3 must-read books for better understanding Risk Parity Investing and the All Seasons Portfolio Strategy

3 must-read books for better understanding Risk Parity Investing and the All Seasons Portfolio Strategy

  • Recommendations for the 3 best books to start with for better understanding risk parity investing
    • The Permanent Portfolio by Craig Rowland and J.M. Lawson
    • Balanced Asset Allocation by Alex Shahidi
    • Risk Parity Fundamentals by Edward Qian
  • Reviews of each book below and suggested reading order
  • Which to pick if you are only going to read one of them

The isolation and restrictions during the Covid-19 pandemic as a result of various local lockdowns and curfews have been challenging to say the least. How can you spend your time in an effort trying to stay sane, when you can no longer travel, barely go to the office, and perhaps not even physically meet friends and family.

Now in March, it becomes one full year of the exceptional circumstances and measures to limit spreading of the virus. It has been a difficult year for all, but even worse for some directly affected by the worst imaginable consequences of the pandemic.

But how do you spend your time locked into your own home trying not to go completely crazy? For me, a great refuge has been to maintain this blog, which helps me occupy my mind, study current economic affairs, and have meaningful discussions. It has been a great joy in my life and I thank you for that!

In another attempt to escape reality for a few moments at the time – and at the same time getting something beneficial from this year – I made an effort to read more books in 2020. That is at least an activity that has not been taken away from us and that is still possible to carry out (as long as bookstores manage to ship books to our homes).

To combine these two activities (maintaining this blog and reading more books), I picked up three great books on risk parity investing to further expand my knowledge in this field.

What about you? Have you felt you haven’t known what to do with your days in quarantine? Could you have used your time a little better by reading a bit more?

Well you still have a great opportunity to catch up on you reading. As you have already found this blog, I draw the conclusion that you have at least some interest in diversified and risk balanced investing. If you have time for another book, perhaps you should consider learning more about how to better manage your money.

Why read books about risk parity?

Risk parity investing is an established discipline among institutional investors and family offices. Of these, the most famous are Bridgewater Associates’ All Weather fund was a pioneer of the field, and is only accessible to pension funds and high net worth individuals.

But the benefits of risk parity investing reach also retail investors – people who do not get access to Bridgewater’s products. Most investors are easily swayed by the most recent developments on the stock markets and are therefore not sufficiently protected against the effects of what changes in expectations of economic growth and inflation can do to a portfolio. This will cause distress and harm to the small investor.

Risk parity as an investment strategy has thus been overlooked by most retail investors, even though there are times when it comes into fashion again – usually in the aftermath of a financial crisis (2000, 2008 and 2020), but is then (unfortunately) soon forgotten when the stock market re-enters better times. For the record, I started this blog already in late 2019, so it is not a product of a fad.

What I am trying my best to convey here, is that it is not enough to be interested in risk parity strategies, such as the All Seasons Portfolio strategy only after a crash, but to have the insight to implement protection already when it is economical to do so.

If you set up a risk parity portfolio after a financial crisis and in the immediate wake of it by reducing your stock holdings and buying gold and bonds, you will be too late and will be losing money on this tardiness. You would be selling stocks at their lows and buying safe asset at their highs – the opposite of what the wise investor should do.

On the other hand, an investors who already before the crisis had a risk parity portfolio in place, could use the crisis as an opportunity to rebalance her or his portfolio by selling from the safe assets which are high in price, and buying stocks which are cheap.

Clearly it is the wiser choice to use a risk parity strategy in the long-term from a risk/reward perspective. But how do you get started, and where can you find information on what risk parity investing means?

Reading is a pastime of successful investors, not only in quarantine, and if you are keen on setting up your own risk parity portfolio (it is very easy to do with widely available ETFs), you should begin by seeking information on this investment discipline in the form of literature.

To make the getting started phase a bit easier for you, in this article, I highlight three great books about setting up a balanced portfolio. They all describe asset classes included (mainly stocks, bonds, gold, and commodities), and, more importantly, the reason behind why each asset class is needed in a portfolio to protect against the changing seasons of the economy.

