The All Weather Portfolio

As an investor who has only invested in equities all my life, it is nice sometimes to take a different perspective on investment.  Just last week, I had chanced upon the concept of an All Weather Portfolio as proposed by Ray Dalio (and subsequently simplified by popular motivational speaker Anthony Robbins).  I find the approach very common-sensical and worth spending some time thinking about.  I have also been thinking about how I can apply it to my own investment portfolio.

First and foremost, the basic assumption for such an approach is a sound one, and that is: we don’t know for certain if any asset class (most commonly equities, bonds, commodities, real estate etc) will do well for sure in the future.  Therefore we have to diversify our investment portfolio. So far so good.  One of the biggest question anyone has to answer then is: what qualifies as a diversified portfolio.  If you are solely investing in equities and you have a portfolio of a hundred stocks, is that diversified?  Back in the days, we were told that is why we are better off investing in a mutual fund rather than trying to pick a few stocks on our own.  “Don’t put all your eggs in one basket” is the old adage in investment.  In modern times, instead of putting money in mutual funds, you can get the diversification you need at a much lower cost by buying Exchange Traded Funds or ETFs.

However, as time went by, this was seen as being insufficient.  Investing purely in equities is clearly volatile.  Many people will have many a sleepless night if they were to track their daily investment portfolio performance (trust me, even after doing it for 2 decades, I am still affected by these swings in prices).  This in industry speak, is called “volatility”.  There are many things not to like about volatility in investment.  Other than the inevitable distress it causes, a short draw down in the size of your investment portfolio can mean that the money isn’t necessarily there when you need it.  Maybe you need to pay for an unexpected medical bill or other personal emergencies.  It is more than the inconvenience of it all.  You may have to sell your shares in a very bad market when prices are generally depressed and when it isn’t in your advantage to do so.

The solution?  A more “balanced” portfolio.  This was in vogue in the 1980s and are still being sold to institutional investors these days.  This means combining equities with fixed income (or bonds) investments.  Depending on the proportion of bonds vs equities, the volatility can be controlled and greatly reduced.  However, this comes at a cost – lower returns over the long run vs a pure equities portfolio.  This is because bonds have lower volatility and generally have lower returns than stocks in the long run.

This is where Ray Dalio’s All Weather Portfolio goes one better.  He recommends adding commodities and gold to the mix.  This is because there are certain conditions under which both bonds and stocks don’t do well and where commodity and gold shines  This is when inflation is generally high.  I have to admit that in the past 20 or so years that I have been investing, inflation had not been an issue.  In fact, it seems like we have been living in an age of deflation where commodity prices (bar the oil price) has generally been on a down trend and wage pressure have been all but absent.  However, as long term investors (and I mean investor who are planning for their retirement), we cannot say for sure that inflation will never return.

So …. after much rambling, here it is, Ray Dalio’s All Weather Portfolio:

  • 30% Stocks
  • 40% Long-Term Bonds
  • 15% Intermediate-Term Bonds
  • 7.5% Gold
  • 7.5% Commodities

And here are the relevant statistics for the 30 year period from 1984-2013 courtesy of Robbins:

  • 9.7% annual returns
  • You would have made money 86% of the time (so only four down years)
  • Average loss of just 1.9%
  • Worst loss was -3.9%
  • Volatility was 7.6%

Here’s more:

  • When back-tested during the Great Depression, the All Weather Portfolio was shown to have lost just 20.55% while the S&P lost 64.4%. That’s almost 60% better than the S&P.
  • The average loss from 1928 to 2013 for the S&P was 13.66%. The All Weather Portfolio? 3.65%.
  • In years when the S&P suffered some of its worst drops (1973 and 2002), the All Weather Portfolio actually made money.

Very impressive isn’t it? Needless to say I was super impressed.  However, the most important thing to note about the portfolio is that bonds make up 55% of the portfolio and that we are probably just coming out of the biggest bond bull market in our lifetime (and possibly in history?).  Interest rates were at a all time low not too long ago having gone down since the Greenspan years in the 1980s.  Although it is arguable whether we will go back to the times where interest rates were 20% or more (like in the 1970s), it is fair to assume that there is plenty of room for it to fall anywhere in between.  Even as we speak, bond markets made the headlines this week when 20 year US Treasury bond yields hit and held at 3.55%.  The long climb back up is probably just starting.

More importantly this means that in the next couple of years, bond prices will probably be down on average.  I am no bond expert but I am definitely looking into bond performance over a period of rising interest rates.  Might that affect the proportion of bonds I hold, it might.  Would I be considering a greater weight in gold and commodities?  Most certainly considering that!  In fact, remember what Jim Rogers said about soft commodities in particular (in my previous post)?  There are not many asset classes that are trading at 40-50% of their recent peak levels in the last 10-15 years and soft commodities is certainly one such asset class.

Now, going back to the All Weather Portfolio.  If you want to build your own All Weather Portfolio here’s how you can do it (courtesy of

  • 30% Vanguard Total Stock Market ETF (VTI)
  • 40% iShares 20+ Year Treasury ETF (TLT)
  • 15% iShares 7 – 10 Year Treasury ETF (IEF)
  • 7.5% SPDR Gold Shares ETF (GLD)
  • 7.5% PowerShares DB Commodity Index Tracking Fund (DBC)

You can consider substituting the above ETFs with your own.  Like I said, instead of DBC, I might consider adding in other soft commodities ETF to the mix above.  At any rate, the idea of diversification to the various classes in the proportion above is a sound and powerful one that all investors should consider.  Modify it by all means to suit your own risk profile.

dalio robbins 14102018