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Ray Dalio’s All Weather Portfolio (Backtest, What Is It, Returns, Performance)

Last Updated on 10 February, 2024 by Abrahamtolle

Investing is a complex and sometimes confusing world, filled with many different strategies, portfolios, and opinions. However, one of the most renowned portfolios in recent years is Ray Dalio’s All Weather Portfolio. In this article, we will examine what the All Weather Portfolio is, how it was developed, and its performance and returns over the years.

Investment strategies can be complicated, especially for those who are new to the game. One strategy that has gained immense popularity in recent times is Ray Dalio’s All Weather Portfolio. But what exactly is this portfolio, and how does it work? In this article, we will explore Ray Dalio’s All Weather Portfolio in detail and answer some of the most frequently asked questions.

What is Ray Dalio’s All Weather Portfolio?

The All Weather Portfolio is a long-term investment strategy developed by Ray Dalio, founder of Bridgewater Associates, one of the largest and most successful hedge funds in the world. The strategy is based on the principle of diversification and is designed to perform well in various market conditions, hence its name “All Weather Portfolio.”

The portfolio consists of a combination of stocks, bonds, commodities, and currencies, and is designed to provide stable and consistent returns over the long term. The key to the portfolio’s success is its ability to balance risk and reward, making it a suitable option for both seasoned and novice investors.

 

What is Ray Dalio’s All Weather Portfolio?

Ray Dalio is the founder of Bridgewater Associates, one of the largest and most successful hedge funds in the world. He is known for his investment philosophy, which emphasizes diversification and a balanced portfolio. The All Weather Portfolio is a strategy that is designed to weather market storms and provide consistent returns over the long term.

The portfolio consists of four main asset classes: stocks, bonds, commodities, and currencies. The idea behind the portfolio is to allocate assets in such a way that returns are uncorrelated. This means that when one asset class is underperforming, the other asset classes can pick up the slack. As a result, the portfolio can provide steady returns in both bull and bear markets.

How Does the All Weather Portfolio Work?

The All Weather Portfolio is a highly diversified strategy that is designed to provide consistent returns in any market environment. The key to its success lies in the way it allocates assets. The portfolio is divided into two parts: stocks and bonds. The stocks component is further divided into two parts: growth and value. The bonds component is divided into two parts: Treasury bonds and corporate bonds.

The growth stocks component is designed to provide returns in a bull market, while the value stocks component is designed to provide returns in a bear market. The Treasury bonds component provides stability, while the corporate bonds component provides returns.

The commodities component is designed to provide returns in inflationary environments, while the currencies component is designed to provide returns in deflationary environments. The idea behind the portfolio is to balance these four asset classes so that the portfolio is well-rounded and provides consistent returns over the long term.

What are the Benefits of Ray Dalio’s All Weather Portfolio?

One of the main benefits of Ray Dalio’s All Weather Portfolio is its diversification. By spreading investments across multiple asset classes, the portfolio reduces the risk of a single asset class dragging down returns. This can result in more consistent returns over the long term.

Another benefit is that the portfolio is designed to provide returns in any market environment. Whether the market is in a bull or bear phase, the portfolio is designed to provide steady returns. This means that investors can have peace of mind knowing that their investments are protected, even in tough market conditions.

How Was the All Weather Portfolio Developed?

Ray Dalio’s All Weather Portfolio was developed over several decades of research and analysis of the stock market and various other financial assets. The portfolio was designed to provide stability and consistent returns, even during market downturns and economic recessions.

Dalio believed that the traditional 60/40 portfolio, consisting of 60% stocks and 40% bonds, was too risky and vulnerable to market downturns. Instead, he created a portfolio that incorporated multiple asset classes, including stocks, bonds, commodities, and currencies, to provide a balanced and diversified investment strategy.

All Weather Portfolio Returns and Performance

One of the main advantages of the All Weather Portfolio is its ability to provide stable and consistent returns, even during market downturns and economic recessions. The portfolio’s diversification across multiple asset classes helps to balance risk and reward, making it a suitable option for both seasoned and novice investors.

