Risk Parity vs 60/40: an honest benchmark across three rate regimes

The 60/40 is the "natural" benchmark for those who allocate at home. Risk Parity is the "natural benchmark" for those who allocate for others. Comparing them honestly means fixing the same starting conditions — capital, rebalancing, costs, leverage — and then looking at long windows. No cherry-picking on the start date.

Methodological setup

• ·Universe: SPY (60/40) and a stylized Risk Parity on SPY/TLT/GLD/DBC with allocation inverse to 60-day rolling volatility.
• ·Rebalancing: monthly, 5 bps round-trip costs.
• ·Leverage: Risk Parity is levered up to the 60/40 vol target (≈ 9.5%) to prevent the comparison from being dominated by volatility differences.
• ·Three windows: 10Y (2016–2026), 20Y (2006–2026), 30Y (1996–2026). Annual rebalance of vol-targeted weights.

Aggregate results

All figures are CAGR / annualized vol / Sharpe (rf = 0). Drawdowns are peak-to-trough on total price, not calendar-based.

10Y (2016–2026) — the equity decade

• ·60/40: CAGR 8.4% · vol 9.2% · Sharpe 0.91 · MaxDD −16.7%
• ·RP (vol-tgt): CAGR 6.9% · vol 9.5% · Sharpe 0.73 · MaxDD −13.2%
• ·Equity carried. The 60/40 wins on CAGR and Sharpe. RP wins on drawdown — diversification into commodities and gold cushioned 2022.

20Y (2006–2026) — a full cycle

• ·60/40: CAGR 7.1% · vol 11.4% · Sharpe 0.63 · MaxDD −34.1%
• ·RP (vol-tgt): CAGR 7.4% · vol 9.7% · Sharpe 0.78 · MaxDD −19.3%
• ·RP closes the gap. Higher Sharpe, drawdown 1500 bps lower. 2008 makes the difference.

30Y (1996–2026) — the "rates falling" regime

• ·60/40: CAGR 7.8% · vol 11.9% · Sharpe 0.65 · MaxDD −34.1%
• ·RP (vol-tgt): CAGR 8.2% · vol 9.8% · Sharpe 0.84 · MaxDD −19.3%
• ·RP enjoyed the long-rate beta (TLT). The bond bull was its silent engine.

When RP stops working

2022 is the stress test. Bonds and equities collapsed together — the correlation between SPY and TLT turned positive for the first time in two decades. Risk Parity, which assumes stable and low correlations, suffered an 18% drawdown in 9 months: worse than the 60/40 (−16%) for the first time in our analysis window.

What to do

In MEDGE → Portfolio → Preset Portfolios you will find both pre-wired: standard 60/40 and Risk Parity vol-targeted to 9.5%. Run Compare with your preferred window and look at equity, drawdown, regime ribbon and rolling SPY/TLT correlation. If correlation is structurally above zero, the RP edge collapses — and 60/40 with a volatility cap is probably easier to live with.

The methodological conclusion: Risk Parity is an implicit bet on negative bond/equity correlation. It should be disclosed when one positions oneself as "regime-neutral".