One of the investors that I really look up to is Ray Dalio. He has stated that a 50/50 stock to bonds allocation does not achieve risk parity because 80% of your risk is still in your stocks. Digging deeper into how one can achieve the risk parity that Dalio has described I found this article where he actually outlines the following asset allocation mix that will provide the average investor with diversified risk.
- 30% - Stocks
- 40% - Long Term Treasury Bonds
- 15% - Intermediate Term Treasury
- 7.5% - Commodities
- 7.5% - Gold
I've started looking into how I can responsibly invest in these asset classes, and it's the bond investment that I don't really understand.
For the long term treasury bonds I'm considering the Vanguard Extended Duration Treasury ETF (EDV). However, the risk potential is reportedly very high.
In comparison, the Vanguard Total Stock Market ETF (VTI) reportedly has less risk.
Given all that context, I'll finally throw out some questions.
How is it possible that long term treasury bonds, which the government has never defaulted on, can hold more risk as an ETF than the stock market index?
Do you assume more risk investing in bond ETFs than you would investing in individual bonds?
Are bond ETFs an appropriate investment vehicle for risk diversification?