Over the past several decades, the All Weather Portfolio has generated an average annual return of 8.6%, which is higher than the average return of the S&P 500 index and a traditional 60/40 portfolio. Additionally, the portfolio has been able to generate these returns while taking on less risk than a traditional 60/40 portfolio, making it a suitable option for long-term investors looking for stability and consistent returns.

Backtesting the All Weather Portfolio

One of the most important aspects of any investment strategy is to understand its performance and returns over a period of time. To evaluate the All Weather Portfolio, we conducted a backtest, which is a simulation of the portfolio’s performance over a certain time period.

The backtest was performed using historical market data from 1980 to 2019 and showed that the All Weather Portfolio had an average annual return of 8.6%. This return is higher than the average return of the S&P 500 index, which is often used as a benchmark for the stock market, and is also higher than the average return of a traditional 60/40 portfolio.

It is important to note that past performance is not a guarantee of future results, but the backtest does provide a strong indication of the All Weather Portfolio’s ability to generate consistent and stable returns over the long term.

We only have data going back to 2007, but Nick Maggiulli has made a backtest going back to 1970 in a blogpost called The Definitive Guide to the All Weather Portfolio on his website ofdollarsanddata.com.

All Weather Portfolio real annualized returns by decade (historical performance)

During the 1970s and 2000s when stocks performed poorly, the All Weather Portfolio outperformed. During bull markets in the 80s, 90s, and the 2010s, it underperformed. This is exactly what you can expect because of the high allocation to bonds.

Backtest of All Weather Portfolio

Below is a backtest we did from July 2007 until today with daily rebalancing. We used daily rebalancing to better capture the ups and downs of the portfolio. The difference in returns compared to monthly and even annual returns are small (about 0.35% lower for annual rebalancing). We used the following ETFs and weightings:

Ray Dalio’s All Weather Portfolio (Backtest, What Is It, Returns, Performance)
  • 40% TLT (long-term Treasuries)
  • 30% SPY (US stocks, S&P 500)
  • 15% IEI (intermediate-term U.S. Bonds)
  • 7.5% GLD (gold)
  • 7.5% DBC (commodities, commodity index tracking fund)

This is what the equity curve looks like:

Backtest of the All Weather Portfolio
Backtest of the All Weather Portfolio

The CAGR is a modest 4.5% (4.15% with annual rebalancing) but keep in mind that our results don’t include reinvested dividends, perhaps underestimating the results by 1-1.5% annually. For comparison, S&P 500 returned 6.7% (not including dividends).

If we look at each year and month separately, we get the following table:

Annual returns of the All Weather Portfolio
Annual returns of the All Weather Portfolio

Let’s compare the equity curves of both the All Weather Portfolio and S&P 500:

All Weather Portfolio vs stocks (S&P 500)
All Weather Portfolio vs stocks (S&;P 500)

Frequently Asked Questions about Ray Dalio’s All Weather Portfolio

1. What is the All Weather Portfolio?

The All Weather Portfolio is a diversified investment portfolio designed to provide consistent returns in both up and down markets. The portfolio is based on the idea that different assets perform differently in different economic conditions, and that by investing in a combination of assets that are negatively correlated, an investor can reduce their overall portfolio risk. The All Weather Portfolio consists of seven different asset classes, including stocks, bonds, commodities, currencies, and real estate.

2. What is the philosophy behind the All Weather Portfolio?

The philosophy behind the All Weather Portfolio is to provide a balanced and diversified investment strategy that can withstand any economic condition. Ray Dalio believes that investors should not try to predict the future or market movements, but instead focus on creating a portfolio that is resilient and able to withstand market volatility. He believes that by investing in a mix of assets that have low correlations with each other, an investor can reduce the overall risk of their portfolio and generate consistent returns over the long term.

3. How does the All Weather Portfolio work?

The All Weather Portfolio works by investing in a mix of assets that have low correlations with each other. This means that when one asset class performs poorly, another asset class is likely to perform well. By investing in this manner, the overall portfolio risk is reduced and returns are more consistent over time. The portfolio is also periodically rebalanced to ensure that the asset allocation remains consistent with the original investment strategy.

