Risk Parity PortfoliosRanked by Performance

Risk parity portfolios allocate capital based on each asset's risk contribution rather than its dollar weight. The goal is to ensure that stocks, bonds, and other assets contribute equally to the portfolio's total volatility, which typically results in a much higher allocation to bonds -- often with leverage applied -- than a traditional 60/40 approach. The concept was developed at Bridgewater Associates and gained widespread attention after the 2008 financial crisis, when diversified risk-parity funds held up relatively well.

Critics point out that risk-parity strategies can struggle in environments where stocks and bonds fall simultaneously, as rising interest rates can create losses in both asset classes at once. The use of leverage also introduces borrowing costs and potential margin risk that don't appear in simpler backtests. Still, for investors focused on volatility-adjusted returns rather than raw performance, risk parity offers a principled alternative to market-cap-weighted allocations.