Sep 4, 2015

Risk Parity In The Financial Times

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After reading quite a few articles making bad arguments against “risk parity” strategies, I wanted to write a post that elucidated my understanding of the thought process behind risk parity, while also pointing out the flaws in the arguments of some critics. I started writing something but it never came together quite the way I wanted. So instead of inflicting more muddled thinking on the world, I put it on the shelf.

Luckily Matthew C Klein at the Financial Times has written such an article and done a better job than I could ever have. This is the article I wish I had written:

http://ftalphaville.ft.com/2015/08/25/2138210/myths-and-facts-about-risk-parity/

Referenced in the above is another masterful example of financial journalism; Warren Buffett’s article in fortune magazine from 1977, How Inflation Swindles the Equity Investor.

Aside from its insights into asset pricing, Mr. Buffett’s article is interesting simply because it harkens back to a time when the problem was too much inflation, not too little. Also, given the excitement regarding the Federal Reserve Board’s impending decision on interest rates, it was striking how the article, without really even trying, seems to outline all the reasons a government, (especially an indebted one), would prefer some small inflation all else being equal.

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