How Did The All Weather Portfolio Perform During Covid-19?

This week I came across this blogpost by Nick Maggiulli. The blogpost is based on the “All Weather Portfolio” developed by Ray Dalio and his firm Bridgewater Associates, one of the biggest hedgefunds in the world. Dalio’s firm has spent a considerable time to develop a portfolio that does well both in times of inflation and deflation. Because most current investors have never witnessed a market where interest rates have gone up, as a matter of fact rates have been falling since the early 1980s, it makes sense to have long-term portfolio that can sustain both economic scenarios. Most investors have long forgotten the stagflation period of the 1970s where stocks produced negative real returns, in addition to the the relatively recent bear market of the 2000s where the dust from the dot com bubble required lots of time to settle. We all fall prone to the recency bias and quickly forget the past.

Those relying on investment income (FIRE) might take notice of this chart by Nick Maggiulli in the blogpost:

Both the 1970s and 2000s produced negative real returns.

Stocks are not a sure thing if you rely on that to cover your living expenses. If you want to retire early, you better make sure you can withstand at least 10 years of mediocre returns. I recently wrote about why I expect lower returns over the next decade, and why it makes sense to diversify.

So what is the All Weather Portfolio?

The aim of Bridgewaters All Weather Portfolio is to use diversification as a tool to smooth returns and lower drawdowns. The asset classes don’t move in perfect tandem, and thus diversification can help you lower drawdowns and sleep well at night. The portfolio is composed like this:

  • 55% bonds
  • 30% US stocks (US stocks are about 50% of world market capitalization)
  • 15% hard assets and commodities.

Nick Maggiulli suggests these ETFs to replicate Bridgewater’s portfolio:

  • 40% TLT (long-term U.S. bonds)
  • 30% SPY (US stocks, S&P 500)
  • 15% IEI (intermediate Term U.S. Bonds)
  • 7.5% GLD (gold)
  • 7.5% DBC (commodities)

I guess every broker offer these ETF’s and thus you can easily compose this portfolio and rebalance whenever you want.

Pros and cons:

There is no free lunch in the stock market, and lower variability comes at a cost: over the long run the All Weather Portfolio will most likely underperform both stocks and 60/40 (stock/bonds) as can be seen from the graph above. This means that the All Weather Portfolio is not for everyone. Especially if you are young, for example in your 20’s, it would make more sense to be more aggressive (invest more in stocks) as you have time on your side.

How did the All Weather Portfolio perform during Covid-19?

Pretty well, as expected:

The All Weather Portfolio performed very well during Covid-19. Blue line is portfolio, pink line is S&P 500. Source: My own calculations.

The graph above assumes 100 000 invested at the closing prices of the first trading day of 2020 (dividends reinvested). While a 100% allocation to S&P 500 suffered 33% drawdown, the All Weather Portfolio only had a very marginal 6% drawdown. This is a huge difference! As of writing, 11th of August 2020, the portfolio has gained 13.3% while S&P 500 “only” 4.4%.


Disclosure: I am not a financial advisor. Please do your own due diligence and investment research or consult a financial professional. All articles are my opinion – they are not suggestions to buy or sell any securities.  

(This article was published on the 13th of August 2020.)