to your account, which will increase your total cost to invest by 0.08%. Learn more

• The strategy will automatically activate on February 22nd.

• If you want to forego the benefits of this strategy, you can opt-out of Risk Parity.

And some more:
Quote
What is Risk Parity?
Risk Parity is part of our PassivePlus® signature suite of investment features. By balancing your risk more intelligently, Risk Parity aims to increase your risk-adjusted returns in a wide range of market environments.

Pioneered by Bridgewater Associates, the largest hedge fund in the world, risk parity investment strategies are predominantly available to institutional investors (e.g., endowments, pensions, insurance companies, etc.). Net-of-fees, Bridgewater’s risk parity strategy, known as the All Weather Fund, outperformed the return of a portfolio with comparable risk (60% stocks/40% bonds) by an average of 0.6% per year over the past 20 years.

Wealthfront offers its own version of Risk Parity for taxable investment accounts with $100,000 or more. Learn more about how this strategy works.

and more!
Quote
Risk Parity equalizes the risk contribution of each asset class in your portfolio and then applies leverage to scale the risk of the portfolio to a desired expected annual volatility. Wealthfront’s Risk Parity targets an annual volatility of 12%.
« Last Edit: February 07, 2018, 07:10:05 PM by justostash »

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1132
  • Location: Seattle, WA
Re: New Wealthfront tool: Risk Parity - Is it worth it?
« Reply #1 on: February 07, 2018, 04:44:58 PM »
Here's the problem:  Volatility is not the same as risk.   Risk should be framed as the chance of losing money.  An asset can be very volatile, but never go below its initial value.  And that's the way stocks work if your holding period is long enough.  The risk becomes zero or close to zero once your holding period is about ten years.*   Since most people's holding periods are much longer than that, your risk of actually losing money in the stock market is zero.  Since your risk is zero, why do you care about managing the volatility?  You don't.  But if you did, you can tamp down the volatility by simply adding cash to your portfolio without affecting returns very much.

Remember, stocks go up and down, but money you pay in fees is lost forever. 

*Cavaet that the future is no worse than the past, but Wealthfront's models are based on the past as well. 




Indexer

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: New Wealthfront tool: Risk Parity - Is it worth it?
« Reply #2 on: February 08, 2018, 08:51:03 PM »
Seeking Alpha has a really good article on Risk Parity.

https://seekingalpha.com/article/4144431-problem-risk-parity

Conclusion: Don't bother. Stick with the AA that makes the most sense for you.