Ray Dalio’s All Weather Portfolio is a pretty well-known portfolio, and for good reasons, in our opinion. Ray Dalio and his team at Bridgewater Associates constructed the All Weather Portfolio to withstand every economic environment (and shocks) possible. What exactly is the All-Weather Portfolio? Which assets are included? How has it performed? What was the performance during the financial crisis in 2008/09, Covid-19, and the bear market of 2022? These are some of the questions we answer in this article. We backtest the All Weather Portfolio to gather the most important statistics about the strategy.
Ray Dalio’s All Weather Portfolio was constructed to stand the test of time, no matter the investing climate – be it inflation, deflation, or stagflation – and the portfolio consists of both stocks, bonds, and commodities. We backtest its performance to establish the historical facts.
The annual returns have been lower than for stocks, but the max drawdowns are substantially smaller. It’s a defensive portfolio. Both during the financial crisis in 2008/09, Covid-19 in 2020, and the bear market of 2022 it performed better than stocks.
We show you how you can construct an All-Weather Portfolio and how you can backtest it. Let’s get started:
Table of contents:
Who is Ray Dalio?
Let’s start with a very brief introduction about Ray Dalio:
Ray Dalio is one of the most famous money managers on this planet. He founded the hedge fund Bridgewater Associates in 1975, and after a setback in the 1980s, he has managed to create an outstanding track record for his fund: 11.5 %. Considering the huge asset base, this result is really impressive.
As a result, Bridgewater Associates has attracted a lot of money from both private enterprises and public sovereign entities. Bridgewater Associates is currently the world’s biggest hedge fund, to our knowledge, with over 155 billion dollars under management.
Ray Dalio’s investment approach is mostly top-down and based on macro fundamentals, and the All-Weather Portfolio is a result of this: It’s all about asset classes – no stock pickings.
We don’t go into details about Ray Dalio in this article, but we recommend our separate article about Ray Dalio.
Now that you briefly know who Ray Dalio is, we go on to explain the All Weather Portfolio, the main purpose of this article:
What is the All Weather Portfolio?
What I’m trying to say is that for the average investor, what I would encourage them to do is to understand that there’s inflation and growth. It can go higher and lower and to have four different portfolios essentially that make up your entire portfolio that gets you balanced…..I think that the first thing is you should have a strategic asset allocation mix that assumes that you don’t know what the future is going to hold.
- Ray Dalio
As we have already mentioned in the introduction, Ray Dalio’s All Weather Portfolio was constructed to stand the test of time, no matter the investing climate – be it inflation, deflation, or stagflation. Because the portfolio is put together to perform well under ANY economic environment, it consists of many assets.
Why does the All Weather Portfolio consist of many asset classes?
It’s all about diversification and correlation. We have diversification to avoid being invested in just one asset class, not to put all our eggs in one basket, and to potentially have a low or no correlation between the asset classes. We have in a previous article explained the benefits of lowly correlated assets or strategies in a portfolio:
- Does your trading strategy complement your portfolio of strategies?
- Uncorrelated or non-correlated assets and strategies – benefits and advantages
- What does correlation mean in trading?
- Mark Spitznagel – Safe Haven Investing (explains why you want to mitigate risk)
The aim of Bridgewater’s All Weather Portfolio is to use diversification as a tool to smooth returns and lower drawdowns. If the asset classes don’t move in tandem, then diversification can help you lower drawdowns and sleep well at night.
Based on backtests and simulations, 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
That is a lot of exposure to bonds! It’s a surprisingly small allocation to stocks, the most successful asset class over the last century (measured in annual returns). But because the portfolio is balanced and constructed to survive and “prosper” in any economic scenario, it consists of several asset classes and not just stocks.
The All Weather principles and the risk parity approach
It is about balancing a portfolio’s risk exposures to attain a greater chance of investment success than what is offered by traditional, equity-centric approaches to asset allocation. We are very pleased to see investors moving in this direction, as we have been communicating and debating our “All Weather” principles of balanced beta with our clients and with the investment community for the past sixteen years. From these core principles the Risk Parity space was born. We want to take this opportunity to revisit those original principles, and to explain how we apply them to achieve reliable balance, which has proven its value in our real-time management of All Weather since 1996 and in 85 years of back-testing. The best way to achieve reliable balance is to design a portfolio based on a fundamental understanding of the environmental sensitivities inherent in the pricing structure of asset classes. This is the foundation of the All Weather approach.
