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How to Create an All Weather Portfolio Like Billionaire Ray Dalio

Investing in uncertain times is a scary proposition, and any investor should wonder: is there is a way to avoid markets’ ups and downs of markets? Unfortunately, the answer is no, but there might be a way to level the playing field with an all weather portfolio.

The All Weather Portfolio is a fund first created by Ray Dalio of Bridgewater Associates, the world’s largest hedge fund. Tony Robbins later popularized the portfolio in his book, Money: Master the Game.

The idea behind Dalio’s portfolio was to create a portfolio you could hold for life. It would allow one to invest through economic growth and stagnation while also thriving during good times and bad times.

Ray Dalio is famous for the All Weather Portfolio and for the Pure Alpha fund his company manages, which holds almost $40 billion in funds. He is a deep thinker and works hard to find the best solutions, and there is a lot we can learn from the creation of the All Weather Portfolio.

In today’s post, we will learn:

  • What is an All Weather Portfolio?
  • Does an All Weather Portfolio Work?
  • How to Create an All Weather Portfolio
  • Investor Takeaway

Okay, let’s dive in and learn more about the All Weather Portfolio.

What is An All Weather Portfolio?

An all weather portfolio is a portfolio designed to perform well during both favorable and unfavorable market and economic situations. The makeup of all weather portfolios contains flexible investment strategies that allow for diversification across different asset classes. The portfolio also allows for alternative techniques such as rotation out of underperforming sectors to manage market volatility.

Although Bridgewater is well known for its all-weather fund, many others utilize this style of investment. Because of these strategies’ broad nature, many fund managers such as Fidelity offer their own all weather portfolios.

Dalio spent over three decades working through the idea of creating the All Weather Portfolio. In 1976, after founding his fund, he determined the causes of asset fluctuations in different market conditions. By 1996, he and his team had discovered that surprises caused the biggest swing in asset prices and created the All Weather Portfolio to counteract those fluctuations.

As Dalio mentions in his All Weather Story:

Market participants might be surprised by inflation shifts or a growth bust and All Weather would chug along, providing attractive, relatively stable returns. The strategy was and is passive; in other words, this was the best portfolio Ray and his close associates could build without any requirement to predict future conditions.”

After discovering the All Weather Portfolio, Bridgewater allocated most of its trust assets to the portfolio, but soon the fund grew to $46 billion in assets by 2011.

The makeup of the All Weather Portfolio

As we mentioned above, the All Weather Portfolio is an investment whose design performs well in all market conditions. Because of this mission, the portfolio comprises of:

  • 55% U.S. Bonds
  • 30% U.S. Stocks
  • 15% Hard Assets (Gold)

Contained within the portfolio is the ability to choose from many different equities, bonds, or commodities. For example, you can choose:

Long-term U.S. Bonds

Commodities

Gold

Short-term U.S. Bonds

U.S. Stocks

Below is a graph showing the breakdown of a sample portfolio.

Why did Dalio decide on this particular asset mix? Because he discovered through his investigations that the above mix performs well under four economic conditions that he identified.

  • Inflation (rising prices)
  • Deflation (falling prices)
  • Bull markets (rising growth)
  • Bear markets (falling growth)

Dalio created a matrix to explain his idea, which uses the above four economic environments to outline the concept.

Dalio uses the matrix to explain which assets perform best under each circumstance. For example, during rising prices, gold and commodities perform well, and during falling prices, bonds perform best. During rising, growth stocks are the best, and during falling, growth bonds are king.

Using that information, we can fill in the matrix with the assets that perform best during each period.

From the above matrix, we can see quite easily why Dalio recommends allocations of a higher percentage of bonds than any other asset class. Also highlighted is the idea that stocks are higher than gold or commodities.

Because not all economic conditions that Dalio describes happen all at once, allocating higher percentages towards high growth and even higher towards falling prices and growth makes complete sense.

The All Weather Portfolio’s core idea is that every asset in the portfolio will react differently during each macro environment, and the portfolio allocations reflect those changes and the ability to adapt to them.

Does an All Weather Portfolio Work?

Now that we understand the makeup of the All Weather Portfolio and the reasons behind its creation. The burning question remains, does it work?

Mostly.

In this section, I will throw a bunch of numbers at you to help explain the portfolio’s performance over a few different situations.

In the last twenty years, we have experienced extreme falling growth and rising growth, so the performance over different periods will lag and outperform the benchmarks.

Typical benchmarks are the S&P 500 and the 60/40 stock to bond mixes, which are most common to use for tracking the performance of any portfolio.

From February 2006 to the present day, the All Weather portfolio compounded rates at 8% a year, while higher than the S&P 500 but lower than the return of the 60/40 mix over the period.

During the Great Financial Crisis, 2007 to 2009, the All Weather Portfolio dropped less than the 60/40 mix at:

  • All Weather – (2.56)%
  • 60/40 – (8.17)%

And during the recent corona crash in March, the All Weather performed similarly, with losses of less than half of the 60/40 mix. All while during both periods, the S&P 500 crashed hard.

The data’s flip side is that the portfolio gives up some growth to compensate for the safety.

1Y

3Y

5Y

10Y

All Weather

19.92%

11.76%

9.26%

8.70%

60/40

24.19%

14.43%

12.0%

12.57%

And during a period like we are experiencing post the Corona quarter through today, February 8th, with stock prices soaring to the moon, any portfolio with bonds in them will underperform.

