How to Create Your Own All Weather Portfolio
Discover the All Weather Portfolio, an investment strategy developed by Ray Dalio to weather any storm.
Key Takeaways
The All-Weather Portfolio is a long-term investment strategy designed to perform well in all economic conditions, using a mix of asset classes with low correlation to each other.
The portfolio is based on the investment principles of Ray Dalio, the founder of Bridgewater Associates, a global investment firm.
The All-Weather Portfolio consists of 30% stocks, 40% long-term bonds, 15% intermediate-term bonds, and 7.5% each in gold and commodities.
What is the all weather portfolio?
Investing can be a daunting task, especially during times of market volatility and economic uncertainty. To help mitigate risk and maximize returns, many investors turn to a diversified portfolio. One such portfolio that has gained popularity in recent years is the All Weather Portfolio.
The All Weather Portfolio is an investment strategy developed by Ray Dalio, the founder of Bridgewater Associates, a prominent hedge fund. It is designed to withstand any economic climate, providing consistent growth and small drawdowns.
The portfolio is based on four economic seasons identified by Dalio: inflation, deflation, rising economic growth, and declining economic growth. Based on these seasons, Dalio chose asset classes that performed well in each season to provide diversification and consistent returns.
This article will explore the All Weather Portfolio in detail, including the asset allocation suggested by Ray Dalio, steps for creating your own portfolio, and the performance of the All Weather strategy over time. We will also discuss the importance of diversification in investing and compare the All Weather Portfolio to other investment strategies.
Ray Dalio All Weather Portfolio Asset Allocation
The All Weather Portfolio's asset allocation is based on the four economic seasons Ray Dalio identified. Each season is associated with different economic conditions that affect the value of various asset classes. Dalio chose asset classes performing well each season to provide diversification and consistent returns.
The four economic seasons and the associated asset classes are:
Higher than expected inflation:
a. TIPS (Treasury Inflation-Protected Securities)
b. Commodities (e.g., oil, natural gas, and industrial metals)
c. Gold
Lower than expected inflation:
a. Nominal bonds (e.g., Treasury bonds, corporate bonds, and municipal bonds)
b. Stocks (e.g., U.S. and international stocks)
Higher than expected economic growth:
a. Stocks (e.g., U.S. and international stocks)
b. Commodities (e.g., oil, natural gas, and industrial metals)
Lower than expected economic growth:
a. Nominal bonds (e.g., Treasury bonds, corporate bonds, and municipal bonds)
b. TIPS (Treasury Inflation-Protected Securities)
The suggested asset allocation of the All Weather Portfolio is as follows:
30% U.S. Stocks
40% Long-Term Treasury Bonds
15% Intermediate-Term Treasury Bonds
7.5% Commodities
7.5% Gold
This asset allocation is designed to provide diversification across different asset classes that perform well in different economic conditions. Most of the portfolio is invested in bonds, with stocks, commodities, and gold making up the remaining portion.
An important note you should consider is how you go gain exposure to bonds. You can buy bond ETFs, but this is not a risk-free investment like buying actual bonds is. Buying bonds rather than bond ETFs ensures you never lose money with your bond exposure.
How do I make an all weather portfolio?
One example of an All Weather Portfolio using ETFs is the one recommended by optimizedportfolio.com, which uses low-cost Vanguard funds and "best in class" ETFs.
This portfolio includes the following:
30% VTI (Vanguard Total Stock Market ETF)
40% VGLT (Vanguard Long-Term Government Bond ETF)
15% SCHR (Schwab Intermediate-Term U.S. Treasury ETF)
8% GLDM (SPDR Gold MiniShares Trust ETF)
7% BCI (Aberdeen Standard Bloomberg All Commodity Strategy K-1 Free ETF).
Is there an all weather mutual fund?
Some mutual funds use similar strategies to an all weather portfolio, but most are not exactly the same and have slightly different allocations.
An example of an all weather mutual fund is the Invesco Balanced-Risk Allocation Fund. This fund invests in several different asset classes, including bonds and equities.
