The All Weather Portfolio in 2021

Table of Contents

Introduction

We discuss many portfolio ideas on this site so you can make more informed investment decisions. In this post, we want to discuss the most popular portfolio on the internet, the “All Weather” Portfolio. Portfolio became extremely popular after Tony Robbins wrote about it in MONEY Master the Game: 7 Simple Steps to Financial Freedom. It is the ultimate get-rich slow portfolio, and everybody should consider it for their investment journey.

Why the name “All Weather”?

The idea is that the portfolio can handle any financial climate. Bull markets, bear markets, sideways markets, recessions, collapses, inflation and deflation, and so on. We have analyzed its historical performance, and so far, it has held up to its name. See complete performance analysis.

Portfolio creator, Ray Dalio.

The portfolio was famously created by Ray Dalio. Mr. Dalio is the founder of Bridgewater Associates, a massive hedge fund with over $160 billion under management. His fund became the biggest in the world in 2005. 

You can read more about Ray on his wiki page: https://en.wikipedia.org/wiki/Ray_Dalio.

This portfolio composition was not known until life coach Tony Robbins interviewed Ray for his new book. 

Composition & Logic

Here is the portfolio composition breakdown:
40% in long-term bonds.
30% in stocks.
15% intermediate-term bonds.
7.5% in gold.
7.5% in commodities. 

Dalio has a theory that four economic seasons impact the value of different assets. When a particular financial season prevails, certain assets will increase in value more than others. 

According to Dalio, the four seasons are:

  1. Inflation. Rising prices due to higher than expected economic growth or the result of monetary stimulus from the central banks. 
  2. Deflation. Decreasing prices due to slow economic growth or when central banks put anti-inflationary measures such as high-interest rates.
  3. General bull market due to higher than expected economic growth.
  4. General bear market due to lower than expected economic growth.


It is hard to say during what season which assets perform better than others. There are rules of thumb, but it is never with certainty. In fact, definitions of these economic events vary quite a bit from expert to expert, so we don’t advise getting bogged down in the details but think of general economic activity in the U.S market. Another reason is economic theory does not always translate well to the real world. Many variables move the markets each day, and it can’t be easy to point to a specific economic event to explain it like most media outlets try to do. 

The fact is, Dalio has designed the “All-Weather portfolio” to be a well-diversified portfolio that performs well in any economic environment. This is because of a few things:

  1. High weight is in bonds. 40% is in long-term bonds. Bonds counter the volatility of stocks and thus bring the volatility of the whole portfolio down.
  2. Stocks and commodities should perform well during periods of economic growth or when there is an excess supply of money to be invested.
  3. Gold is considered a safe-haven asset and sees appreciation during difficult economic times. In fact, the price of gold went up over 27% in 2007, over 8% in 2008, and over 25% in 2009.

Portfolio Composition with ETFs


This portfolio provides an excellent passive investment. It provides both safety and freedom from concern. 

Weight Ticker Ticker Info
40% TLT
15% IEF
7.5% DBC
7.5% GLD  
30% VTI

Historical Performance vs. S&P500

Let’s compare All Weather performance to S&P 500. To make it simpler we will compare it to SPY ETF. Here are the results starting in 2007.

For 9 years from 2007 to 2016 All Weather has outperformed the S&P. What’s also interesting is how stable the growth for All Weather portfolio is.

Breakdown of performance during 2008 crisis.

In 2008 when the global markets collapsed, All Weather Portfolio returned a remarkable 3.15%. During the same period, the S&P dropped a whopping -36.81%. 

To understand why exactly that happened, let’s break down the return by each ETF by month. I want to specifically highlight October to December, as all other months were quite unremarkable.

As you can see while stocks and commodities were falling, bonds and gold performed extremely well to the point that the whole portfolio went up in value.

YearMonthReturnBalanceiShares 20+ Year Treasury Bond ETF (TLT)iShares 7-10 Year Treasury Bond ETF (IEF)Invesco DB Commodity Tracking (DBC)SPDR Gold Shares (GLD)Vanguard Total Stock Market ETF (VTI)
200810-8.64%$10,024.69-1.86%-0.87%-25.08%-16.14%-17.48%
2008116.22%$10,648.5914.34%7.75%-12.37%12.57%-8.01%
2008128.43%$11,546.4013.64%5.15%-3.22%7.73%1.78%

The reason the All Weather portfolio outperformed during a crisis is the same reason it underperformed vs. the S&P500 during the last three years when there was a boom in stocks. The portfolio doesn’t have a large enough exposure to stocks. Bonds exposure is the reason why the volatility is lower than the S&P but also why returns are lower on a long enough timeline.

Here is the breakdown of returns by ETF from 2007. Stocks and long term bonds produced majority of the return.

Performance vs. Volatility

To illustrate this point further, let’s take a look at CAGR vs. Standard Deviation of All Weather and the S&P 500 (SPY ETF).

By simply buying the S&P historically you would have gained a 3% point better performance but with double the volatility. The worst year for SPY was a 36% loss while for the All weather portfolio it was only 3.3%. Imagine sitting there during one of the greatest financial crisis in history and actually watching your portfolio go up in value while everybody else was losing a third of their portfolio in a matter of months. That is the power of high bond exposure.

Asset Breakdown

Asset types we buy when we purchase this portfolio:

It is a quite simple allocation, 55% in U.S bonds, 30% in US Stocks and 15% in commodities and gold.

Stock sectors we buy into when we purchase this portfolio:

Fees and Risks

Fees
This portfolio is constructed using ETFs that you can see under composition section. ETFs are professionally managed and carry a fee called MERs. This fee is part of your return so it is not charged separately. Here is the breakdown of the fees.

The most expensive ETF on the list is DBC (Commodity Tracking Index) but because of low exposure to DBC at only 7.5% the overall portfolio fee is not impacted by it too much. The overall fee is fairly low at 0.19%.

Risks
Any investment carries some risk of loss. Risk is captured by portfolio’s volatility.  Here is the summary of how much each ETF contributes to portfolio’s volatility as a % of total. 

 

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WeightTickerTicker Info
40%TLT
15%IEF
7.5%DBC
7.5%GLD 
30%VTI

Notes on results:

Performance analysis is not of the exact portfolio offered by a 3rd party service. For back testing purposes, portfolios are reconstructed using best available information. 

Past performance is no guarantee of future results, which may vary. Please see our terms of use.

Investing involves risk, including possible loss of principal. The value of the investments and the income derived from them may fluctuate over time.

All portfolio returns presented are hypothetical and backtested. Hypothetical returns do not reflect trading costs, transaction fees, or taxes.

The results are based on information from a variety of sources we consider reliable, but we do not represent that the information is accurate or complete.

The results do not constitute investment advice or recommendation, are provided solely for informational purposes, and are not an offer to buy or sell any securities.

The results are based on the total return of assets and assume that all received dividends and distributions are reinvested.

CAGR = Compound Annual Growth Rate

Stdev = Annualized standard deviation of monthly returns

The results assume annual rebalancing of portfolio assets to match the specified allocation