How to Master Ray Dalio’s All-Weather Portfolio?

Periods of rapid growth in the stock market are often followed by corrections and crises. When a retail investor includes 90% stocks in their portfolio, they are hoping for high returns on their investments but often forget about the risks and the different behaviors of securities in various situations. Publications in specialized literature can help by describing several interesting investment portfolio structures that can provide stable income from investments under almost any conditions. We will briefly explain how to master Ray Dalio’s All-Weather Portfolio, which delivers positive financial results even during prolonged crises.

About Ray Dalio’s Portfolio

The main theoretical basis for forming the All-Weather Portfolio is the portfolio theory by Harry Markowitz, well-known to all professional and many private investors. In this theory, the primary role in asset selection is played by the calculation of volatility, and to reduce risks, low (around 0) or negative correlation coefficients are used.

Ray Dalio extended this theory not only to individual securities but also to asset groups. He was one of the first to widely apply computer technology, analyzing market behavior and modeling portfolio investments. This allowed for numerous virtual experiments and the identification of certain patterns:

• The market’s behavior is mainly influenced by just four factors.
• The portfolio should include not individual securities with low or negative correlations but groups of assets that meet this requirement.
• Risks should be balanced not by individual instruments but by their groups.

Ray Dalio identified the following as the main factors most significantly affecting the market:

• Inflation.
• Deflation.
• Economic Growth.
• Economic Decline.

Each of these factors defines its own “macro-economic season” within economic cycles (you know that the economy develops cyclically). During such a “season,” groups of assets behave differently. By properly selecting their ratios within the portfolio structure, it is possible to achieve quality compensation for drawdowns and reduce risks.

As a result, a portfolio was created that performs well in any of the aforementioned “seasons.” This portfolio became known as the All-Weather Portfolio (another, less common name is the “All-Season Portfolio”). This approach has achieved impressive results.

Performance of the All-Weather Portfolio

In literature and on thematic websites, comparisons between the All-Weather Portfolio and the S&P 500 benchmark are often presented.

• From 2007 to 2023, the portfolio demonstrated an average annual return comparable to that of the index—8.14% for the portfolio versus 8.48% for the index. However, the maximum loss for the portfolio over this period was significantly lower than that of the benchmark—3.25% compared to 37.02%.
• During the mortgage crisis of 2007-2008, the portfolio declined by only 14.75%, while during the “coronavirus” crisis in 2020, it fell by 3.74%. In the same periods, the S&P 500 dropped by 50.80% and 26.27%, respectively.
• In the time of the Great Depression (simulated over a very long interval), the maximum drawdown was 20.55% for the All-Weather Portfolio and 64.4% for the S&P 500.

The average annual market volatility calculated for the S&P 500 index is 15.37%. In contrast, for the basket of assets assembled by Ray Dalio, this figure is only 7.68%, which is almost half of that obtained for the benchmark.

The high efficiency of the portfolio is also confirmed by the calculation of the ratios:

• Sharpe Ratio. 0.98 for the All-Weather Portfolio versus 0.55 for the S&P 500.
• Sortino Ratio. 1.44 for the All-Weather Portfolio versus 0.88 for the benchmark.

From these results, the following conclusions can be drawn:

• The efficiency of asset management in such a portfolio is higher than in many strategies oriented towards the broad market.
• The portfolio generates more stable, albeit slightly lower, returns.
• The level of investor risk is significantly lower.

This means that investors should consider portfolio construction based on a similar structure for their own investments. As you understand, halving the risks with a slight concession in returns is worth it.

Structure of the All-Weather Portfolio

The exact asset allocation in the All-Weather Portfolio remains a trade secret of Bridgewater Associates. However, the general principle of formation by Ray Dalio has long been published and is available to all investors.

The portfolio structure includes:

• Broad Market Stocks: 30%
• Long-Term Bonds: 40%
• Intermediate-Term Bonds: 15%
• Gold: 7.5%
• Commodity Market Assets: 7.5%

Important! It is better to assemble such a structure using ETFs, as this will save the investor from the painstaking and lengthy work of selecting individual instruments and also requires a substantially smaller capital size.

The structure can be implemented as follows:

• Vanguard Total Stock Market ETF (VTI) — broad market stock fund: 30%.
• iShares 20+ Year Treasury Bond ETF (TLT) — treasury fund for long-term investing: 40%.
• iShares 7-10 Year Treasury Bond ETF (IEF) — intermediate-term bond fund: 15%.
• SPDR Gold Shares (GLD) — gold ETF: 7.5%.
• Invesco DB Commodity Tracking (DBC) — commodity ETF encompassing a wide range of goods, from energy to agricultural products: 7.5%.

In addition to the portfolio structure, the author of this diversification strategy formulated extra requirements for the asset set include inflation-protected assets in the list of bonds. Bonds should represent both developed and emerging markets. Commodities should be represented by a wide range of products: metals, energy, agricultural products, etc. Some positions may be purchased with leverage to balance risks and stabilize returns.

Ray Dalio proposed several variations of the structure. For investors who find it difficult or impossible to allocate 7.5% to commodity assets, he recommended alternatives such as real estate funds or stocks of utility companies. Another option is to replace the actual commodity market instruments with stocks from corresponding sectors. For example, metals can be replaced with shares of metallurgical companies, and energy can be substituted with stocks of oil and gas sector issuers, etc.

The All-Weather Portfolio mandates rebalancing. The optimal frequency for this is quarterly or semi-annually, and the best method is selling assets whose share has increased and using the proceeds to purchase those whose share has decreased.

Considerations When Forming the All-Weather Portfolio

Some investors find Dalio’s proposed structure somewhat inconvenient to implement. For example, gold and other commodities need to be purchased outside stock exchanges. Precious metals are sold in discrete lots, complicating rebalancing. Other commodities are typically available only through futures contracts, which may not accurately reflect the actual prices of goods and materials and behave differently in various market situations. Additionally, futures trading often involves margin trading, potentially distorting the portfolio structure significantly and exposing buyers to substantial risks.

Users often ask if physical assets can be replaced with corresponding company stocks. As mentioned, purchasing shares of goods and materials producers instead of actual commodity market instruments is possible. The same applies to gold. However, it’s important to understand that the correlation between asset prices and company stock values is not 1 and often significantly deviates from this value. As a result, the protective functions of this part of the portfolio will be somewhat diminished, overall volatility will increase, and risks will rise. If you wish to form the entire portfolio in the stock market, it’s better to replace physical assets with commodity ETFs. Fortunately, there are plenty available. For example, you can buy Invesco Optimum Yield Diversified Commodity ETF (PDBC), which was used in the example portfolio. This fund invests in 17 futures contracts on various commodity assets and successfully mitigates many drawdowns.

Some investors face problems diversifying the bond part of the portfolio by country. Emerging market bonds may not be trusted, and these market participants may want to avoid such investments. Principally, it’s possible to manage without purchasing such bonds. However, remember that maximum protection requires deep diversification by types of securities, countries (markets), and currencies. Refusing one of these directions weakens the portfolio’s protection and increases risks.

Overall, Ray Dalio’s All-Weather Portfolio is a functional investment strategy, proven effective, demonstrating decent returns and excellent risk protection. Assembling such a portfolio is not difficult — you can find an ETF for each component. This provides the necessary level of diversification and requires minimal capital.