The All Weather Portfolio

The goal of this article is to share a little bit about my personal favorite book on investing and a very interesting principle covered in the book with regard to portfolio balancing.

In 2014, Tony Robbins published a book called "MONEY Master the Game: 7 Simple Steps to Financial Freedom” with the aim of helping people make smarter decisions with regard to saving money for retirement. He does so by taking investment advice he received from the smartest financial and business minds in the world, and packaging it into a few simple and easy to understand steps that anyone can follow. One of the people Tony interviewed in this book is Ray Dalio. Ray Dalio is the founder of the biggest and most successful hedge fund in the world Bridgewater Associates, which has over 150 Billion USD in assets under management. Ray shares an investment strategy called the “All Weather Portfolio”.

Traditionally, balancing a portfolio involved looking at the percentage of your capital that you had in different asset classes. Typically people would suggest 50% stocks and 50% bonds, or have a higher/lower percentage of one depending on your investment goals and risk appetite. What ray suggested was to not look at the percentage of money you’ve allocated into an asset class, but look at the volatility within each class. Stocks are typically three times more volatile than bonds. So a portfolio that has 50% stocks and 50% bonds may seem balanced in terms of percentage asset allocation, but it is not the case in terms of overall risk. As a result, when you have market corrections your portfolio’s value could drop by a lot.

Instead Ray suggests a portfolio with

30% in stocks (ex: in the form of S&P500 index funds)

15% in intermediate term treasury bonds (7-10 years)

40% in long term treasury bonds (20-25 years)

7.5% in gold

7.5% in commodities

This may seem bond heavy at first to anyone who is familiar with portfolio balancing. But remember, the goal is to balance the volatility of stocks. When back tested from 1984 - 2013, the All Weather Portfolio has returned 9.72% annually net of fees. For reference the “market” (S&P500) has returned around 9.8% annual over the last 90 years, which is usually the benchmark that investors set with regard to investment goals. But more importantly the portfolio made money over 86% of the time, with the worst loss being just -3.93% in 2008 when the market was down 37%!! The goal is to provide you with a portfolio that works in every economic condition and not just booms.

For more backtested data about the all weather portfolio I highly recommend reading Tony Robbin’s book MONEY Master the game. It has a lot of useful information on what investments to avoid, why to avoid them, and more importantly who to get financial advice from (Hint: A fiduciary. Not a financial advisor who gets paid to sell you investments. Not some guy on youtube. And not some dude with a blog).

#Finance