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#prp - Permanent Risk Parity (how I invest)

PRP Response to Market Crash

2020-03-09

Today saw historic moves in the stock market. The S&P 500 declined 7.6% and Canada's TSX fell an incredible 10.3%. This absolutely was a stock market crash.

In this post, I will discuss how my PRP model portfolio responded to the crash. The model portfolio is an ideal ETF-based portfolio that I track for benchmarking purposes. My own investments are very similar, though not identical, to the model portfolio.

PRP was down 1.6% today, which is actually pretty good: this is a milder decline than most balanced funds (which fell 4% to 5%).

Why was today's movement in PRP so mild? Let's look at the individual pieces that make up the PRP:

Canadian stocks: XIU fell a whopping 10.7% today. Nothing good to say about this.
Foreign stocks: ZSP tracks the S&P 500, in Canadian dollars, non-hedged. ZSP was down 6.0% today, benefiting from the rise in the U.S. Dollar. There is a tendency of the USD to rise during market turmoil, so this foreign asset actually softened the crash.
Bonds: XBB was unchanged today (0% move), which is certainly better than some of the alternatives! This softened the crash.
Gold: MNT was up 3.0% today, a significant benefit. Though MNT is supposed to track gold, it does sometimes rise or fall a bit more. Today, there was a rush to get into gold, and MNT went up more than the underlying 2% increase in gold. A bit of a fluke.

Gold turned out to be especially useful to Canadian investors today because of the sharp drop in CAD. While gold was virtually unchanged on a USD basis, it was up 2% when priced in CAD.

These constituents are combined according to their weights in PRP. However, as with any portfolio, the weights shift around over time depending on how the assets perform. PRP benefited from already being slightly underweight stocks heading into today's crash. This was due to the declines in stocks leading up to today, and the fact that I only rebalance PRP once a year.

Note that if PRP was rebalanced more often, such as monthly, today's drop would have been worse.

The net result was -1.6% which, in my opinion, is a pretty good outcome for one of the worst days in Canadian market history. One of the goals of PRP and risk parity in general is to reduce market volatility by using superior diversification.

— Jem Berkes