– Bob Prince
The groundwork for the All Weather investment principles was done in the 1980s and the early 1990s, and in 1996 Dalio decided to use the approach for his own family trust.
Bob Prince, the Co-Chief Investment Officer for Bridgewater Associates, wrote a paper in August 2011 called Risk Parity Is About Balance, where he laid out the foundation of the All Weather investment principles. The main takeaway was that a balanced portfolio achieves the same returns as equities with 1/3 of the risk. Bob Prince presented this backtest in the paper:
One takeaway from their findings is their All Weather risk parity approach. We will not get into details about the risk parity approach but in general terms, it’s about keeping the risk for each asset class constant based on volatility. Because we don’t know future volatility, trailing volatility was used as an estimate. Rising volatility means more risk and thus lower allocation in the portfolio.
In our backtests, we don’t take into consideration the volatility, and thus we are simplifying.
What are the assets included in the All Weather Portfolio?
Let’s look at the different asset classes more deeply.
The chart below is taken from the book Triumph of the Optimists and shows the US’ returns for stocks and bonds:
As you can see, stocks have been, by far, a much better asset class than bonds.
Why then allocate so much to bonds and less to stocks?
It’s because Ray Dalio and his team do not necessarily look to optimize the total returns, but rather to create a “sleep well at night” portfolio with smaller drawdowns and good risk-adjusted returns. The latter is a very important strategy metric. The portfolio is backtested from the period after WW2, and there is a reason why they implemented a lot of bonds at the expense of less to stocks.
Again, we emphasize that the All Weather Portfolio is an investment portfolio whose purpose is to perform well under different economic environments – preferably ANY environment. Most investors have long forgotten the stagflation period of the 1970s where stocks produced negative real returns, while real assets soared. Real assets had mediocre returns from 2000 until 2021 when they suddenly started rising after being “dormant” for two decades. We all fall prone to the recency bias and quickly forget the past.
One other important issue is that the time horizon for the portfolio is decades. Even though stocks have been the best for over a century, they don’t necessarily perform well during shorter time periods of say 1-5 years. We suspect bonds are added to serve as a balancing anchor to the portfolio.
Stocks, bonds, and commodities are included because they have their own separate contributions to the returns of a portfolio:
Stocks
Stocks are included because they have historically produced good returns. If you own a broad portfolio of stocks, you participate in public companies’ wealth creation. Over the last 100 years, stocks have risen about 10% annually with dividends reinvested. This is before inflation, but most research we have seen shows a real return of about 6%. Thus, over the long term, you should have a decent hedge against inflation. Stocks go the same way as the GDP – up.
The drawback with stocks is drawdowns. The market dropped almost 90% from the top in 1929, and in 2008/09 the S&P 500 dropped 55%. These drops are gut-wrenching for most investors!
Can you handle these drawdowns? History shows that retail investors have poor returns, and one of the reasons is they buy market tops and sell market bottoms. They can’t stomach losses. They fear a loss will become bigger and sell. When the market recovers they reenter at much higher prices. It’s a vicious cycle.
Bonds
A bond is a loan to a company or sovereign government. As compensation, the lender (the owner of the bond) is paid a coupon at certain intervals. Because the interest rates fluctuate over the life of the bond, the price of the bond goes up and down. We have explained the relationship in our article named what happens to stocks when bonds go up.
Thus, just like stocks, bonds also have drawdowns. However, they are normally of a smaller magnitude than stocks.
Commodities
Commodities are hard assets like gold, metals, grains, oil, etc. They are real assets, tangible assets that we use in everyday life. Without commodities, the world faces supply shocks, as evidenced after Covid-19 and during the Ukraine-Russian war. It’s the grease that keeps the wheel turning and is essential for increasing living standards.
Why are commodities included in the All Weather Portfolio?
We assume it’s because they tend to rise when stocks and bonds go down. Rising commodity prices are inflationary, resulting in lower prices for stocks (and bonds). To offset this risk, commodities are included in the portfolio. It’s to balance the portfolio – to mitigate risk and neutralize falling stock prices. 2022 is a perfect example of this: stocks and bonds are both down, while commodities are up (a lot). Because of this, trend-following funds are having a fantastic year in 2022.
Now that you know the asset allocations, you might wonder how you can go about and create such a portfolio yourself:
How do you make an All Weather Portfolio yourself?
How can you diversify like Ray Dalio and Bridgewater Associates?
