Book Review: Risk Parity, How to Invest in All Market Environments

Risk Parity, How to Invest in All Market Environments

Alex Shahidi

Wiley, 2021

Hardcover ‏ : ‎ 208 pages

ISBN-10 ‏ : ‎ 1119812569



Risk Parity: How to Invest in All Market Environments describes Alex Shahidi’s (of Evoke Advisors) approach to constructing a portfolio that balances risk versus reward.  Risk Parity sees the financial  world in two dimensions, growth and inflation, where either can be either increasing or decreasing.  To  handle all four environments (e.g., rising growth with rising inflation, rising growth with falling inflation),   he advises investment in four asset classes due to their outperformance in the different environments:

  • Equities
  • Treasuries
  • TIPS (Treasury Inflation Protected Securities)
  • Commodities

Because asset classes like Treasuries tend to have lower risk and reward, Shahidi recommends the use of leverage to create equity-like returns with the commensurate risk.


Finally, Shahidi recommends rebalancing regularly to ensure that portfolios sell high and buy low.


Ultimately, Shahidi shows data the indicates that Risk Parity, on historic data, had returns in excess of pure equity (10.7% versus 9.0%) as well as other investment strategies with a much lower volatility (10.8% versus 14.8%), including during the several black swan events over the last several decades (Table 9.6).


While reading this book, however, I do wonder why Shahidi used global equities as a baseline.  I am not an experienced investor, so maybe this is a typical baseline.  But, isn’t it well-known that the S&P had returns in excess of 11% over the last century?  This is not a big problem with the book because the core arguments still stand.  But including an S&P baseline would have made the results more approachable for me - a casual US-based investor.


I would have also liked more treatment for the individual investor - a "news you can use" section.  Like, how would a private individual use this information to construct her own portfolio?  What might it look like?  Are there brokers of web sites he might recommend?


Overall, I think Shahidi’s book is very clearly written and very timely.  His treatment of inflation is particularly prescient.  While he wrote this book in 2021 (before the 2022 surge in inflation) and foretold that, if economic theory were correct, we should brace for the impact of all the spending governments have been doing during Covid.  He was right.

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