What to Make of Ray Dalio’s All-Weather Investment Portfolio?
And have reports on the death of the classic 60/40 investment portfolio been greatly exaggerated?
I have no information on its provenance – date or origin. Was it designed with foresight, what’s to come? Or was it designed with hindsight, what has been, and what would have worked had we known? All I can say is that it’s a hit with the Boglehead crowd.
The hit is “Ray Dalio’s All-Weather Investment Portfolio,” which when Googled returns a five-asset class portfolio with a recommended allocation to each class. The assets and their respective allocations are as follows:
30% Stocks (Broad Market)
40% Long-Term US Treasury Bonds
15% Intermediate-Term US Treasury Notes
7.5% Commodities
7.5% Gold
The portfolio is easily and economically replicated by all. Inexpensive exchange-traded funds are readily found to cover the asset classes and to propagate the percentages. Here are the ETFs I decided to run with for my replication.
30% Vanguard Total Stock Market ETF (VTI)
40% iShares 20+ Year Treasury Bond ETF (TLT)
15% iShares 7-10 Year Treasury Bond ETF (IEF)
7.5% Invesco DB Commodity Tracking ETF (DBC)
7.5% iShares Gold Trust ETF (IAU)
For those who are deep into their Buick-driving years and find sequence risk a nerve-rattling prospect, the all-weather portfolio is worth a look.
The financial cyclone that devastated the market in 2007 and 2008 delivered sequence risk with full force. A 50% market sell-off was no hypothetical threat. It was real and as palpable as a punch to the face.
Compared to the classic 60/40 portfolio (60% VTI, 20% TLT, and 20% IEF) and an all-equity portfolio (100% VTI), Dalio’s all-weather portfolio proved its worth as a haven for those desperate for sanctuary. The all-weather portfolio exited the financial crisis a little dinged, a bit scratched but still very pilotable. The numbers tell us so.
From the beginning of 2007 through the end of 2009, the all-weather portfolio delivered a 5.6% CAGR. Investors would have had to endure a 12.0% drawdown during the most furious passing of the storm, but even then the worst year of the three ended with a 2.0% return.
The classic 60/40 portfolio was barely a haven. Investors endured a 25.7% drawdown and an 11.8% loss during the worst of it. Stocks bore the brunt of the storm. The Vanguard Total Stock Market ETF was pummeled with a harrowing 50.8% drawdown and 37.0% worst-year loss.
The classic 60/40 portfolio sufficiently recovered by the end of 2014 to surpass the all-weather portfolio’s long-term CAGR. The all-stock portfolio sufficiently recovered to pull ahead two years later at the end of 2016.
We have had two more notable market corrections since. One occurred in early 2020 with the onset of the COVID pandemic. The other occurred in 2022 with the quantitative tightening the Federal Reserve instituted to combat the consumer-price inflation surge that followed the quantitative easing instituted to combat the great economic lockdown mandated during COVID.
Unlike 2007/2008, though, investors were best served sticking with stocks in 2020. The sell-off that occurred was mostly a one-month affair. Stocks regained formed in a hurry, and then some, soaring to new heights by the end of the year.
Despite experiencing a 20.8% drawdown, the all-stock portfolio still generated a 21.0% CAGR in 2020; the classic 60/40 portfolio endured an 8.0% drawdown, and the portfolio still generated an 18.3% CAGR. Investors seeking cover in the all-weather portfolio endured only a 3.9% drawdown to realize a 16.4% return.
The all-weather portfolio was the most efficient from a risk/volatility perspective – an appreciated palliative for those especially susceptible to motion sickness.
Fast forward to 2022 and the all-weather portfolio proved again to be less volatile, but this time only marginally so. The 40-year bull-market run ended in 2022. Stocks sold off, and bonds sold off nearly as much.
The all-weather portfolio experienced a 21.3% drawdown and a 19.3% loss for the year. The all-stock portfolio was only marginally less crappy with a 24.8% drawdown and 19.5% loss. The classic 60/40 experienced its worst year in generations, posting a 24% drawdown and a 21.0% loss.
(Sidebar: Because 2022 was exceptionally brutal to bonds, I was curious as to how an all-US Treasury bond/note portfolio fared. It fared better than I expected. An equal allocation to the iShares 20+ Year Treasury Bond ETF, the iShares 7-10 Year Treasury Bond ETF, and the SPDR Portfolio Short Term Treasury ETF (SPTS) experienced an 18.4% drawdown and a 16.6% loss.)
If we ended this little experiment before 2022, the all-weather portfolio would prove its worth for volatility-adverse investors fearful of sequence risk. From 2007 through 2021, the all-weather portfolio lost only 3.2% in its worst year and posted an 8.1% CAGR over the period.
As for the competition, the classic 60/40 portfolio and the all-stock portfolio generated CAGRs of 9.6% and 10.7%, respectively, but the classic 60/40 portfolio’s worst year was three times worse than the all-weather portfolio’s worst year. The all-stock portfolio’s worst year was 11 times worse.
When we consider how it all played out for investors over the past 17 years, we see what we should expect to see. Stocks are the best bet for accumulating wealth long term. But “long term” is open to interpretation. We all reach an age when the long term isn’t so long and sequence risk and our need to draw down the portfolio take precedence.
When we run the experiment to the end, the all-weather portfolio reveals a worst-year loss of 19.2% and 6.3% CAGR. The classic 60/40 portfolio gives us a 21.0% worst-year loss and a 7.9% CAGR over the same time.
The classic 60/40 portfolio – declared dead by many in 2022 – rises again to prove its worth as an efficient portfolio, and even more so than Ray Dalio’s all-weather portfolio. Chesterton’s Fence is alive and well, after all.
I’ll confess that I began this endeavor with a biased mission – to condemn Dalio’s All-Weather Portfolio – because I dislike commodities and gold; I’m ambivalent toward fixed income. Commodities and gold are not investments (no recurring cash flow) though they are assets. What’s more, the long-term price trend in commodities is down in real dollars, and flat in nominal dollars. (Indeed, an Invesco DB Commodity Tracking ETF investment generated no return if your holding period were the past 17 years.) Commodities only value is a negative correlation with stocks, but that benefit is muted by the all-weather portfolio’s low commodities allocation. That commodities are negatively correlated with stocks is enough to tell you commodities are lousy assets to hold long term if wealth creation is the goal.
Every market correction is unique — no two are alike. And it’s always the portfolio that skates through the past market corrections that trips up during the next market correction. It’s just the way it is. The all-weather portfolio is the latest example.
If you want an investment return, you have to accept uncertainty and risk. No one offers a return on certainty. And guess what? No such thing as certainty exists.
DYR – Do Your Research. I have opinions, but I am not your personal investment advisor. Always remember the buck stops (and starts) with you. What works for me might not work for you. I’m not responsible for you.
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