With the All Weather Portfolio containing a smaller allocation to stocks (30%), we should expect that it will not match the returns of the S&P 500 over a short period.

The All Weather Portfolio’s design is to be far more attractive during times of not high growth.

If you backdate the portfolio mix to 1973, the annualized returns over that period are 5.4% adjusted for inflation, with dividends included in those calculations. Compare that to the 6.4% return of the S&P 500 over the same period.

From Robbins’ book, throughout 1948 thru 2013, the following stats:

  • 9.7% annual returns
  • You would have made money 86% of the time (only four down years)
  • The average loss of only 1.9%
  • The worst loss of (3.9)%

If we change the period from 1972 to 2013, the returns would have been 9.5%, with the largest loss of (4.2)%.

The basic story is the portfolio works well through the different economic conditions because the backtests above show periods of high inflation, low inflation, high growth, and low growth.

To go a bit further, if you look at the 60/40 mix throughout 1928 to 2013, you see a performance of 7.2%.

Backtesting over longer periods and comparing the numbers is not quite apples to apples because gold before 1973 wasn’t allowed to fluctuate its price much.

I could drown you in more numbers, but I think we have highlighted the idea that the portfolio will function well throughout different economic conditions.

Comparing the portfolio to separate asset classes during short periods is useless because the short-term market fluctuations will bend one way or the other. Any combination of conservative allocation will suffer in comparison to the S&P 500 in today’s market.

How to Create Your Own All Weather Portfolio

Building your own All Weather Portfolio is quite simple, using ETFs as means of putting together your mix.

Remember the mix:

  • U.S. Bonds – 55%
  • U.S. Stocks – 30%
  • Gold & Commodities – 15%

Here is a sample of the All Weather Portfolio using investments with a variety of different ETFs.

Position

Ticker

Category/Sector

Weight

iShares 20+ Year Treasury Bond ETF

TLT

Government Bonds

40%

iShares 7-10 Year Treasury Bond ETF

IEF

Government Bonds

15%

Invesco DB Commodity Index

DBC

Commodities

7.5%

SPDR Gold Trust

GLD

Precious Metals

7.5%

S&P 500

SPY

Large Cap Growth

30%

The best part of the above portfolio is the low fees, 0.21%, which allows for better returns.

Keep in mind the above portfolio is just an example, and you have the option of mixing and matching different funds that fit your needs.

The All Weather Portfolio is meant to be a set it and forget it type of portfolio, with rebalancing periodically, typically quarterly, but whatever terms work best for you.

For example, I have seen different portfolio mixes subbing out the SPY fund with the VTI Total Market Fund from Vanguard, which matches the whole market, compared to the SPY, which focuses on the S&P 500.

For those of you outside of the U.S., this formula can easily translate to funds within your own country or region; it is up to your risk.

It also allows for diversification among the different asset classes, such as breaking down the stock weighting using additional ETFs. For example, let’s say you want more exposure in small-cap stocks or the tech sector; you can reduce your overall market allocation by whatever percentage your risk can tolerate.

The same rule applies to bonds; you can allocate more to corporate bonds or municipal bonds and adjust the duration of the funds.

Bottom line, the portfolio is a set it and forget style investment, and if you want to have a bigger impact on the choices, you have that option.

The only thing to keep in mind is the adjusting of allocations could also affect the portfolio’s long-term results. Dalio and the team created the portfolio with the idea that it would be weather proof, mostly for market downturns.

Investor Takeaway

The All Weather Portfolio created by Dalio and the team is a great introduction to a portfolio that can withstand market fluctuations over a long period.

The portfolio is easy to recreate using ETFs, plus it is low-cost by using Vanguard and others, which reduces the costs associated with managing the fund. The nature of the portfolio allows for a hands-off approach, with little management, if you wish.

But it also allows for adjustments if you want to have more input on the management of your money.

We didn’t discuss individual stocks, but it allows for those as well; but keep in mind that starts to move outside the portfolio’s design.

The other nice thing is that it is easily accomplished through any brokerage accounts such as Schwab or Fidelity because of the use of ETFs or other investment vehicles.

After all the decisions about what exact assets to buy, you need to account for account rebalancing, which is best done annually, but of course, if you wish to do more, it is possible.

There are additional variations on this portfolio, such as:

  • All Seasons – simplified version of the All Weather Portfolio
  • Golden Butterfly – based on the All Weather Portfolio but equal weights the following assets
    • U.S. Large Cap – 20%
    • U.S. Small-Cap – 20%
    • U.S. Long-term Treasuries – 20%
    • U.S. Short-term Treasuries – 20%
    • Gold – 20%

Many feel that the All Weather Portfolio is best for those closer to retirement because of the portfolio’s more defensive nature. It is possible that it might be a great use for the portfolio. Still, it also could serve as a great anchor to a more aggressive part of your portfolio, providing safer returns while you step out and buy more aggressive securities.

One of the many great aspects of investing is in the many different flavors available. Think of investing like creating a great meal, there are many different ingredients, and it is up to us to combine those flavors in a flavor we enjoy.

Using a portfolio like the All Weather allows you to step out and be more aggressive if you choose, or you can set it and forget it, whatever floats your boat.

If history is any indication, your All Weather Portfolio should give you great returns with less volatility than other portfolios over a long time.

With that, we will wrap up our discussion.

As always, thank you for taking the time to read this post, and I hope you found something of value in your investing journey.

If I can be of any further assistance, please don’t hesitate to reach out.

Until next time, take care and be safe out there,

Dave