All-Season Portfolio: Risk Parity Allocation

by: Scott's Investments

Earlier this year I launched an "All-Season" ETF Portfolio. The initial launch of the portfolio provided a static allocation to 8 ETFs and was inspired by Ray Dalio of Bridgewater Associates.

I have added two dynamic allocations to the All-Season portfolio spreadsheet. The first is an unleveraged risk-parity asset allocation. The allocations for each ETF are updated daily based on the trailing 20-day volatility of each ETF as calculated using adjusted closing prices. The allocation to each ETF is calculated by taking the inverse of its trailing 20-day volatility and then calculating the percent each ETF contributes to the sum of all the inverse volatilities (for an example of the calculation please visit the spreadsheet). Bottom line: the lower trailing volatility an ETF has relative to the other ETFs in the portfolio, the higher its allocation.

The allocations as of last Friday's close are below. The 20-day volatility is listed along with the static allocation I proposed in January. While the allocations update daily, I do not personally check the allocations daily nor do I endorse checking allocations daily. The spreadsheet and calculations were created to allow for maximum flexibility; hence, the daily updates:

Name Symbol Original Static Allocation Historic 20-Day Volatility of ETF Risk Parity Weighting
Vanguard Total Stock Market VTI 18.75% 12.85% 5.11%
PowerShares DB Commodity Index Tracking Fund DBC 7.25% 7.01% 9.38%
SPDR Gold Trust GLD 7.25% 14.23% 4.62%
iShares iBoxx $ High Yield Corporate Bond Fund HYG 6.50% 3.60% 18.27%
iShares Emerging Markets USD Bond ETF EMB 14.50% 4.44% 14.80%
iShares Barclays TIPS Bond Fund TIP 20.75% 4.51% 14.57%
iShares Barclays 20+ Year Treasury Bond ETF TLT 12.50% 12.42% 5.29%
iShares Barclays Aggregate Bond Fund AGG 12.50% 2.35% 27.96%
Click to enlarge