The All Weather Portfolio is has performed well during certain times in the past. By the end of this post, however, you’ll know why the All Weather Portfolio might work well for the extremely wealthy Dalio family for whom it was designed, and why it may not work so well for investors like you and me.
There are several pros and cons of the All Weather Portfolio. The pros are that it is low risk, easy to implement, low cost, and diversified among asset classes. The cons with The All Weather Portfolio are that it underperforms during stock bull markets, has unusually high risk from rising interest rates, has unusually high inflation risk, and owns the same assets regardless of expected returns.
In this article, I’ll expand on:
- All Weather Portfolio pros and cons
- ETFs and percent allocations in the All Weather Portfolio
- Performance of the All Weather Portfolio
- Biggest risks of this supposedly “defensive portfolio”
- Who the All Weather Portfolio works best for
- Who might want to avoid the All Weather Portfolio
- How to find portfolios with higher returns and less risk
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Who Developed the All Weather Portfolio?
This popular buy and hold 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. During the 2008 financial crisis, the White House called in Dalio for his advice on how to resolve the crisis, for example. Not only this, Dalio predicted the financial crisis before it even happened.
In other words, he’s a pretty brilliant guy whose expertise I admire greatly; his book even made my list of favorite advanced investing books.
The investing approach of the All Weather Portfolio, however, isn’t how the firm Ray Dalio founded invests; the firm’s strategy does tactical investing based on macro factors. It would be expected that the firm would outperform simple buy and hold investing strategies like the All Weather Portfolios. Admittedly, I prefer to pay attention to what the smart money does, not overly simplified buy and hold investing strategies.
The All Weather Portfolio has merits for buy and hold investors, however, do let’s dig in.
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 in The All Weather Portfolio 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 All Weather portfolio allocation in the chart below.
All Weather Portfolio Performance
The Allocate Smartly chart below shows the returns from The All Weather Portfolio (ORANGE) as compared to the benchmark portfolio (RED) with 60% in SPY (S&P 500 stock index) and 40% in IEF (Intermediate Treasury bonds).
Note that you can’t click and drag to zoom here but you can on Allocate Smartly.
The benchmark index outperformed the All Weather Portfolio in the years from 1970 until late March 2023. The ride was a little less bumpy, however, in the All Weather Portfolio than it was in the benchmark portfolio, as you’ll see later in this post.
Pros and Cons of the All Weather Portfolio
Every investment strategy has a mix of pros and cons. Let’s see what they are for The All Weather Portfolio.
Pros of the All Weather Portfolio
There are many pros for this well diversified investment strategy and here they are.
1. Low Risk Portfolio Structure
There is a good 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 defensive nature during “worst case scenarios”.
The reason the risk is so low with this portfolio is because of it’s high allocation into defensive assets that go up when stock go down, known as non-correlated investments. For example, treasury bonds have almost always gone up when stocks have gone down in recent decades, and gold and other commodities often do too. (Please read this entire article, however, with crucial risk information about stock and bond price correlation.)
In the video below, I explain more about what gold has done in past bear markets.
2. Easy to Implement Investment Strategy
The All Weather Portfolio is a simple buy and hold investment strategy that’s easy to implement; you buy the ETFs and rebalance the ETFs every year back to the asset class percentages in the portfolio. This can be done easily inside your brokerage account.
3. Low Cost Investment Strategy
It is unbelievably cheap to implement an ETF portfolio. ETF’s can be bought commission free at most brokerage firms. The costs of owning most ETF’s are also minimal with the exception of GSC, the suggested gold ETF. Unfortunately, GSG’s net expense ratio is high at 1.25%, but VTI is only .03%.
4. Diversification in Defensive Investments
This diversification strategy is more advanced than popular but very basic stock and Treasury bond portfolios. It’s even more sophisticated than popularly promoted portfolios that venture into just international stocks and bonds since it has a heavy focus on defensive investments that go up when stocks go down with allocations to gold and shorter term Treasury notes.
Such diversification may appeal to investors who especially want to manage risk from the stock market inside their portfolios.
5. It’s An All Weather Portfolio
As the name “All Weather Portfolio” implies, this portfolio is supposed to be built for all economic conditions, good, bad, and ugly. That’s a good thing because we do, in fact, have financial markets that are good, bad, and ugly at times.
A full 70% of this portfolio is kept in defensive assets, including the ETFs IEI, TLT, GLD, and GSG. Even VTI is not unusually high risk as far as a stock index goes when compared to an index fund that’s heavy in high growth stocks.
No, this is not typical cookie-cutter asset allocation. It’s for sophisticated investors that understand that bull markets and economic expansions don’t last forever. I appreciate this about the All Weather Portfolio.
This heavy weighting in bonds does come at a cost even though Treasury debt can be excellent risk management assets.
