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Risk parity funds, on the other hand, allocate their money based not on asset classes but on risk. Take Invesco's Balanced-Risk Allocation Fund, which has gathered nearly $14 billion of assets since its launch in 2009. The fund deploys its assets in order to equalize risk between stocks, bonds and commodities. The goal is to keep the fund prepared for a range of economic outcomes. Stocks should stand the fund in good stead when inflation is tame and the economy is growing. High-quality bonds are suited to recession or times of crisis. And commodities can help returns keep pace when inflation heats up. "I think (investors) are understanding that, as they get closer to retirement, they cannot have a full equity portfolio out there," says Peter Gallagher, head of U.S. retail sales at Invesco. "They need to focus on what happens if the market turns." Before you plunge into risk-parity funds, you should carefully consider the risks. First and foremost, the funds still have very short track records. For better or worse, early investors will be guinea pigs. On top of that, risk-parity funds are complex. One way their managers equalize risk across asset classes is through the use of leverage and derivatives. If you can't define these terms, you're probably not ready to invest in the funds. A good financial adviser can be a big help in evaluating risk parity funds. But as Lee points out, many advisers don't necessarily understand complex products much better than you do. Worse yet, some are financially conflicted -- they'll talk up a certain fund because they stand to earn a fat sales commission. Risk parity funds have attracted lots of believers in the early going. But if you're uncertain, wait and see how their performance plays out. Or stick your toe in the water with a small investment. "A lot of investors are better off taking very conservative steps," says Lee, "because they don't know or understand the risks of these funds."
[Associated
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