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the all-weather portfolio is a well-diversified low-risk portfolio from Ray dalio designed to weather any environment here we'll look at the all-weather portfolio's components historical performance and stick around till the end when we'll talk about how to build this portfolio with low-cost ETFs first we'll take a brief look at what this portfolio is comprised of and why the all-weather portfolio isn't available to the masses portfolio modeled somewhat after the risk parity-based all-weather fund from the famous hedge fund Bridgewater Associates the portfolio idea was created by the legendary Ray dalio founder of Bridgewater and was then popularized by Tony Robbins dalio has become almost like a god in the world of finance and investing and rightfully so I would highly recommend his best-selling book principles as well as his more recent book big debt crises his newest book from November 2021 is principles for dealing with the changing World Order why Nations succeed and fail Bridgewater is perhaps most famous for their focus on and Analysis of different economic Cycles in the economic machine they're all weather fund and subsequently the all-weather portfolio is designed to survive all economic environments using different types of assets that perform differently during those different seasons appropriately it is also sometimes referred to as the All Seasons portfolio while Bridgewater is constantly watching the market and the economy dalio himself admits that he can't predict the future thus the need for a portfolio that mitigates the financial impact of unexpected economic events known as Black Swan events the all-weather portfolio becomes especially attractive during periods of Market turmoil particularly for investors who have a low risk tolerance and or are primarily concerned with capital preservation it has long been known the portfolio diversification mitigates risk and volatility the weather portfolio seemingly maximizes diversification using a variety of asset classes this diversification benefit is born of the inherent uncorrelation of these assets for example when stocks go down bonds tend to go up this conveniently obviates the need for for any attempt at or anxiety over Market timing or guesswork dalio actually explicitly maintains that attempting to time the market is a Fool's errand note that the all-weather portfolio as it is prescribed is not based on true risk parity of the assets but it is pretty close it is simply the product of an interview between Tony Robbins and Ray dalio in which dalio suggests that these weightings without leverage would be suitable and easy to manage for the average investor dalio even suggested that these weightings would not be exact or perfect In fairness the real all-weather fund at Bridgewater after which this portfolio is modeled seems to be based on risk parity of the four economic Seasons we'll cover in a second as the name suggests the all-weather portfolio is designed to be able to weather any storms it uses asset class diversification based on seasonality in the interest of limiting volatility and drawdowns the Holdings and allocations thereof correspond to dalio's views on economic Seasons dalio's strategy and expertise are so pervasive that the phrase all weather is now used to describe other portfolios that behave like his in surviving any economic climate such as with the phrase investing in an all-weather portfolio dalio proposes that the following four things affect asset value inflation deflation Rising economic growth and declining economic growth based on these dalio expects we can see four seasons of the economy higher than expected inflation lower than expected inflation higher than expected economic growth and lower than expected economic growth dalio chose asset classes that performed well in each of these different seasons with the goal being diversification that allows for consistent growth and small drawdowns to minimize volatility the portfolio is mostly bonds and only allocates 30 percent to stocks the all-weather portfolio asset allocation looks like this 30 U.S stocks 40 long-term treasury bonds 15 intermediate term treasury bonds 7.5 percent Commodities and 7.5 percent gold with live fun data for Commodities only going back to 2003.
here's the all-weather portfolio versus a traditional 60 40 portfolio in the S P 500 through 2022 as we'd expect the all-weather portfolio has had less than half the volatility and consequently a much higher risk-adjusted return and significantly smaller drawdowns versus the s p 500. this shows the all-weather portfolio doing precisely what it's intended to do whether any storm personally I probably wouldn't adopt the all-weather portfolio unless I were near or at retirement age or if for some reason I absolutely couldn't mentally and emotionally endure volatility and drawdowns which is a very real case for some the gold Commodities and heavy Bond allocation would likely just drag down long-term Total return since it only has 30 percent allocated to stocks we can see the all-weather portfolio had a slightly lower return with a nearly identical risk adjusted return compared to a 60 40 portfolio for this period I'm also usually not even a fan of gold or Commodities period they have no place in my portfolio at this time that said this would be a good set and forget portfolio making it attractive for investors who want to be completely hands off and it is probably my favorite of the volatility minimizing any economic climate portfolios like the permanent portfolio Golden Butterfly and Ivy portfolio moreover the best strategy is the one you can stick with and mitigating volatility year to year makes that much easier there's also no denying the allocation to Broad Commodities helped immensely in 2021 and 2022 so my foot has been in my mouth recently with that since I'm quick to hate on Commodities now let's talk about how to build the all-weather portfolio with low-cost ETFs that looks like this 30 vti 40 vglt 15 schr 7.5 gldm and 7.5 percent BCI I'll include a link to invest in this portfolio in the description what do you think of the all-weather portfolio let me know in the comments thanks for watching
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