6. Investment Income
This portfolio will generate a decent amount of investment income from Treasury bond interest when compared to a portfolio that holds a large percent of growth stocks. This is due to it’s large allocation to bonds.
This All Weather pro is a dual edge sword, however, since the income from bonds doesn’t always generate a positive real yield as addressed elsewhere in this post in detail.
Cons of the All Weather Portfolio
Again, where there are pros, there are cons. Here’s what I don’t like about the All Weather Portfolio.
1. Underperformance 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 underperform vs simply owning only a large US stock index, such as an ETF like SPY or VTI.
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 usually perform better. The interest rate cycle heavily affects the performance of this portfolio, however, as explained elsewhere in this post.
Which strategy (an all stock or the All Weather portfolio) performs better depends on macro factors way beyond our control, like the economy and interest rates.
There is no way of predicting bear stock markets with timing certainty. You can, however, use recent and long term history as a guide to increase the predictability of whether it’s better to own more defensive assets or not.
This awareness is what leads investors to more active portfolio re-balancing when using strategies such as the All Weather Portfolio. Bi-annual re-balancing may be done instead of yearly rebalancing, for example, to address this disadvantage of the All Weather Portfolio.
I personally invest following a portfolio strategy that rotates out of assets expected to underperform and into assets expected to outperform even more often, as explained in my Allocate Smartly review. I just don’t think it makes sense to own defensive assets that aren’t expected to go up just for the sake of playing defense, due to the underperformance this causes. That’s one of the biggest cons of the All Weather Portfolio.
2. Out Performance Due to Interest Rate Declines
Most performance results for the All Weather Portfolio are for the past decade or so. As such, they reflect how the portfolio would have performed during long periods of decreasing interest rates since this was the case over most of the past decade. This problem intensifies when returns for the past two decades are shown because the percent of time interest rates were declining increases even more.
The high past return accounts for much of the popularity with the All Weather Portfolio when it first became well known from being in Tony Robbins book on money.
Unfortunately, many investors come to expect the same performance even during different economic circumstances but economic conditions change. This causes returns from stocks, bonds, and other assets to change.
Excellent long term outperformance may not be the case with the All Weather Portfolio going forward, however. Due to the large allocation in bonds, the All Weather Portfolio will do well when interest rates are declining as rates have been doing since the prime rate peaked at over 21% in December 1980!
It seemed imperative and logical that interest rates would have to rise again at some point, as I predicted here and on my YouTube channel. Sure enough inerest rates finally did rise again in 2022 causing bonds to fall when many investors owned them to offset stock market risk.
The All Weather Portfolio will likely not perform as well during rising interest rates since Treasury bonds go down in price when interest rates go up and this strategy has a large bond allocation of 45%. Investor’s flight to safty drive can certainly fuel Treasury bond increases during uncertain economic times, but this hasn’t always been enough to offset declining bond values due to rising interest rates.
3. Temptation to Tweak
It can be very tempting for an investor to tinker with this portfolio if emotions affect investing, as they do at times for most investors.
In other words, an investor may sell the stock ETF just before a bear market ends instead of holding the set percentage in stocks.
Such temptations can be overcome, however, if you work from an overall wealth plan, and the results of this particular portfolio has shown it will achieve your long term financial goals while considering impending changes in macro economics in your return estimates. When this is the case, it can make sense to commit to a certain strategy unless or until you see the strategy isn’t working for specific reasons, as I teach in my investing course.
Admittedly, while I’m a tactical vs a strategic investor myself nowadays, I adjust my ETF portfolio in strict adherence to a strategy from Allocate Smartly that has 50 years of backtested results with risk and returns that meet my own financial goals as written previously in this post. This strict adherence prevents me from tinkering with my portfolio when I hear scary news or think I know better than the expert that developed the portfolio. The only way to get near the returns published from an investment strategy is to adhere to it. That is, of course, assuming macro factors are the same during your investing time frame as they were for the study period that revealed those desired investment returns.
It’s worth noting that the All Weather Portfolio is one of the strategies analyzed at Allocate Smartly. I didn’t even consider it for my own portfolios because many years ago the high related bond risks turned me away from it, however.
4. Less Than Stellar Returns
Let’s face it; The All Weather Portfolio returns are not stellar.
That’s the problem with defensive portfolios. They underperform during times of economic expansion and perform well during bear markets.
Here’s what I’ve learned: Risk management is painful when we don’t need it and a Godsend when we do.
The All Weather Portfolio keeps investors prepared for bear markets at all times yet bear markets are much more rare than bull markets have been over long time frames.
This defensiveness can be both good and bad, however. It’s bad from a return perspective but good from a risk perpective.
I’ve found we can invest in a way that meets both our risk and return criteria. I think we should all strive for this until we have reached the point of having enough wealth. Then we can invest for preservation (risk) only, should we choose. The reality is that the All Weather Portfolio is more about risk management than return optimization.
