Try though we might, human beings can’t always accurately predict the weather. Dark, misty mornings can precede warm sunny days just as a tropical storm can emerge seemingly out of nowhere. So, too, can the economic climate be near-impossible to predict accurately at all times. That is where investing strategies like the Ray Dalio all-weather portfolio come into play.
The all-weather portfolio is a simple approach to portfolio-building that offers peace and security amid the chaos of unpredictable financial markets. With just a handful of investments, it offers investors the chance to consistently thrive in rain, shine, or anything in between.
Ray Dalio, Investing Legend
Before diving deeper into the mechanics of the all-weather portfolio, let’s take a quick look at its visionary creator, Ray Dalio.
A New York native, Dalio has been making waves in the financial world his whole career. Just two years after earning his MBA from Harvard Business School, Dalio founded his own hedge fund, Bridgewater. Bridgewater has since grown to become the largest hedge fund in the world, with Dalio still serving as co-chief investment officer today.
The hedge fund’s meteoric success is primarily due to Dalio’s keen eye for value, patient long-term planning, and often unconventional approaches to finding and selecting investments with untapped potential.
Today, Ray Dalio is one of the wealthiest human beings on the planet and one of the most successful investors of all time.
What Is the All-Weather Portfolio?
The all-weather portfolio is an investing strategy intended to work well for investors in any financial climate. That means never needing to adjust, rebalance, or reallocate based on the latest investing news. Ray Dalio designed it as a one-size-fits-all-weather option so investors can effectively set it and forget it.
The portfolio uses a small handful of investments to achieve broad diversification both across and within asset classes. Typically, this involves a few mutual funds or ETFs, but how different investors implement the portfolio may vary.
By relying on a diverse array of asset classes, the all-weather portfolio seeks always to have the right tool for the job. Whether the markets are rising, falling, highly volatile, or dealing with inflation or deflation, the all-weather portfolio has investors covered.
As mentioned above, the all-weather portfolio is relatively simple in practice. It comprises five investments, each broadly diversified in a critical asset class. They break down as follows:
- 30% Total stock market
- 40% Long-term US bonds
- 15% Intermediate-term US bonds
- 7.5% Diversified commodities
- 7.5% Gold
This allocation may look somewhat unconventional at a time when many investors’ portfolios weigh in at 80% or even 90% stocks. With only one stock investment at 30% of the allocation, the all-weather portfolio may come off as highly conservative.
The portfolio is somewhat more conservative than its stock-heavy counterparts. To achieve its all-weather stability, the allocation of the portfolio needs not only to reduce overall risk but also to make room for opportunities that don’t rely on stock.
For instance, the portfolio includes a significant portion of commodities, which many modern portfolios ignore entirely, creating a powerful opportunity in some situations. Let’s take a closer look at the simple genius of that strategy.
Strategy Behind the All-Weather Portfolio
Rather than as five separate funds, it may help to think of the all-weather portfolio instead as a group of three broad asset classes: stocks (30%), bonds (55%), and commodities (15%).
Contrary to what may be one’s initial impression, the portfolio is not light on stocks simply to avoid volatility. The allocation of the all-weather portfolio is specifically designed so that, no matter the economic climate, something within the portfolio is in a position for growth.
When the investing markets are doing well, the total stock market allocation in the portfolio will naturally rise with the tide. Growing markets often come with consumer inflation. In that case, too, stocks offer a valuable hedge against the diminishing value of currency.
But things aren’t always going up. At times of market shrinkage or deflation, the bonds and commodities in the portfolio hold much more promise, owing to their often-inverse relationship with equity investments.
The all-weather portfolio doesn’t simply allocate away from stocks to reduce risk. It actively invests in diverse asset classes so that whatever may come, its investors will have what they need.
Strategy is one thing; real-world performance is another. How does the all-weather portfolio perform over the long term? Let’s take a look at how a $10,000 initial investment in the all-weather portfolio would have performed over the 10-year period from January 2013 to December 2022, compared to an S&P 500 index fund as a baseline:
Data source: calculations and charts from portfoliovisualizer.com with author’s input
As the casual observer may have predicted, this portfolio did not outperform the overall growth of the stock market over this period, nor is it likely to do so over any long term. However, high-velocity long-term growth is not the core purpose of the all-weather portfolio. Its purpose is to weather the storms and provide growth and stability amid shifting conditions.
And it does so pretty effectively.
A closer look at the chart above reveals that the all-weather portfolio doesn’t sacrifice potential gains for nothing; it trades them for smoother seas. At every point that the S&P (red) sees a sharp drop, the all-weather portfolio either experiences a minor dip or doesn’t react at all.
This portfolio will likely never be a contender for top long-term growth. But it's worth a closer look for investors seeking stability and financial security.
How to Invest in the All-Weather Portfolio
The Ray Dalio all-weather portfolio is a strategy for investing rather than a specific investing instrument like an ETF. As such, different investors may implement the system and build an all-weather portfolio in many ways. However, this implementation will most often involve five funds to fulfill the portfolio’s five asset class allocations. For instance, the following five ETFs would be a straightforward way to achieve that goal:
- 30% Vanguard Total Stock Market (VTI)
- 40% iShares 20+ Year Treasury Bond (TLT)
- 15% iShares 3-7 Year Treasury Bond (IEI)
- 7.5% Invesco DB Commodity Tracking (DBC)
- 7.5% SPDR Gold Trust (GLD)
This implementation may, and likely will, vary from one investor to another based on personal preference. For instance, some investors may want to rely heavily on their favorite brokerage or fund issuer wherever possible. Others may put 15% of their portfolio into one total stock market ETF and 15% into another to make up their 30% and test two options against one another.
There is no be-all, end-all approach to building the all-weather portfolio. The most important thing is to expose your capital to the five essential asset classes in the appropriate proportions. The rest is up to you, the investor.
One Portfolio, Any Type of Weather
When preparing to leave home on a day with questionable weather, it can be difficult to tell if you’ll need a jacket or whether a pair of heavy boots will slow you down. Fortunately when it comes to investing, you can pack for anything without these unnecessary burdens. All it takes is an approach like the Ray Dalio all-weather portfolio.
A simple strategy on the surface level, the all-weather portfolio taps into the economic asymmetries of a few key asset classes to consistently benefit from any market. If stability or preservation of capital is one of your top investing priorities, this portfolio is worth a look. It may not yield as much as a stock-heavy portfolio in the long term, but its approach to financial stability offers shelter in any storm.
Sam is the founder of the personal finance and self-improvement blog Smarter and Harder. His mission is to start exciting new conversations that empower people to improve their work, lives, and money, and hopefully have a fantastic time doing it. In all things, he strives to lead with positivity, understanding, and more than a bit of enthusiasm.