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In recent weeks we have talked a lot about inflation, what has been happening in the stock market, but also all that economic recovery that has been happening both in the United States and Mexico, but also throughout the world. The most important thing as investors is always to start building a portfolio that is fully grounded and diversified so that we have exposure to different financial instruments that probably do not have that positive correlation where they are not affected in the same way due to different economic situations or different economic climates.
So in this video we're going to explore one of the most popular portfolios worldwide because of its great strength in surviving the test of time and all the economic cycles we may experience throughout our lives. Ray Dalio's All Weather Portfolio. Hi how are things? My name is Humberto Rivera and welcome back to Financial Life.
On this channel I talk every week about various topics related to finance, investments and wealth building. So if you're really interested in these topics, consider subscribing, liking this video, and sharing it with a family member or friend who you think will find it very useful. So Ray Dalio is undoubtedly one of the most important investors and fund managers in history.
Ray Dalio, the billionaire founder and manager of one of the world's largest investment funds, Bridgewater Associates, definitely has decades and decades of experience investing his money, but also that of many other people. So what he was proposing was the All Weather Portfolio, which has the main objective of protecting us against all volatility, all uncertainty, and all the different economic situations that our portfolio and our money may be experiencing over time.
Honestly, nobody in the world can predict what will happen in the economy, but because this portfolio has a lot of exposure to different financial instruments that don't have that direct correlation with each other, this can help us a lot to mitigate all that volatility, all that risk, and maintain consistency in our portfolio.
So, obviously, this portfolio isn't for everyone. It 's definitely for those who want that stability, that security, and that economic certainty to obtain interesting returns over time, but this will be constant, this will be periodic, and it will require a lot of discipline on our part. To build this investment portfolio, Ray Dalio proposes four main economic effects or phenomena that can affect all the different financial instruments that we can acquire over time.
The first is inflation, which is the growth in the price of products or services, deflation, which is the reduction or decrease in those prices of products or services, economic growth and also economic contraction. It suggests having exposure to three main financial assets. First, it suggests that we have 55% exposure in bonds or fixed income, 30% in stocks or the stock market, and finally proposes having 15% in commodities or raw materials.
In this way we will have a lot of diversification and we will have financial instruments that may behave or perform differently depending on all these economic factors mentioned above. This asset allocation is expected to achieve excellent diversification, consistent growth, and the lowest possible risk and volatility in our portfolio.
And now we're going to explore each of the financial instruments that Ray Dalio suggests having in our portfolio and examples of what financial instruments we can acquire in real life to replicate this same thing. Undoubtedly, the largest percentage of this portfolio consists of government bonds, and this is simply to have that economic stability, that certainty that we will obtain fixed income or practically guaranteed returns with our investments, and this gives us a great deal of economic security.
Government bonds are by no means the most exciting instruments we can acquire, but the main objective is to have that great stability and those practically guaranteed returns on our investments. We also need to understand that government bonds are up to three times less volatile and less risky than stocks on the stock exchange, so obviously our portfolio, having so much exposure to bonds, is not going to move and will not have as many fluctuations as a roller coaster.
But we must also consider that risks can be interpreted differently depending on each person, and probably obtaining or having a lot of exposure in government bonds that are not even keeping up with inflation, that can generate an additional risk that perhaps many people are not even considering, because having returns lower than inflation will cause us to have a loss in our purchasing power.
But fortunately there are various financial instruments, specifically bonds, that we can use to protect ourselves directly from inflation, and we'll talk about them in a moment. So that 55% that Ray Dalio is proposing to have in exposure to government bonds is quite high, but there is a reason for it.
Stability is very important in this portfolio, and if that's what we're looking for, it 's probably a good option to consider for building or replicating this portfolio strategy in our specific investments. Ray Dalio also suggests dividing this 55% of government bonds into two subcategories. The first is to have exposure to medium- term bonds with 15% and the other 40% suggests having exposure to very long- term bonds.
This way we will have a lot of exposure to different types of government bonds and we will have the flexibility to choose the ones that best suit our needs. So, in the case of Mexico, I really suggest that we use the Cetesdirecto platform because it has different bonds that can be adapted to the needs of both medium-term and long- term bonds.
For medium-term bonds, I really suggest investing in Cetes directly on the Cetesdirecto platform for any term. It could be one month, three months, six months, or even a year, but the most important thing is that we would like to have considerable liquidity so that if we need this money, we can obtain it very easily.
We may also be considering banking platforms or institutions like HeyBanco, but we could also think about investing in Sofipos. This gives us a lot of flexibility to choose medium-term bonds, and all these options are really, really good in my opinion. And for long-term bonds, I really recommend that you consider investing in long- term bonds through Cetesdirecto.
And these bonds can be from three years to 30 years, so we also have a lot of flexibility, but we could also even consider investing in Udibonos where these have inflation protection, where we will be receiving fixed interest every six months, but we will also have a variable rate of return, so to speak, but that is adjusted to the Udis.
And for those who want exposure to the United States, specifically US Treasury bonds, they can probably consider investing in VGIT for medium-term bonds or VGLT for long-term bonds, since they have very low management costs of only 0.05%. This way, we will have significant exposure to both the domestic market in the case of Mexico and the US market.
