All Weather Portfolio by Ray Dalio

Ray Dalio

Are you looking for an All Weather Portfolio? It sounds like the Holy Grall, right? 

We know the importance of a personalized investment portfolio in line with our character, needs and expectations. How to design a great asset allocation is a fierce debate among investment pros. Is it better a 100% Equity? or a 50%-50% split between equity and bonds? What about the traditional 60%-40% equity and bond?

Indeed, studying and understanding some of the Portfolios used and/or promoted by great investors is helpful. Today’s article opens a series of reviews on the most popular Investment Portfolios. The first review focuses on Ray Dalio’s Investment Portfolio: the All-Weather Portfolio.

Ray Dalio is a well-known American financial author and founder of Bridgewater Associates (back in 1975): an investment management firm for institutional clients with USD 160 million in AUM. We particularly like his interview at Valuetainment.

During his career, he became obsessed to prepare for anything – the unknown around every corner. Ray does not suggest any retail investor trying to beat/time the market: “You don’t want to be in that game”: it would be like playing poker with the best players in the world who play round the clock with nearly unlimited resources.

Ray strongly criticizes classic investments based on so-called balanced portfolios (50% stocks, 50% bonds):

  • He believes that most portfolios have an extreme bias to do well in good times and bad in bad times. For him, classic diversification does not diversify the risk! To do it, we must divide our money based on how much risk/reward there is, not just equal amounts of money in each investment asset.
  • Ray thinks that stocks are 3 times more risky (more volatile) than a bond. A 50-50 balanced portfolio does not diversify the risk in a 50-50 ratio, but more realistically to a 95-5 ratio.
  • Another inaccurate assumption behind a balanced portfolio is, for him, the idea that stocks and bonds have a low and negative correlation. For many years, investors thought that stocks and bonds would not both go down in price simultaneously. The truth is that during some events (i.e. the 2008 crisis), they moved together in the same negative direction!
  • He believes the balanced portfolio suffers from 3 risky hopes:
    1. the hope that stocks will do well
    2. the hope that Bond will do well
    3. the hope that both won’t go down at the same time during the next crash

During his Investment career, Ray developed a different way of looking at the market. He looks at 4 driving forces that move the prices of assets:

  1. Inflation
  2. Deflation
  3. Rising economic growth
  4. Declining economic growth

As such, he recognizes  4 possible economic scenarios (seasons):

  1. Higher than expected inflation
  2. Lower than expected inflation (deflation)
  3. Higher than expected economic growth
  4. Lower than expected economic growth
Ray Dalio 4 Scenarios

Nobody knows which season will come next, therefore Ray uses an All Weather Portfolio divided into 4 baskets, in order NOT to have exposure to any particular environments. The point of this all-seasons portfolio is to reduce volatility/risk while still maximizing gains.

Here is how the All Weather Portfolio of Ray Dalio is composed:

  • 30% in stocks (S&P500). Only 30% of stocks because stocks are 3 times riskier than bonds for Ray
  • 15% in intermediate term-bonds (7-10 treasuries)
  • 40% in long-term bonds (20-25 years treasuries)
  • 5% in gold and 7.5% in commodities. These assets will perform well in case of accelerated inflation


Ray Dalio All weather portfolio

As with every portfolio, also the All Weather Portfolio benefit from an annual re-balance: when one segment (basket) does well, we sell a portion and reallocate back to the original allocation.

So, is your Investment portfolio well-designed? Was it ready for COVID-19? Will it be ready for the next correction, crash or black swan? Is is an All Weather Portfolio?

Keep It Real. Sweat Your Assets.




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