The three great books are:

  • The Permanent Portfolio by Craig Rowland and J.M. Lawson
  • Balanced Asset Allocation by Alex Shahidi
  • Risk Parity Fundamentals by Edward Qian

These three books will all be presented in more detail below, but let me begin by saying that there is a natural order in which these books ought to be read, as they differ somewhat in accessibility and complexity. The order the books are presented, is also the recommended order of reading, based on their contents.

For example, The Permanent Portfolio is presented in a clear and educative way that can be understood by every investors, while Risk Parity Fundamentals requires at least a pre-existing and basic understanding of risk parity and assets (knowledge that is picked up from the two previous books).

The core concept behind all presented books is that life and economic conditions are uncertain. One can therefore not put all eggs in one basket and solely hope that over time through cost averaging, the stock market will provide good average returns over time, and you may even need to withdraw money from your investment account during down years. Hence, it is vital that you prepare your portfolio in a way that you achieve the same annual return, but with much less volatility. The three books presented below teaches you how you can do that, and, more importantly, why it works.

The Permanent Portfolio by Craig Rowland and J.M. Lawson

The Permanent Portfolio, written by Craig Roland and J.M. Lawson, guides you through Harry Browne’s investment approach. Harry Browne was a financial advisor and a pioneer in recognising the different economic conditions and how to construct a portfolio that can withstand the turns between these conditions.

This book offers a practical approach to building a diversified portfolio, and also assists you in mitigating other risks as well than only financial (for example how to allocate your gold investments in both ETF form for the liquid share, and bullion for the core part of the allocation).

While the permanent portfolio advertise by the authors is not a risk parity portfolio per se (please bear this in mind while reading), as the asset allocation is balanced only when considering capital allocation rather than risk allocation to each economic condition, the fundamental basis for each asset included holds true. This book therefore remains a great resource for better understanding what added value each component of a diversified portfolio brings to the overall performance.

Excerpt from The Permanent Portfolio

Especially if you are not yet too savvy on investing, portfolio management and how the economic environments affect assets, The Permanent Portfolio is the absolutely best book you can pick up to get started on your journey toward a better portfolio. According to the authors, a portfolio should be simple, safe and stable, which is a motto I can get behind to 100%.

The book is laid out by first presenting why it is necessary to decrease risk when investing and then what the “permanent portfolio” is. Thereafter, you get a great background to each of the asset classes used in the portfolio (stocks, bonds, gold, and cash) and their biases, before you receive a great overview on how to practically implement and maintain a permanent portfolio on you own. This practical approach is one particularly appealing trait of this book and why it is useful for new investors.

Final words: I just finished this book myself and found it a great reading experience. The book was quite easy to follow thanks to its educative format. Highly recommended for anyone looking for a place to start with diversified investing and to have a better balance in your financial life.

Buy it on Amazon.com


Balanced Asset Allocation by Alex Shahidi

Of the three books presented in this article, while all are great, the Balance Asset Allocation by Alex Shahidi is by far my favourite. It ranks somewhere in the middle of the other two books in terms of complexity, but when compared to The Permanent Portfolio, this book actually describes how to construct a portfolio with risk parity in mind.

The author, Alex Shahidi, is the fund manager of the recently launched RPAR ETF (which literally stands for “Risk Parity ETF”) and he has repeatedly been ranked as one of the top financial advisors in the USA.

The subtitle of the book is “How to profit in any economic climate”, and that is the purpose of a truly diversified portfolio. Stocks will do well in times of economic growth, but as we saw when growth was cut down with the coronavirus pandemic, other assets will bring stability to your portfolio.

With regard to the book’s contents, you may expect to first find a convincing argument of why most retail investors’ portfolio are not well balanced. This includes “permanent portfolios” as described in the book review above. Then you will find a segment that you will recognise from The Permanent Portfolio: a case for the different economic environments and how each asset class performs in them. Where Balanced Asset Allocation deviates from The Permanent Portfolio in this segment is twofold: firstly, the review is more detailed and with more depth in Alex Shahidi’s book, and secondly, here you will also read about commodities and inflation-linked bonds which are two asset classes not covered in The Permanent Portfolio.

