All Weather Portfolio Pros and Cons | ETFs | Performance | Chart | Videos

Man over 50 with cash   The All Wealth Portfolio is popular among sophisticated DIY investors looking to increase returns while lowering risk without a financial advisor. In this article, I’ll share the All Weather Portfolio pros and cons, the portfolio ETFs and allocations, the performance, and a chart of the portfolio allocation which I created for you. This popular investment strategy was developed by hedge fund billionaire Ray Dalio, originally as a way for his family to invest. Dalio was the founder of Bridgewater Associates and is a leader among investment professionals. You know I don’t follow the herd, so why would we listen to Ray Dalio? During the 2008 financial crisis, the White House called in Dalio for his advice on how to resolve the crisis. Not only this, Dalio predicted the financial crisis before it even happened. In other words, he’s a pretty smart guy whose expertise I admire.

The All Weather Portfolio ETFs

This diverse portfolio invests in the following assets with ETF’s, or Exchange Traded Funds. ETFs are index based funds that you can buy just like you buy stocks. Note the percent allocated to each asset class and the ETF symbol below.
  • Large Cap US Stocks – VTI – 30%
  • 20 Year Treasury Bonds iShares – TLT – 40%
  • 3-7 Year Treasury Bonds iShares – IEI – 15%
  • Gold SPDR Gold Trust – GLD – 7.50%
  • iShares S&P GSCI Commodity Indexed Trust – GSG – 7.50%
You can see the allocation in the chart below. All weather portfolio review image (donut chart)

Pros and Cons of the All Weather Portfolio

The All Weather Portfolio is a brilliant strategy and you’ll see why. But by the end of this post you’ll know why the All Weather Portfolio would work so well for the Dalio family and may not work so well for others, proving once again that where there are pros, there are cons.

Pros of the All Weather Portfolio

There are more pros than cons for this well diversified investment strategy. Here are the cons.

1. Low Risk Portfolio Structure

There is an extremely high probability the All Weather Portfolio won’t lose money overall. If this strategy does lose money, we have a bigger problem than our investments since it holds assets that are specifically known for their preference during “worst case scenarios”. The reason the risk is so low with this portfolio is because of it’s allocation into non-correlated investments, like stocks, bonds, and gold. For example, treasury bonds almost always go up when stocks drop, and gold and other commodities do too. See my video on this or read my post Do Bonds Always Go Up When Stocks Drop? and How to Avoid Losing Money When Stocks Drop. In the video below, I give details about what gold has done in past bear markets.

2. Easy to Implement Investment Strategy

The All Weather Portfolio is simple to implement. You buy the ETFs and rebalance the ETFs every year.

3. Low Cost Investment Strategy

It is unbelievably cheap. Costs of owning these ETF’s are minimal. While GSG’s net expense ratio is a bit high at .75%, VTI is only .03%.

4. Do It Yourself Investing Like A Pro

The All Weather Portfolio allows individual investors to invest like a professional wealth manager. As you can see, there is a lot to love about this structured portfolio. You may enjoy my related video with more from Ray Dalio What Will the Stock Market Do Over the Next 10 Years?

5. Diversity

This strategy is much more sophisticated than the popular stock and Treasury bond allocation that is touted these days. It’s even more sophisticated than popularly promoted portfolios that venture into just international stocks and bonds, given it’s a heavy focus on assets that tend to perform well during bad times. Read my related post What Goes Up When Stocks Go Down? and How to Manage Risk in the Stock Market.

6. It’s All Weather

A full 70% of this portfolio is kept in risk lowering assets, including ETFs IEI, TLT, GLD, and GSG. Even VTI is not unusually high risk as far as stocks go. No, this is not typical cookie-cutter asset allocation. It’s for sophisticated investors that get that bull markets and economic expansions don’t last forever. And I appreciate that about it. Enjoy my related post How to Know If Stocks Will Go Up and How Will a Stock market Crash Affect Me? History can’t lie so let’s use it to our advantage to build wealth with less risk. In my video below, I share what bonds have done in past bear markets.

Cons of the All Weather Portfolio

Again, where there are pros, there are cons. Here’s what I don’t like about this investment strategy.

