When investing with a long-term horizon is important to make sure that our Portfolio is in the best possible position to better address future uncertainties and difficulties, as much as to take advantage of future possible opportunities.
To help us do this we can rely on Ray Dalio’s All-Weather Portfolio, a diversified asset mix first introduced by hedge fund manager Ray Dalio and popularized in Tony Robbins’s book: “MONEY Master the Game: 7 Simple Steps to Financial Freedom”.
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Who is Ray Dalio?
Ray Dalio is one of the greatest hedge fund managers of all time, born in 1949, he started his career in finance on the floor of the New York Stock Exchange as a commodity futures trader, immediately after completing his education. Then, in 1975 he founded the investment management firm “Bridgewater Associates” out of his apartment, it now manages about $160 billion. He appeared on the annual Time 100 list of the 100 most influential people in the world, and with an estimated net worth of $18.7 billion (Forbes 2019) is one of the richest men on earth.
He developed the All-Weather Portfolio and revealed it in an interview published in Tony Robbins’s book, where Dalio presented an asset allocation mix that according to Robbins “stands the test of time.”
How does it work?
The All-Weather Portfolio is an asset allocation strategy that is designed in a way that should mitigate the negative effects of the different “seasons” of financial markets: Inflation (a general increase in the price of goods and services, and the subsequent drop in purchasing value of a currency), Deflation (a general decrease in the price of goods and services), Bull Market (when there is optimism in the financial markets and prices keep going up), Bear Market (the opposite of the bull market, when there is a negative view about the future of the economy and there are more sellers than buyers, prices keep going down).
To mitigate the effects (positive or negative) of these “seasons”, Dalio proposes the following strategy of asset allocation:
This strategy is usually implemented not by buying individual stocks, bonds or futures but by purchasing their relative ETF.
ETFs (Exchange-traded funds) are investment funds traded, like many other financial assets, on stock exchanges. They work as a container of many different assets such as stocks, commodities, or bonds and can be used by investors that want to diversify more their portfolio by investing in many different stocks or other assets even without having a massive amount of capital to invest or without having to select each one of them individually.
The portion of this portfolio allocated in stocks is low compared to other strategies because they are usually more volatile than other assets like bonds, and are usually riskier.
Then, in my opinion, it is worth mentioning the presence of 15% (7,5%+7,5%) of commodities and gold, this has been done mainly because historically they tend to perform well in more inflationary environments.
How to rebalance
To better implement this strategy is important to understand how often, and in which way you will need to rebalance your Portfolio. Unfortunately, there is no one universal rule, however, is important to keep track of at least every quarter of the changes in proportions.
If for example in a period of euphoric markets the value of your stock holdings goes to 45% you may want to sell the extra 15% and reinvest that amount in other categories of assets that are smaller than the ideal proportions.
One thing to keep in mind is that each transaction costs money, in terms of brokerage fees and taxes, therefore is important to rebalance only when necessary.
This strategy has performed well in the past, in fact as highlighted in the book by Tony Robbins, the All-Weather Portfolio “has produced just under 10% annually and made money more than 85% of the time in the last 30 years (between 1984 and 2013)”, moreover, the average loss was just under 2% with one of the losses at just 0.03%.
Other studies reveal that during the Great Depression, this strategy would have lost 20.55%, compared with a loss of 64.4% for the S&P.
Finally, I would like to share with you some personal thoughts about this strategy.
I think that for every investor, having a set of rules to follow is often the key to a good performance and good returns on the money invested. The All-Weather Portfolio is based on solid principles and a remarkable track record, of course, is always important to remember that past performance is no guarantee of future results, therefore is very important to be always aware of the risks that investing carries, and that is important to always evaluate at best every situation.
However, after this premise, I want to recommend this strategy mainly to:
- Whoever wants to have good returns on his/her capital but does not know how to properly manage it, and does not have the time and knowledge to analyze every single investing opportunity available in the market;
- Anyone who wants to manage his/her money more actively, this strategy can be a good place to start and a very useful reference point. In fact, from my experience, I can say that having a series of simple but effective rules can be very helpful to develop your strategy, that suits best your personality and your financial goals.