Risk Parity

Target high returns and greater consistency with this insightful guide from a leading investor

The market volatility exacerbated by the COVID-19 pandemic has led many to question their exposure to risk in their own portfolios. But what should one do about it?

In Risk Parity: How to Invest for All Market Environments, accomplished investment consultant Alex Shahidi delivers a powerful approach to portfolio management that reduces the potential for significant capital loss while maintaining an attractive expected return.

The book focuses on allocating capital amongst four diverse asset classes: equities, commodities, Treasury bonds, and Treasury Inflation Protected Securities. You’ll learn about:

• The nature of risk and why traditional approaches to risk management unnecessarily give up potential returns or inadequately protect against catastrophic market events
• Why proper risk management is more important now than ever
• How to efficiently implement a risk parity approach

Perfect for both individual and professional investors, Risk Parity is a must-have resource for anyone seeking to increase consistency in their portfolio by building a truly balanced asset allocation.

Foreword ix

Preface xi

Acknowledgments xiii

About the Author xv

Introduction xvii

Chapter 1 What Is Risk Parity? 1

Chapter 2 Two Steps to Build a Well-Balanced Portfolio 11

Chapter 3 Equities 21

Chapter 4 Treasuries 35

Chapter 5 TIPS 51

Chapter 6 Commodities 63

Chapter 7 Other Asset Classes 75

Chapter 8 Risk Parity Portfolio Summary 89

Chapter 9 Risk Parity Portfolio Historical Returns 99

Chapter 10 The Timeliness of Risk Parity 115

Chapter 11 The Rebalancing Boost 129

Chapter 12 Efficient Implementation 135

Chapter 13 When Does Risk Parity Underperform? 143

Chapter 14 FAQs 155

Chapter 15 Conclusion 173

Index 175

ALEX SHAHIDI is Managing Partner and Co-Chief Investment Officer at Evoke Advisors, one of the largest registered investment advisors in the United States. He has over two decades of experience as an investment advisor managing billions of dollars for institutional and ultra-high-net-worth clients. Alex is a Chartered Financial Analyst charterholder, a Certified Investment Management Analyst, and a Certified Financial Planner. Barron’s magazine has repeatedly ranked him as one of the top financial advisors in the country. Alex has been interviewed on Bloomberg Television and Radio, BBC World News, and Yahoo! Finance and for articles in the Wall Street Journal, Barron’s, and other major publications. He has also been featured in numerous podcasts including Capital Allocators, The Investor’s Podcast, and Seeking Alpha.

Most portfolios that promise high returns take on an excessive amount of risk. Black swan events like the 2008 financial crisis and the COVID-19 pandemic have highlighted the devastating impact this can have on the typical portfolio. But is there anything the average investor can do differently?

In Risk Parity: How to Invest for All Market Environments, a veteran investment advisor delivers a roadmap to achieving equity-like returns with less risk. Drawing on decades of experience managing billions of dollars, the author explains how traditional risk management approaches give up potential returns yet still leave portfolios vulnerable to catastrophic market events. He then shows how investors can do far better with a more balanced portfolio that is less susceptible to shifting economic environments.

You’ll discover how a simple, passive approach to allocating risk across equities, commodities, Treasury bonds, and Treasury Inflation Protected Securities (TIPS) can produce a reliably diversified portfolio that anyone can access.

Perfect for both individual and professional investors, Risk Parity: How to Invest for All Market Environments is the ideal resource for anyone seeking a more consistent, less volatile path to earning attractive expected returns over the long run.

Praise for Risk Parity

“Alex’s insights and clear writing style provide a great introduction to a common investor question: how to earn equity-like returns while taking less than equity-like risk. Alex lays out the benefits of a risk parity approach to investing, defines the lower-risk asset classes that can be structured to achieve higher returns in ???parity’ with equities, explains which market environments benefit each asset class, and provides historical evidence that the approach works over many investment timeframes. If you want to learn how risk parity as an alternative to traditional 60/40 portfolio construction can work for you as an investor, Alex’s book is a great read.???

—BRIAN HIGGINS, Founder and Managing Partner, King Street Capital

“Alex is a clear thinker who attacks a challenging investment framework from first principles. In Risk Parity, he peels back the onion one layer at a time, with each iteration offering more depth and nuance. Risk Parity offers both a refresher on what drives investment returns and a thoughtful paradigm to execute.”

—TED SEIDES, investor; host, Capital Allocators podcast

“Alex is one of the pioneers who thoughtfully allocates capital for his asset owners in an investment world with so many unknowns.”

—FRAN KINNIRY, CFA, Principal, Global Head of Private Investments, Vanguard

“Alex has a long track record of successful investment strategies for both institutions and high wealth individuals. He has articulated his vision for success in this book and it provides valuable insights for anyone seeking intelligent portfolio planning.”

—JIM GIANOPULOS, Chairman and CEO, Paramount Pictures

“Diversification is the only free lunch available to investors. Alex’s book brilliantly explains how to best balance a portfolio.”

—BRUNO DEL AMA, Co-Founder, Global X ETFs