5. After Inflation Return
The All Weather Portfolio’s has a very high allocation to bonds. Inflation is particularly challenging for bond investors since they are locked into low interest rates even as the cost of living rises from inflation.
Inflation hurts bond investors in two ways.
- The value of the investment income deteriorates from inflation.
- The value of bonds drops during high inflation because higher yielding bonds can be obtained from other income investments and other, newer bonds.
In my video below I explain inflation in more detail.
6. Bonds Have Risk
Many investors are unaware that Treasury bonds are not without risk. Again, the All Weather Portfolio has a very high allocation to bonds.
Yes, it’s highly unlikely you won’t get back the face value of Treasury bonds if you buy them individually, but the All Weather Portfolio holds a bond ETF.
And there are many risks from owning Treasury bonds as an investor.
What are the risks of bonds?
- When interest rates go up, the value of fixed interest rate bonds (funds or indivdual) goes down
- Bonds provide marginal performance during most time frames and may not provide returns needed for enough retirement savings
- Bond income is often negative after considering inflation, taxes and or financial advisor fees
- Bond returns are highly subject to macro economic factors, especially interest rates
7. Fixed Asset Allocation
The All Weather Portfolio is based on a fixed asset allocation vs investing in the asset classes that are expected to outperform over the upcoming period. This dynamic means that inherently you own stocks, bonds, gold, and commodities even when they are probably not going to perform well. This is one thing about fixed asset allocation strategies that just doesn’t make sense based on sound investing principles!
You also can’t sell assets when they are extremely overvalued (risky) or buy them when they are undervalued (less risky).
These are two major disadvantages of the All Weather Portfolio that are present with all fixed asset allocation strategies. While fixed asset allocation can work well during bull markets, it violates core financial principles of buying assets for less than they are worth and selling them for more than their cost.
Note that past results of fixed asset allocation models like The All Weatther Portfolio can be compared with more advanced investing strategies at Allocate Smartly. Some of these tactical investing strategies beat fixed asset allocation strategies and vice versa. The All Weather Portfolio, however, significantly underperforms many of the tactical portfolios with less risk, as measured by lesser and shorter drawdowns.
The image below which I took at Allocate Smartly (with permission) shows that the Sharpe ratio is a little bit better with The All Weather Portfolio than the 60/40 stock and bond benchmark portfolio.
What I really like even more than the Sharpe ratio is looking at the drawdown amount (-21.1%) and time frame (20 months) to assess risk, as I teach in my investing program. This data hits home with me more than a ratio developed by someone else because it shows how much the portfolio went down and for how long.
You can also see that the return of the All Weather Portfolio was a little less than the benchmark from 1970 through March 2023. Remember, though, the portfolio’s performance had the benefit of declining interest rates much more often than rising rates during that same time frame.
8. Times Have Changed Since All Weather Portfolio Creation
The financial environment is very different than it was when the All Weather Portfolio was developed. Dalio has warned about bonds decreasing in price due to rising interest rates in recent years, just as I have.
I believe Dalio would suggest a different asset allocation given today’s economic picture.
All Weather Portfolio Vs S&P 500
Investors are always looking to compare investment strategies to simply owning a stock index fund such as the S&P 500. The All Weather Portfolio simply cannot be compared to an all stock portfolio, however, since it holds other assets.
It’s easy to look back after bull markets and see that an all stock portfolio would have performed much better than a defensive strategy like The All Weather Portfolio. What investors often forget, however, is that they had superior risk management by owning that defensive portfolio.
Investors will need to decide if risk management or higher returns are the priority as addressed previously.
Is All Weather Investing Good?
There will be times when The All Weather Portfolio would be considered good and times when it would not be considered good. This will depend on economic cycles and the financial markets, those macro factors I keep referencing.
In 2009, investors would have been thrilled with an annualized investment return of 5% or more. This is because most stock investors had experienced negative annual returns for a decade!
On the other hand, in 2021, investors would turn up their noses at a 7% return due to the massive bull market from 2010 t0 2020.
The reality is that managing stock market risk always comes at a cost. Finding the balance between risk and return is crucial for investors before selecting an investment strategy so they know what meets their own criteria.
The All Weather Portfolio may suit a passive investor desiring to keep risk management as a priority.
One important thing to remember, though, is that the primary risk management asset, long term Treasury bonds, is not without risk itself!
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:
- Have at least a couple of decades to compound wealth from their investments OR
- 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 increase wealth necessarily. It can also work for those seeking a low risk, easy to manage investment portfolio that slowly builds wealth.
There are similar low-cost portfolios that require only a little more work but have historically had up to double the multi-decade returns of the All Weather portfolio with less risk, as I share with my financial coaching clients.
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