We have never seen or read Ray Dalio explain explicitly how “normal” retail investors can create the All Weather Portfolio. However, we see several options on the internet. Due to a wide range of mutual funds and ETFs, it’s a lot easier now than before to put together a portfolio.
We suggest the same as many others do and pick these five different ETFs:
- 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 and that you understand the holdings of the ETF or the fund.
Because of rebalancing, which should be done at least once a year, it’s preferable to use a tax-deferred account.
Why is the All Weather portfolio good?
First and foremost the All-Weather Portfolio is a defensive portfolio. It’s not made to make you rich quickly (nothing is), and you are almost guaranteed to underperform in a bull market in stocks. So then, why invest in such a portfolio?
Here are some arguments for having an All Weather Portfolio:
- It’s a defensive portfolio. You’ll most likely underperform stocks in a rising market, but outperform in a falling market.
- Because of number 1, you’ll have smaller drawdowns than in stocks, and thus be less likely to commit behavioral mistakes.
- It’s about preserving what you have, not going for the jugular.
- It’s potentially a smart portfolio for retirees or those about to retire in a few years (because of estimated smaller drawdowns).
Is the All Weather portfolio good for retirees or FIREs?
Because the All-Weather Portfolio is constructed to survive any investment climate, it’s potentially a good portfolio for retirees and FIREs. It’s a hands-off portfolio that you only need to rebalance 1-2 times per year.
We made a separate article a few months back where we made some simulations of why you need to diversify to different asset classes if you plan to withdraw capital for consumption (or whatever reason):
- How likely are you to go broke as retired or FIRE? (Sequence risk, diversification, and withdrawal rate)
When should you rebalance the All Weather portfolio?
There are no definite answers to this. However, we believe at the least you should rebalance once a year, perhaps semi-annually, but not more than quarterly.
But it also depends on your tax situation. If you have a tax-deferred account, something that is strongly recommended, even paramount, you have fewer things to worry about and consider, which means you can balance as often as you want. That said, it most likely makes no sense to rebalance more often than quarterly.
The Pros and cons of the All Weather portfolio
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 graphs further below in the article.
This means that the All Weather Portfolio is not for everyone. Especially if you are young, for example in your 20s, it would make more sense to be more aggressive (invest more in stocks) as you have time on your side to let your capital compound (and the stomach to handle drawdowns).
How has the All Weather Portfolio performed? Let’s backtest
This is probably what most readers care about: how has the All Weather Portfolio performed?
We only have data going back to 2007, but Nick Maggiulli has made a backtest going back to 1970 in a blogpost called The Definitive Guide to the All Weather Portfolio on his website ofdollarsanddata.com.
During the 1970s and 2000s when stocks performed poorly, the All Weather Portfolio outperformed. During bull markets in the 80s, 90s, and the 2010s, it underperformed. This is exactly what you can expect because of the high allocation to bonds.
Backtest of All Weather Portfolio
Below is a backtest we did from July 2007 until today with daily rebalancing. We used daily rebalancing to better capture the ups and downs of the portfolio. The difference in returns compared to monthly and even annual returns are small (about 0.35% lower for annual rebalancing). We used the following ETFs and weightings:
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This is what the equity curve looks like:
The CAGR is a modest 4.5% (4.15% with annual rebalancing) but keep in mind that our results don’t include reinvested dividends, perhaps underestimating the results by 1-1.5% annually. For comparison, S&P 500 returned 6.7% (not including dividends).
If we look at each year and month separately, we get the following table:
Let’s compare the equity curves of both the All Weather Portfolio and S&P 500:
Clearly, the red line, which is the All Weather Portfolio, has a substantially smoother path, although you end up with less capital. It’s a trade-off.
All Weather Portfolio and drawdowns
Most backtests scan a test in less than a second and voila! – you have an equity curve. We tend to focus on the end result, and not the journey of the equity curve. That is a shame because most traders and investors give up in the midst of a panic or sell-off in the markets. Most retail investors end up with mediocre results exactly because of this reason.
You don’t know how much pain you can suffer until you are in the midst of it. Thus, drawdowns are very important to understand. Because of this, we backtest All Weater Portfolio during the three most dramatic selloffs since 2007:
How did the All-Weather portfolio perform during the financial crisis in 2008/09?
The red line is the All Weather portfolio and the blue line is S&P 500. Clearly, over many years, the All Weather Portfolio performed much better than stocks with a max drawdown of 17%. It was not until late 2016 that stocks managed to recover the “losses” relative to the All Weather Portfolio.