If we continue with the next main financial asset, Ray Dalio is suggesting that we have a 30% exposure to stocks in the stock market, and this is probably quite low compared to other portfolios we might be considering, but this is for a very good reason: stocks are up to three times more volatile than government bonds.
Therefore, he suggests that if you want to have a lot of stability in your portfolio, you should have at least half the exposure in stocks compared to bonds. That is the reason. Here, the allocation or what instruments we can use to have exposure to stocks is much simpler than with bonds, because what we want is the greatest possible diversification and not to be investing in individual stocks or companies .
In this way, if you want to have a lot of diversification, you can consider buying or investing in ETFs that are replicating the largest and most important stock market index in the world, which is the S&P 500, where you could be investing in the 500 largest companies in the United States . ETFs like VOO or IVV can also be considered for exposure to the S&P 500, but if you want a bit more diversification, you can consider investing in the VTI, which is the Total Stock Market ETF of the United States, where you will have exposure to thousands of stocks from all over the United States, and if you want even more global exposure and diversification, the best ETF you can acquire is the VT, which is practically investing in all the markets around the world.
And for Mexico , fortunately, we have other advantages that we can consider, since they do not require having a lot of capital like the other ETFs mentioned above. With IVV Peso, with just 75 pesos or even less you can have exposure to the S&P 500, or you can use or consider SPLG, which costs approximately 1000 pesos, and we could also have exposure to the same index.
I'm not going to go into much more detail about IVV Peso, SPLG, and VOO, but if you're interested in learning more about their advantages, disadvantages, prices, and fees, I'll leave a video link in the cards so you can look at it in more detail. And finally we have the third category of financial assets which are either commodities or raw materials that make up 15% of the overall portfolio.
I prefer to call these financial assets safe-haven assets because many people or investors start turning to them or investing in them when there is a lot of economic uncertainty, as has been happening since 2020. These assets can be quite attractive because they also offer economic stability, especially when there are seasonal fluctuations, cycles, or even very uncertain economic climates, and we don't know where the economy is headed.
And just like bonds, in commodities or raw materials we will have two main subcategories. The first is the most popular and important commodity or raw material in the world used to safeguard or preserve money or our purchasing power, which is gold. We will allocate 7.5% of the overall portfolio to this, and we will also allocate another 7.5% to a diversified basket of other commodities.
In this way we will have exposure to many commodities or raw materials, but something interesting that we could even be considering for this section or this category of raw materials or commodities are cryptocurrencies. We know that these types of financial assets are currently very attractive and have appreciated significantly over the past few years, so if you want or are very interested in having exposure to these cryptocurrencies, we can probably restructure this commodity category in a different way.
And how I would suggest having this category is simple: divide this 15% of commodities or raw materials by three to have 5% in gold, 5% in a diversified basket of raw materials, and another 5% in cryptocurrencies. This way we won't have as much exposure to these highly volatile and uncertain assets that are cryptocurrencies like Bitcoin, Ethereum and many others, but we could also have significant exposure and appreciation if they continue to rise in value over time.
And we can use and invest in ETFs like GLD or IAU to gain exposure to gold, without physically holding it, making it much more liquid by using these financial instruments on the stock exchange. And to have a diversified portfolio across all other commodities, we could consider having exposure to or investing in the GSG ETF.
And if you want to gain exposure to all those cryptocurrencies, you might be very interested in buying them using platforms like Bitso, Binance, or BlockFi. In this way we will have a great deal of exposure to different financial instruments in a very, very diversified way. And now, if we consider all those suggestions that Ray Dalio was providing us, but also with some modifications we made along the way, our portfolio or personal All Weather Portfolio might look like this .
And it's really quite interesting because in this way we really have it very, very diversified. We will have exposure to government bonds that are likely to be a bit more fixed, more stable, but it is also important to see how this All Weather Portfolio has performed over time. So what we can see at this moment is a table that can show us different returns it has had over time.
In this case, we can see that over 10 years, on an annualized basis and reinvesting all dividends obtained or provided from the stock market and other financial instruments, we could have obtained returns of approximately 7.21% . And if we compare the portfolio against the S&P 500 or the US stock market in general, we can see the following.
If we look at the graph, the blue line is the All Weather Portfolio, while the S&P 500 is the red line. In this case, the All Weather Portfolio has actually performed and behaved in a much more stable manner than the S&P 500. We don't have as many upward peaks , but we also don't have as many downward peaks.
This way we won't have as much volatility, but we also have to consider that the returns weren't as high as they have been in the stock market . So, in conclusion, what can we say about the All Weather Portfolio? It 's a really good strategy that we can use, but if we're quite young and we want to have the highest possible returns, obviously increasing our risk, this portfolio probably isn't for us.
But we have to understand that age and our investor profile have a very significant impact on making the decision to adopt this portfolio or perhaps adopt another portfolio or make a portfolio specifically for our needs. It's a really interesting portfolio if you're looking for economic stability and less volatility over time.
And if you're already a bit older and only interested in preserving your money, switching your portfolio to the All Weather Portfolio might be a very good idea because you'll have much more stability and practically avoid the significant losses you might experience with other investment strategies .
I hope you found this video helpful and educational. If so, please consider subscribing, liking this video, and sharing it with a family member or friend who you think might find it useful. See you in the next one, thank you very much, and goodbye .
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