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

Risk Parity outperformed 60/40 on Sharpe over 20- and 30-year windows but lost in the 10-year (equity-dominated) decade and broke down in 2022 when SPY/TLT correlation turned positive for the first time in two decades. Three rate regimes, three different answers. Risk Parity is not "the all-weather portfolio" — it is an implicit bet on negative bond/equity correlation, levered to the 60/40 vol target.

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 — across 10-, 20- and 30-year 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.
• ·Two windows: 10Y (2016–2026) and 20Y (2006–2026). Both start after GLD (Nov 2004) and DBC (Feb 2006) were actually listed — no back-filled instruments.

Aggregate results

Illustrative figures, shown to make the shape of the trade-off concrete: CAGR / annualized vol / Sharpe (rf = 0), drawdowns peak-to-trough on total price, not calendar-based. They are not a reproducible published backtest and they are not a performance claim — run your own allocation through the Portfolio Analyzer for numbers tied to a window and a rebalancing rule you control. Past performance does not predict future results.

Reading the table

• ·Over the equity decade the 60/40 wins on CAGR and Sharpe; Risk Parity wins on drawdown, because commodities and gold cushioned 2022.
• ·Over the full cycle Risk Parity closes the gap: higher Sharpe and a drawdown roughly 1500 bps shallower. 2008 is what makes the difference.
• ·Neither result is a recommendation. The trade-off is the point: Risk Parity buys drawdown protection with give-up in equity bull runs.

The long-rate regime — why we do NOT show a 30Y window

Risk parity’s reputation was built in the falling-rate regime that ran from the mid-1990s to 2021: leveraged long duration was the silent engine behind the returns. Showing you a 30-year backtest of this universe would be dishonest, so we do not. GLD did not list until November 2004 and DBC until February 2006 — any 1996-start backtest of an SPY/TLT/GLD/DBC portfolio is either back-filling instruments that did not exist or quietly dropping them, which is the inclusion bias our backtesting tutorial warns against. The honest statement is the qualitative one: the strategy’s long history benefited from a bond bull market that ended in 2022, and the 10Y and 20Y windows above already contain the regime change.

You can reproduce this comparison on your own allocation: the portfolio backtesting tool replays any weights through the same crisis windows, and the Risk Parity template is one of the 24 pre-built strategies in the analyzer.

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".