The All-Weather Portfolio by Ray Dalio

The all-weather portfolio is often said to be the best-diversified portfolio mix for every season, in every economic cycle. But is it suitable for you?


The recent weak economic data from China and Germany, flattening of the US treasury yield curve and escalating trade rhetoric by President Trump saw a sharp selloff in global equities. Investors were placed on a risk-off mode as gold and long-term US treasuries saw their prices heading up while global equities have traded range-bound for the past year.

Image result for trade war
The world’s superpowers are embroiled in a year-long trade war with little signs of slowing. Image: More than Shipping

Usually in times of gloom and worsening outlook investors take the opportunity to review their asset allocation, risk appetite, and portfolios to ensure that they can withstand economic shocks. Remember – a 50% portfolio decline requires a 100% increase in value to return to its original value – highlighting the importance of mitigating large portfolio drawdowns.

In this article, we will explore the all-weather portfolio recommended by Ray Dalio – a buy-and-hold strategy with periodic rebalancing to maintain the weights of its constituent assets.

The All-Weather portfolio

The All-Weather Portfolio is a diversified portfolio introduced by Ray Dalio from Bridgewater Associates, one of the biggest hedge fund managers in the world. It is expected to perform well in any economic conditions – both favorable and unfavorable – hence the name all weather. You basically just set it and forget it until you retire.

Asset allocation in the all-weather portfolio
  • 30% stocks
  • 40% long term bonds
  • 15% intermediate-term bonds
  • 7.5% gold
  • 7.5% commodities

The asset allocation is highly skewed towards bonds compared to traditional portfolios which tend to allocate more towards equities as they are historically the best driver of long-term returns. The negative correlation between long-term bonds and other assets in the portfolio versus stocks helps to stabilize the portfolio.

Cumulative equity and bond excess returns over cash. Source: PIMCO.

You can see from the graph above that, during the recession that lasted from December 1969 to November 1970. bonds returned 10.9% over cash while equities returned -7.0%, providing the stability needed in a portfolio to mitigate large drawdowns.

Why traditional correlation approaches don’t work

To understand this allocation a little better, we first explore the correlations between stocks and bonds. This part is a little advanced.

The prices of both assets – stocks and bonds – are discounted based on the value of future cash flows (stocks: future earnings, bonds: future coupon payments). Both asset classes react similarly to inflation surprises, meaning, the value of future cash flows on both stocks and bonds decreases when inflation is higher than expected, and the prices of both assets correspondingly decrease, ceteris paribus.

On the other hand, both asset classes react differently to growth and interest rate surprises. When growth is unexpectedly stronger than expected, stocks are worth more due to higher claim on future earnings, while bonds are worth less as they discount a fixed stream of coupon payments.

Hence, both growth and inflation outlook are important to determine the correlation between stocks and bonds. But without knowing the future economic environment, a portfolio with fixed stocks vs bonds component cannot be expected to do well in all scenarios.

Let us look at BlackRock’s analysis of the correlation between the US stock market returns and 10-year treasury returns (a form of a government-issued bond).

Source: BlackRock

In the chart above, you can see that since the early part of 2010, the correlations of daily returns between the two asset classes have trended upwards (i.e. less negative). This trend in the correlation between stocks and bonds might not bode well for investors who want bonds to stabilize part of their portfolios when equities sell-off during a recession. That’s because both stocks and bonds – because of their increased correlations – will sell off together and neither will offset the other in returns.

The balanced approach

The Bridgewater solution to the above problem is a balanced portfolio based on the concept of risk parity.

Risk parity is a methodology that allocates capital across several asset classes by equalizing their risk levels – so that equities alone do not become the primary driver of returns.

In traditional asset allocation methodology, investors are expected to tolerate higher short term risk in exchange for higher long term returns. This is because a majority of investors’ portfolio (up to 90%) is allocated towards stocks. The issue with this approach is that every asset class has the potential to poor performance for many years caused by a sustained shift in the economic environment, and the concentration risk in equities can derail many long-term portfolio returns.

The all-weather approach achieves a balanced portfolio based on the relationships of the assets to their economic environment, rather than their correlation with each other. By structuring a portfolio of assets with offsetting environment sensitivities, the risk premium of the asset is the remaining dominant driver of portfolio returns. The use of leverage is then deployed to scale the allocation to provide for that desired level of risk, achieving a higher Sharpe Ratio and be more resilient to recessions than traditional portfolios.

How do they hold up?

The concept of risk parity seemed noble and intuitive, especially to its believers. However, critics remain skeptical about its high bond allocation, the use of leverage which may be difficult to access, and poor performance during strong equity markets like in the past decade.

With that said, I ran a backtest with an initial capital of $10,000 starting from 2007 against a Bogleheads 3 fund portfolio (50% US, 30% ex-US, 20% US bonds). The results were clear that a risk parity portfolio had significantly better Sharpe ratios (0.84 vs 0.47) and lower volatility (standard deviation of 6.81% vs 12.53%) compared to the Bogleheads portfolio.

Portfolio 1 (Blue): Bogleheads 3 Funds; Portfolio 2 (Red): Ray Dalio All Weather Fund

In times of severe distress like the 2008 financial crisis, investors who have a traditional 60/40 portfolio might face far worse drawdowns and hence longer time to recovery compared to those with more risk-averse portfolios like the all-weather portfolio.

However, history can only serve as a guide, and looking back it is always 20/20. Given that easy monetary policy and negative interest rates are unprecedented in modern history, no one knows for sure how markets will trend in the future.

Other reading:

Buying and selling: When should you sell a stock? | Lump sum vs DCA
ETF portfolio building: Building your portfolio with ETFs

Source: All Weather Story by Bridgewater Associates

  1. That’s a great article, thanks!
    I am an active user of the all seasons portfolio, and it has stacked up quite decently actually now during the coronavirus outbreak, just to provide an example.
    Sure, the stock part is down quite a bit YTD (Vanguard Global Stock; VGWL) at -15%, and so are commodities ex-gold (CMOD; -21%), but on the other hand, Gold is up 10% and Long Term US Treasury Bonds are up close to 25%.
    While S&P500 was down about -19% YTD, my portfolio – which has the right splits – is leveled around 0% yield since 31 December 2019.
    Now, I have changed some ETFs recently, as I noted I had the wrong bonds ETF. Would I have had the correct one from the Start (iShares $ Treasury Bd 20+), m portfolio would have been about 3.8%.

    All in all, it is a good portfolio for most investors who want to limit the risk. Sure, it has been easy to make money on the stock market during the longest bull run in history, but now when reality comes back with drawdowns, these kind of risk parity approaches show they are worth their while.

    1. I’d be interested in knowing how the returns from this lineup compares to RPAR the ETF that uses risk parity as a methodology. RPAR, while not performing specularly, rises consistently in different markets and looks like a sensible investment.

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