Can an All-Weather Investment Strategy Survive in “Bad” Weather?

In this article, we examine the performance of a simple and popular risk parity investment portfolio, the so-called All-Weather portfolio. We examine a period of 15 years, from 2005 to 2020, which include the 2008 Global Financial Crisis and the 2020 Stock Market Crash. We find that the All-Weather portfolio outperforms other portfolios in the long run and during the two crisis periods. Its superior performance is determined by the correlation structure among various asset classes, the risk parity asset allocation weights, and such “luck factors” as the bull market for bonds during the sample period. The Monte Carlo simulation analysis of the optimal target weights for dynamic risk parity asset allocation reveals that the optimal target weights in the All-Weather portfolio do exist. Our findings shed some important insights on the All-Weather investment strategies for academia and investors, especially for small and individual investors.