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Resolve's Gestalt University

Nov 18, 2020

This is “ReSolve’s Riffs” – live on YouTube every Friday afternoon to debate the most relevant investment topics of the day.

As US equities and bonds continue their apparently unstoppable rally, their expected return over the coming years grows vanishingly small, Especially if markets are faced with anything other than the goldilocks environment of growth, deflation and abundant liquidity that has ruled the past 12 years.

Readers of our research (as well as any student of history) will know that stocks and bonds can go through prolonged periods of synchronized underperformance, while Risk Parity can navigate virtually any form of inflationary or growth shock. But when executed properly, with periodic rebalancing, Risk Parity can benefit from a substantial tailwind, as we showed in our recent paper – Maximizing the Rebalancing Premium.

Our discussion of the rebalancing premium and its implications for investors included:

  • The traditional thinking on rebalancing is likely outdated – adjusting for drift is not enough
  • Defining the rebalancing premium and how it can be maximized
  • The benefits of rebalancing for different implementations of Risk Parity
  • Why buy-and-hold investors are paying this premium
  • Risk Parity vs the ubiquitous 60/40

The debate also delved into the importance of reducing volatility drag to smooth out the path portfolios take and improve geometric returns.

Thank you for watching and listening. See you next week.