1. Under Performance During Bull Markets

The All Weather Portfolio is a very defensive portfolio with only 30% allocated to stocks, all in the US. Therefore, during bull markets, it will under perform vs simply owning only a large US stock index, such as an ETF like SPY or VTI. There will be more risk, of course, from simply owning stocks. The all stock portfolio will outperform the All Weather Portfolio over certain time frames as you’ll see later in this post but during bad economic times, the All Weather Portfolio will perform better. Which strategy (all stock or the All Weather portfolio) performs better depends on factors way beyond our control, like the economy and interest rates. But there is no way of predicting the future of bull and bear stock markets with certainty. You can, however, use recent and long term history as a guide to increase the predictability of whether it’s better to invest defensively or not. This awareness is what leads investors to more active portfolio re-balancing with strategies such as the All Weather Portfolio, such as monthly re-balancing instead of yearly. Read more about alpha, cycle and alternative investing in my post Alternative Wealth Solutions.

2. Out Performance Due to Interest Rate Declines

The All Weather Portfolio’s back testing data was done during periods of decreasing interest rates. This accounts for some of the popularity of this investment strategy when it first became well known. Unfortunately, many investors come to expect the same performance even during different economic circumstances. Long term out performance or may not be the case with the All Weather Portfolio. Due to the large allocation in bonds, this portfolio will do well when interest rates are rising as they have been doing since the prime rate peaked at over 21% in December 1980! It seems logical that interest rates will rise again at some point. When they do, the All Weather Portfolio will not perform as well since bonds go down when interest rates go up and this strategy has a large bond allocation of 45%.

3. Temptation to Tweak

It can be very tempting for an investor to tinker with this portfolio. This temptation can be overcome, however, if you are working with an overall wealth plan, and this particular portfolio helps you achieve your long term life and financial goals. If you see that, based on past returns with reasonable adjustments to those returns, you can reach the level of wealth you want by a certain time, it’s easier, however, to leave it alone and let it do it’s own thing. Read my related post Stock Market Return 2010 through 2019 and Why You Care.   

4. Less Than Stellar Returns

Let’s face it. The returns are not stellar. According to (I didn’t link due to a Google security warning), from the end of March 2010 through March 2020, the annual return was 7.42%. An investment in only the stock index VTI returned 10.15% a year during that same time frame. It’s worth noting that the Commodity ETF GSG drug the portfolio down during that time frame with an annual return of -11.39%. This is a perfect example of a risk-reward trade off. Using the All Weather strategy, there was less risk during that 10-year time frame, but there was also significantly less reward. Here’s what I’ve learned: Risk management is painful when we don’t need it and a Godsend when we do.  

5. After Inflation Return

After factoring in the annual historical inflation rate of 3%, that annual return would drop to 4.42%. Remember, with inflation, you still got the return. However, the return was worth less each year. Not only this, but inflation is particularly challenging for bond investors since they are locked into low-interest rates even as the cost of living rises from inflation. Watch my video on inflation if this concerns you.  

Investor Perception

After a few decades of investing, I’ve learned that this is how investor’s expectations work: In late 2009, investors would have been thrilled with a 7.42% annual investment return. This is because most stock investors had experienced negative annual returns for a decade! On the other hand, in late 2019, investors would have turned up their noses at a 7.42% return due to the massive bull market from 2010 t0 2020. Investor “recency bias” leads us to focus more on what’s happened lately instead of long term history in making investment decisions. This can be a dangerous habit for investors. Read my related post How Much to Keep in Money Market Accounts.

All Weather Portfolio Summary

As I often say, no one is going to get rich from long term buy and hold index investing unless they:
  1. Have at least a couple of decades to compound wealth from their investments OR
  2. Are already wealthy since their wealth compounds on top of their accumulated massive wealth
For this reason, you can see how the All Weather Portfolio is ideal for the Dalio family but may not work well for someone trying to build wealth without decades to do it. Overall, however, the All Weather Portfolio can be an excellent strategy for wealthy investors who don’t need to necessarily accumulate a great deal more wealth, and also for those seeking a low risk, easy to manage investment portfolio that slowly builds wealth. As I share with my coaching clients, there are similar low-cost portfolios that require only a little more work that has historically had up to double the return of the All Weather portfolio with comparable low risk.  
The best place to start is with my Ultimate Wealth Plan. You can get it here now.  Thanks for reading. If you enjoyed this post, please share it with others on your favorite social media.  
The information on this website is for education only and is not to be construed as personal financial advice.