Here’s what the portfolio looks like:
The reason he chose those assets goes into his theory on economic “seasons.” According to Dalio, there are four things that affect the value of assets:
- Inflation. The increase in prices for goods and services — and the drop in purchasing value of a currency.
- Deflation. The decrease in prices for goods and services.
- Rising economic growth. When the economy flourishes and grows.
- Declining economic growth. When the economy diminishes and shrinks.
Based on these elements, Dalio says that we can then expect four different seasons that the economy can go through. They are:
- Higher than expected inflation (rising prices),
- Lower than expected inflation (or deflation),
- Higher than expected economic growth.
- Lower than expected economic growth
so he constructed a portfolio with assets that have performed well when each of those seasons occurred. The result is a diversified portfolio that can consistently earn you money while keeping you financially secure during bear markets.
A few interesting takeaways from the portfolio:
- The portfolio has a relatively low amount of stocks. This is due to the high volatility of stocks and, if you’re trying to make a portfolio that is as risk-free as possible, you’re going to want to minimize that.
- Bonds make up the majority of this portfolio.…This counters the volatility of the stocks and, if you’re building a portfolio that prioritizes minimal risk over making as much money as possible, this is the way to do it.
- There is 15% in gold and commodities. With the high volatility of those assets, they do well historically in environments where there is inflation.
This all combines to make a well-balanced portfolio that can “weather” any season … but how well has it really done in the past?
How has the All Weather Portfolio done in the past?
Back-testing the All Weather Portfolio reveals that it…lives up to its name….
- [It] has produced [returns of] just under 10% annually,
- [It] made money more than 85% of the time in the last 30 years (between 1984 and 2013),
- it outperformed the popular 60/40 asset allocation mix from 1984 through 2013 and
- [its] average loss was just under 2% with one of the losses at just .03%.
A few more fast comparisons:
- When back-tested during the Great Depression, the All Weather Portfolio was shown to have lost just 20.55% while the S&P lost 64.4%. That’s almost 60% better than the S&P.
- The average loss from 1928 to 2013 for the S&P was 13.66% while the All Weather Portfolio lost only 3.65%
- In years when the S&P suffered some of its worst drops (1973 and 2002), the All Weather Portfolio actually made money!
If you want to build your own All Weather Portfolio but don’t know where to start, don’t worry. Here’s a suggestion for comparable securities that you can invest in yourself (courtesy of Nasdaq.com):
- 30% Vanguard Total Stock Market ETF (VTI)
- 40% iShares 20+ Year Treasury ETF (TLT)
- 15% iShares 7 – 10 Year Treasury ETF (IEF)
- 7.5% SPDR Gold Shares ETF (GLD)
- 7.5% PowerShares DB Commodity Index Tracking Fund (DBC)
The breakdown of your portfolio will look like this when it’s all said and done:
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