Dominant Portfolio

All-Weather Portfolio

The same photo of a path across four different seasons

All-Weather Portfolio in Theory

The All-Weather Portfolio is a buy-and-hold portfolio for retail investors modeled around hedge fund Bridgewater Associates's All-Weather Fund. The idea was first created by Bridgewater's founder, Ray Dalio, and later popularized by Tony Robbins. Bridgewater is well known for their tracking of various economic cycles and the All-Weather Portfolio is designed specifically to 'weather' those cycles. It seeks to meet this goal by using a wide array of assets that should, ideally, perform differently from one another across the different seasons. This concept is often referred to as asset diversification.

The main theory of the portfolio is as follows. If one can not predict the market it follows that one will undoubtedly face a degree of unexpected market turmoil. Such unexpected events are known as black swan events. As a result, this portfolio concept is especcially attractive to investors primarily concerned with growing their wealth steadily while conserving their capital at the same time. Additionally, when designed well a diverse portfolio mitigates both risk and volatility while maintaining adequate returns to meet an investor's given goal. Thus, it would seem that a portfolio designed to perform adequately across every season would be the strongest possible option to pursue such a goal. It is called the "All-Weather" portfolio after all. It sounds like the perfect option! However, this portfolio is the result of an unscripted interview in which Dalio suggested the portfolio as an imperfect approximation of what such a portfolio might look like for a retail investor as shown below.

Asset Percentage
Total Stock Market 30%
Long-Term Treasuries 40%
Intermediate-Term Treasuries 15%
Gold 7.5%
Diversified Commodities 7.5%

All-Weather Portfolio in Practice

The All-Weather Portfolio in practice is very reasonable. The implementation was the main focus of the initial Tony Robbins interview that popularized Ray Dalio's conception of an All-Weather Portfolio for anyone. The first chief concern of that implementation, however, is the lower returns associated with the portfolio's individual asset selections. The Total Stock Market is very reasonable, however, at only 30% much lower returns may be expected over some time periods. Long-Term Treasuries and Intermediate-Term Treasuries are powerful diversifiers from the stock market over the past three decades, however, over longer periods of history they can be highly correlated with the stock market. This means that they can go up at the same time as the stock market, or down at the same time as the market over long periods. Finally, the diversified commodities have a negative long-term return This can potentially bring down overall returns of the portfolio and should be considered as an accepted risk when using an All-Weather approach.

Each asset mentioned can potentially bring down overall returns or even increase volatility of the portfolio over some time periods. This is not a unique risk to the All-Weather Portfolio. Thus it should be considered as an accepted risk when selecting any investment approach. Regardless, an investor should always consider the risks taken with any given portfolio in the context of a holistic view that takes the expected interactions between all assets into account.

The second chief concern is that as a result of not owning anywhere near 100% stocks, the investor will be exposed to greater tracking error, or the difference between a fund or portfolio and its respective benchmark. Tracking error can be both mentally and financially challenging. An investor can potentially lose out on a lot of relative returns during periods where the chosen benchmark is doing better than the All-Weather Portfolio. On the other hand, they can also potentially do very well during periods where the chosen benchmark - and the markets as a whole - are not. It is important to have a plan in place incase the risks associated with a given portfolio approach show up. As a result, certified financial professionals may be necessary to plan against and counteract increased financial and psychological risks.

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M1 Finance Implementation

M1 Finance is a fantastic brokerage for implementing the All-Weather Portfolio. M1 has zero transaction fees, dynamic rebalancing for new deposits, and can rebalance with a push of a button. In addition, M1Finance allows you to set a cash threshold before buying with new deposits and automate transfers to align with your paycheck schedule. Anyone based in the US can add this to their portfolio on M1 Finance by following this link and then clicking "Save to my account" or "Invest in this pie".
As always, not a recommendation to invest in any security or portfolio. Not financial advice. Use this as a starting point for your own research.