Last Updated on March 6, 2021 by Oddmund Groette
This week I came across this blogpost by Nick Maggiulli about The All Weather Portfolio.
What is The All Weather Portfolio?
Maggiuli’s blog post is based on the “All Weather Portfolio” developed by Ray Dalio and his firm Bridgewater Associates, one of the biggest hedge funds in the world. Dalio’s firm has spent considerable time developing a portfolio that does well both in times of inflation and deflation (any kind of market conditions).
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 a long-term portfolio that can sustain all market conditions and keep your money safe. Most investors have long forgotten the stagflation period of the 1970s where stocks produced negative real returns, in addition to the relatively recent bear market of the 2000s where the dust from the dot com bubble required lots of time to settle. Bear markets are inevitable in long-term investing. We all fall prone to the recency bias and quickly forget the past. Right now the interest rate risk might seem low, but economic conditions can change on a dime.
Those relying on investment income (FIRE) might take notice of this chart by Nick Maggiulli in the blogpost:
Stocks are not a sure thing if you rely on them 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. Your personal finances are important and it pays off to include a margin of safety.
How do I make an All Weather Portfolio?
The aim of Bridgewater’s 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. Ray Dalio’s Bridgewater Associates composed the portfolio 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 Treasuries)
- 30% SPY (US stocks, S&P 500)
- 15% IEI (intermediate term U.S. Bonds)
- 7.5% GLD (gold)
- 7.5% DBC (commodities, commodity index tracking fund)
I guess every broker offers these ETF’s and thus you can easily compose this portfolio and rebalance whenever you want. You can of course change some of these components yourself but be sure you know what you are doing.
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 is the All Weather Portfolio doing?
The portfolio has continued to perform well in 2020. The All Weather Portfolio vs the S&P 500 has a clear winner:
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 a 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%.
Clearly, Dalio’s strategy still performs well, but that is of course no guarantee it will in the future.
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.