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  • Nicholas Pihl

Dalio's All Weather Portfolio

Updated: Aug 2, 2021

Ray Dalio popularized the concept of the "All Weather Portfolio," an asset allocation strategy that is diversified enough to perform decently across a broad range of economic conditions. He suggests that macroeconomic environments are defined according to two main variables: economic growth, and inflation The performance of different asset classes, he expects, should correspond to the direction of these two variables.


For instance, in a disinflationary, rising growth environment, he expects equity investments to perform well. And indeed, that's exactly what we've seen over the last 10 years. Conversely, in the 1970s, you saw the unusual combination of declining growth and rising inflation. This was a great performance period for gold and hard assets, but a poor one for stocks. And finally, in periods of both declining prices and declining growth, high quality bonds have performed very well.


Accordingly, he advocates for a broadly diversified portfolio composed of 30% equities, 40% long-term US bonds, 15% intermediate term bonds, 7.5% gold, and 7.5% commodities. The point of most of these holdings is not to pick the asset class that will perform best over the long haul, but to select a blend that minimizes drawdowns and allows you to rely on your portfolio through thick and thin.


It's an attractive concept in its simplicity, as well as its branding. The name "All Weather" connotes ruggedness, and stability. And in fact, backtests going back to 2002 look pretty good when it comes to managing risk. Its largest drawdown was less than 15%, compared with a little over 50% for the S&P 500. The returns it delivered were good too, at least on a risk-adjusted basis, at 7.71% annualized. The S&P 500 though, despite its higher volatility, offered 10.49% returns over the same period. Over longer periods, too, the All Weather Portfolio underperformed both the S&P 500, and a simple 60/40 portfolio of stocks and bonds, as Nick Maggiulli points out here.


So what does this mean for you? Well, it really depends on your appetite for risk, your need for growth, and your timeframe for when you'll need the money. The greatest feature of the All Weather Portfolio is its stability. For someone nearing retirement who intends to draw on their portfolio within the next 5 years, there are worse ways to invest your money. But for someone who is primarily concerned with growing their assets, it may not be a good fit. (As always, don't just base your decisions off this one article. I really encourage you to engage a knowledgeable professional who knows your situation.)


Look again at what this portfolio is invested in. Roughly 55% bonds, 15% gold and commodities, and only 30% stocks. Over the last century, bonds have kept pace with inflation (at least on a pre-tax basis), as has gold. The other commodities, though, despite brief periods of huge gains, have actually gotten cheaper in real, inflation-adjusted terms. Still, inflation shocks and equity bear markets are serious concerns over the short term, and these are the wealth-management problems that the All Weather Portfolio is designed to solve. This really illustrates the intent of the portfolio. It isn't primarily intended to produce wealth for the long term, so much as preserve wealth for the short term, and keep pace with inflation over the long run.


The main issue I see with this portfolio is that it may be too conservative for all but the wealthiest clients. Likewise, when you see a massive drawdown in the equity markets, I think you're crazy if you aren't using some of your bonds and safe money to buy stocks. Maintaining a mere 30% allocation to stocks at those moments when they are lowest risk and highest reward just isn't good investing.

The same thing is true when you have money invested for very long-term objectives (15+ years). Over such periods, the risk of losing money in stocks is low, and the impact of inflation on a "safe" portfolio of bonds and gold is potentially high.

What's needed, then, is not a one-size-fits-all asset allocation, but a deliberate financial plan that matches specific investments to specific cash needs in the future. For anything under 2 years, I think holding cash makes a lot of sense. For anything 5-7 years out, a blend of stocks, bonds, and gold is appropriate, as long as the specific blend is tailored to the specific client. For years 7-15, a primarily stock portfolio, with maybe a small amount of cash, bonds, and gold looks good. And beyond year 15, stocks. (note, this isn't personal investment advice, just a very rough framework based on the historic returns for theses asset classes, as well as their historical drawdowns).


To wrap up this discussion on portfolio construction, stocks are the long-term winners, but have had some bumpy years along the way. You want to make sure those bumps don't throw you off your goals, which is what Dalio's portfolio does (arguably at the expense of long term growth). My own solution to this problem, rather than a one-size-fits-all approach, is to make sure the portfolio and financial plan are designed uniquely for each individual client to promote progress towards their long term goals, while preparing for the risks and opportunities of their unique situation. I think it makes sense to hold cash, bonds, and gold for specific needs, not just for the sake of maintaining pre-decided allocations.





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