However, creating your own, all weather portfolio is recommended since you will build more knowledge about the markets. Creating your own portfolio will also give you more control and reduce the amount of fees you pay.
What is the yearly return of the all weather portfolio?
According to a backtest done by optimizedportfolio.com, the CAGR of the all weather portfolio is 6.95%, with a backtest starting from 2003.
The S&P 500, within the same timeframe, generated a CAGR of 9.95%. However, the max drawdown of the S&P 500 was -50.97% compared to the max drawdown of the all weather portfolio of -21.45%.
The All Weather Portfolio is designed to provide a balance of risk and reward, with an emphasis on consistent growth and small drawdowns. By diversifying across asset classes that perform well in different economic conditions, the All Weather Portfolio aims to minimize volatility and provide consistent returns.
Ray Dalio’s All Weather Portfolio | Bottom Line
The benefits of the All Weather Portfolio include diversification across asset classes, lower volatility and drawdowns, and a balance of risk and reward. By investing in a combination of stocks, bonds, commodities, and gold, investors can reduce their portfolio risk while still achieving consistent growth.
While the All Weather Portfolio may not be suitable for every investor, it is a useful tool for those who are risk-averse or seeking a balanced investment strategy. Understanding the tradeoff between risk and reward when considering the All Weather Portfolio and conducting thorough research before making any investment decisions is essential.
Frequently Asked Questions
What is the all-weather model portfolio?
The all-weather model portfolio is an investment portfolio designed to perform well in all types of market conditions. It was developed by Ray Dalio, the founder of Bridgewater Associates, a prominent hedge fund. The portfolio consists of 55% U.S. bonds, 30% U.S. stocks, and 15% hard assets (Gold + Commodities).
How do you make an all-weather portfolio?
The following is the asset allocation to build an all-weather portfolio:
40% in long-term bonds
15% in intermediate-term bonds
30% in stocks
7.5% in commodities
7.5% in gold
You can use ETFs or mutual funds to invest in these asset classes. For example, some popular ETFs for the all-weather portfolio are:
30% VTI (Vanguard Total Stock Market ETF)
40% VGLT (Vanguard Long-Term Government Bond ETF)
15% SCHR (Schwab Intermediate-Term U.S. Treasury ETF)
8% GLDM (SPDR Gold MiniShares Trust ETF)
7% BCI (Aberdeen Standard Bloomberg All Commodity Strategy K-1 Free ETF)
Does Ray Dalio’s all-weather portfolio still work?
Ray Dalio’s all-weather portfolio still works as a low-risk, diversified portfolio that can generate stable returns in various market conditions.
However, the all-weather portfolio may not be suitable for everyone, as it depends on your risk tolerance, time horizon, and investment goals.
How often should you rebalance your all-weather portfolio?
There is no definitive answer to how often you should rebalance your all-weather portfolio, as it depends on your personal preference and the performance of your assets. However, some general guidelines are:
You should rebalance your portfolio at least once a year to maintain your target asset allocation and reduce risk.
You should rebalance your portfolio more frequently if there are significant changes in the market conditions or the performance of your assets.
You should rebalance your portfolio less frequently if you want to save on fees and taxes or if you want to capture the momentum of your assets.
What is a lazy portfolio?
A lazy portfolio is a type of investment portfolio that consists of a few low-cost index funds or ETFs that cover different asset classes and regions. A lazy portfolio is designed to be simple, diversified, and easy to maintain. It follows a passive investing strategy that does not require frequent trading or market timing. Some examples of lazy portfolios are:
The Three-Fund Portfolio: Consists of a total U.S. stock market fund, a total international stock market fund, and a total U.S. bond market fund.
The Coffeehouse Portfolio: Consists of 40% in a total U.S. bond market fund and 10% each in six different U.S. stock market funds covering large-cap value, large-cap growth, small-cap value, small-cap growth, REITs, and international stocks.
The Ivy Portfolio: Consists of 20% each in five different asset classes: U.S. stocks, international stocks, REITs, commodities, and bonds.