Imagine being a retiree in January 2008 and only being invested in stocks! The sell-off would be heart-ripping.
One of the reasons it took so long for stocks to recover relative to the All Weather Portfolio is the compounding effect. When you suffer a huge drawdown of 50% you need 100% returns to recover. But when drawdowns are smaller you can start compounding at higher levels after the sell-off.
How did the All-Weather portfolio perform in 2020 during Covid-19?
Let’s go to the Covid-19 debacle in March 2020.
Stocks sold off 33% while the All Weather Portfolio had a much more modest drawdown of about 6%:
Unlike the financial crisis in 2008/09, stocks recovered quickly due to a swift response from central banks with plenty of money printing. By the end of the year, stocks had managed to recover the losses relative to the All Weather Portfolio.
How did the All-Weather portfolio perform in 2022?
The “crash” of 2022 involves both stocks and bonds. Bonds have often been a safe haven, but not this time. Due to the selloff in bonds, the only place to hide has been in commodities and this has softened the decline somewhat:
The red line is All Weather Portfolio and the blue line is S&P 500. The drawdown for the All Weather Portfolio is about 12%.
What happens if you leverage the All Weather Portfolio?
You might argue you can leverage the All Weather Portfolio because of its low drawdowns.
Let’s run a backtest where you leverage 1.5 times equity. The equity curve looks like this:
The CAGR goes up to 6.5% from 4.5% (still not including dividends) and the max drawdown increases to 25% during the financial crisis (but still a pretty modest drawdown).
How does it compare to holding S&P 500?
Over the 15-year backtest the All Weather Portfolio returns the same as S&P 500 but with significantly lower drawdowns. We have not deducted interest payments for the leverage.
Changing the allocations in the All Weather Portfolio
It’s a lot of bonds in the portfolio. What happens if use the same ETFs and assets but change the weightings?
Let’s change the weightings to this:
- 25% TLT (long-term Treasuries)
- 50% SPY (US stocks, S&P 500)
- 10% IEI (intermediate-term U.S. Bonds)
- 7.5% GLD (gold)
- 7.5% DBC (commodities, commodity index tracking fund, please also read our take on commodity trading strategy)
Without leverage, the portfolio would have fared like this:
The CAGR goes up to 5.2%, but the max drawdown goes up to 29%.
Let’s do another last backtest of the All Weather Portfolio with the following weightings:
- 25% TLT (long-term Treasuries)
- 40% SPY (US stocks, S&P 500)
- 10% IEI (intermediate-term U.S. Bonds)
- 15% GLD (gold)
- 10% DBC (commodities, commodity index tracking fund)
The CAGR goes up to 5.3% and we experience slightly reduced drawdowns:
How to code the All Weather portfolio in Amibroker?
If you want to backtest Ray Dalio’s All Weather Portfolio yourself or you are struggling to backtest similar strategies, you can buy the Amibroker code for the All Weather Portfolio (plus the code for all the other free trading strategies we have provided). Please click on the green banner below. We have also provided Tradestation/Easy Language code for about 50% of the strategies.
The All-Weather Portfolio investment strategy – conclusions:
Ray Dalio’s All Weather Portfolio offers lower drawdowns but it comes at the expense of lower returns than stocks (in the long term). Thus, the portfolio is not for those who are going for the jugular but is more directed to risk-averse and conservative investors. It could potentially suit those who are retirees, FIREs, or soon to become retired.
However, as with every investment, there is no guarantee that the All Weather Portfolio will perform well in the future, as witnessed in 2022 when bonds sold off heavily.
FAQ:
What is Ray Dalio’s All Weather Portfolio?
Ray Dalio’s All Weather Portfolio is a diversified investment strategy designed to perform well under various economic conditions, including inflation, deflation, and stagflation. It consists of a mix of stocks, bonds, and commodities to provide a balanced and defensive approach.
How has the All Weather Portfolio performed during significant market events?
The All Weather Portfolio has historically performed well during challenging market conditions, including the financial crisis in 2008/09, the Covid-19 pandemic in 2020, and the bear market of 2022. Its defensive nature has resulted in smaller drawdowns compared to stocks.
Why is the All Weather Portfolio considered a defensive strategy?
The All Weather Portfolio prioritizes defense and risk mitigation over aggressive growth. While it may underperform in strong bull markets, its primary goal is to preserve capital and provide investors with a portfolio that can weather various economic climates.