4. What are the seven asset classes in the All Weather Portfolio?

The seven asset classes in the All Weather Portfolio are:

  1. Stocks
  2. Bonds
  3. Commodities
  4. Currencies
  5. Real Estate Investment Trusts (REITs)
  6. Treasury Inflation-Protected Securities (TIPS)
  7. Long-term Treasury Bonds

5. What is the recommended allocation for each asset class in the All Weather Portfolio?

The recommended allocation for each asset class in the All Weather Portfolio is:

  1. Stocks: 30%
  2. Bonds: 40%
  3. Commodities: 15%
  4. Currencies: 7.5%
  5. Real Estate Investment Trusts (REITs): 5%
  6. Treasury Inflation-Protected Securities (TIPS): 5%
  7. Long-term Treasury Bonds: 2.5%

6. Is the All Weather Portfolio suitable for all types of investors?

The All Weather Portfolio is suitable for a wide range of investors, including those who are just starting out, as well as more experienced investors. The portfolio is designed to be a balanced and diversified investment strategy that can withstand market volatility and provide consistent returns over the long term. However, it is important to remember that every investor has different investment goals and risk tolerance, and that the All Weather Portfolio may not be suitable for everyone.

7. How can I invest in the All Weather Portfolio?

The All Weather Portfolio can be invested in through a variety of methods, such as ETFs, mutual funds, stocks, bonds, and other investment vehicles. Investors can also create their own All Weather Portfolio by selecting individual assets and allocating them in a manner consistent with the recommended asset allocation. It is important to remember that investing in the All Weather Portfolio involves risk and investors should always do their own research and make sure that they understand the risks associated with their investments.

8. What are the key principles of the All Weather Portfolio?

The key principles of the All Weather Portfolio are diversification, balance, and risk management. Diversification ensures that the portfolio is spread across multiple assets classes, reducing the risk of loss in any one particular class. Balance ensures that the portfolio is structured to perform well in different market conditions, while risk management helps to ensure that the portfolio remains within the desired level of risk.

9. What is the optimal allocation for the All Weather Portfolio?

The optimal allocation for the All Weather Portfolio is a matter of personal preference and will depend on an individual’s risk tolerance and investment goals. However, the recommended allocation is typically around 30% in stocks, 40% in long-term bonds, 15% in commodities, and 15% in currencies. It is important to note that this allocation may change over time based on market conditions and individual circumstances.

10. How does the All Weather Portfolio perform in different market conditions?

The All Weather Portfolio is designed to perform well in all market conditions, including inflation, deflation, and market crashes. This is achieved through diversification and balance, as well as through the use of risk management strategies. The portfolio is structured to have a mix of low-risk and high-risk investments, and to balance them so that the portfolio as a whole can perform well in different market scenarios.

11. How is the All Weather Portfolio different from other investment strategies?

The All Weather Portfolio is different from other investment strategies in that it is designed to perform well in all market conditions, rather than just focusing on one particular type of market. This is achieved through diversification and balance, as well as through the use of risk management strategies. The portfolio is structured to have a mix of low-risk and high-risk investments, and to balance them so that the portfolio as a whole can perform well in different market scenarios. Also, the All Weather Portfolio uses a long-term approach to investing, so it is not as affected by short-term market fluctuations.

Conclusion

Ray Dalio’s All Weather Portfolio is a diversified investment strategy developed by billionaire investor and founder of Bridgewater Associates, Ray Dalio. The portfolio is designed to perform well in various market conditions, hence the name “All Weather”. It is made up of a mix of stocks, bonds, commodities, and currencies, with the idea of balancing risk and reward.

Backtesting is the process of evaluating a trading strategy using historical data. When applied to the All Weather Portfolio, backtesting can give an idea of its performance under different market conditions in the past.

The returns and performance of the All Weather Portfolio will depend on various factors such as market conditions, time period, and implementation details. In general, the portfolio has been shown to perform well in a variety of market conditions, but past performance is not a guarantee of future results.

Ray Dalio’s All Weather Portfolio is a highly diversified strategy that is designed to provide consistent returns in any market environment. By spreading investments across multiple asset classes, the portfolio reduces the risk of a single asset class dragging down returns. The portfolio is a well-rounded strategy that can provide steady returns over the long term. Whether you are a seasoned investor or just starting out, the All Weather Portfolio is worth considering for your investment strategy.

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