Excerpt from Balanced Asset Allocation

But Balanced Asset Allocation does not stop there. Because this book teaches you more about how to think about portfolios and constructing them than just a copy-paste approach, you will also learn how you should think when you want to include other asset classes in your portfolio. This thinking could be applied to for example cryptocurrencies or real estate. You will need to consider how does any new asset class perform in the different environments, and you will also need to consider their volatility to maintain the risk balance of your portfolio.

As mentioned earlier, this is my favourite of the three books, as it describes a risk parity approach to investing in a deep and meaningful way, but not being as complex as Risk Parity Fundamentals (which I will describe shortly).

Final words on Balanced Asset Allocation is that if you are only going to pick up one book on this topic, this is the one to choose. It best covers clear and understandable information on risk balanced investing and the core underlying reasons why this way of sensible investing is superior to unbalanced portfolios only including one or two asset classes.

Buy it on Amazon.com


Risk Parity Fundamentals by Edward E. Qian

The third and last book that I recommend in this article is Risk Parity Fundamentals by Edward Qian of PanAgora Asset Management. Qian is one of the pioneers in the risk parity sphere and actually the one who coined the term “risk parity” in 2005.

While the two previous books described in this article were of a more theoretical nature, giving you an understanding of how to set up a portfolio and why it works, Risk Parity Fundamentals is really awarding you with in depth insights and how these portfolios have stood against actual market conditions.

You will learn about the mathematics behind risk parity portfolio construction, find tonnes of data and graphs described in a comprehensible way, for example how each of the asset classes stocks, bonds and commodities have performed in the past, and how a risk balanced portfolio in turn has performed through various market conditions.

The inflationary 1970s and the wake of the Global Financial Crisis of 2008 are only a couple of periods covered as examples of times of adverse effects on asset classes, and perfect examples of why risk parity portfolios give more stability.

Excerpt from Risk Parity Fundamentals

This book also covers other adjacent topics, for example how risk-on/risk-off market sentiments impact assets and portfolios, how currency exposure affect risk parity portfolios, duration on bonds, roll yields of commodities, and much more extremely useful knowledge.

My only word of warning though is that you better pick up at least one of the two previously described books before reading Risk Parity Fundamentals. This is a fantastic book and I highly recommend that you take your time to consume it, but it helps if you have some background information on diversified portfolio strategies. As some sections of the book may be information heavy, it is good to read it piece by piece and consider each section of a chapter to better take in the details described.

Of the three books covered by this article, this is the book from which I learned the most, and I am certain you will feel the same way. That should be the goal for reading, wouldn’t you agree?

Buy it on Amazon.com


Do you want to increase your knowledge and understanding of risk parity investing and building a more stable and balanced portfolio? I bet that by reading these three books, you will learn all you need to know to get started with more intelligent investing by seeing past high-risk portfolios with only stocks and realizing that by reducing volatility, you have better chances of getting rich.

As Warren Buffett once famously commented, his number 1 rule is “Do not lose money” (his second rule is “see rule number 1”). By reducing volatility and thereby drawdowns, you don’t need to increase the portfolio risk to get back to the level where you started. By having protection in place all the time for every market condition, you will see safer and more stable growth of your wealth.

What if you cannot buy all of these three books right now? In that case, I strongly recommend beginning with Balanced Asset Allocation by Alex Shahidi. It best and most educationally describes the function of each asset class from the portfolio perspective, combined with a practical approach in constructing a risk parity portfolio on your own.

What is your best book tip for anyone looking to improve their investment decisions? The Intelligent Investor by Benjamin Graham? The Most Important Thing by Howard Marks? Or maybe The Black Swan by Nassim Nicholas Taleb? Which ever book it is you feel any prudent investor cannot miss, share your recommendations in the comment section below to help spread the knowledge!

Thank you kindly for your attention, and I hope you have found inspiration to become an even better and wiser investor,
Nicholas Ahonen

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