Bridgewater All-Weather Fund: A Guide To Investing

The All Weather Fund is an investment strategy created by Ray Dalio, the founder of Bridgewater Associates, a hedge fund. The fund is designed to be a globally diversified portfolio that can perform well in various market conditions. The core of the fund is a combination of 30% stocks, 40% long-term bonds, 15% intermediate-term bonds, and 15% commodities. The specific investments within each category can vary, but the overall allocation is meant to be relatively stable over time, which could be achieved through regular rebalancing. The fund is intended to be relatively simple and easy to implement.

The All Weather Fund is based on the idea of risk parity, which seeks to balance risk across different asset classes rather than maximising returns from any particular asset. The goal is to create a portfolio that can weather market volatility and produce consistent returns over the long term.

The All Weather Fund has become particularly attractive during periods of market turmoil, especially for investors with a low-risk tolerance and/or those who are primarily concerned with capital preservation.

The All Weather Story

The All Weather investment strategy was pioneered by Bridgewater Associates, a prominent hedge fund and the world's largest, founded by Ray Dalio. The All Weather fund was created to be an investment strategy that could perform well in any economic climate, hence the name.

The fund is based on the idea of "risk parity", which seeks to balance risk across different asset classes rather than maximising returns from any one asset. The goal is to create a portfolio that can weather market volatility and produce consistent returns over the long term. The All Weather fund is designed to be relatively simple and easy to implement, with a mix of stocks, bonds, commodities, and currencies.

The core of the All Weather portfolio is a combination of 30% stocks, 40% long-term bonds, 15% intermediate-term bonds, and 15% commodities. The specific investments within each category can vary, but the overall allocation is meant to be relatively stable over time, which could be achieved through regular rebalancing.

Dalio spent over three decades working on the idea for the All Weather Portfolio. In 1976, after founding Bridgewater, he determined the causes of asset fluctuations in different market conditions. By 1996, he and his team had discovered that surprises caused the biggest swings in asset prices and created the All Weather Portfolio to counteract those fluctuations.

The All Weather Portfolio is designed to be a portfolio that can be held for life, allowing investors to invest through economic growth and stagnation while also thriving during good times and bad. Dalio created a matrix to explain his idea, which uses four economic environments: inflation (rising prices), deflation (falling prices), bull markets (rising growth), and bear markets (falling growth). He uses this matrix to explain which assets perform best under each circumstance.

For example, during rising prices, gold and commodities perform well, and during falling prices, bonds perform best. During rising growth, stocks are the best, and during falling growth, bonds are king. The All-Weather Portfolio’s core idea is that every asset in the portfolio will react differently during each macro environment, and the portfolio allocations reflect those changes and the ability to adapt to them.

The All Weather Portfolio has proven to be effective in reducing volatility and risk. In the last twenty years, which have seen extreme falling and rising growth, the portfolio has outperformed the S&P 500 during the Great Financial Crisis of 2007-2009 and the Corona Crash of 2020, with losses less than half of the 60/40 stock-to-bond mix.

The All Weather Portfolio is meant to be a "set-it-and-forget-it" type of portfolio, with rebalancing done periodically, typically quarterly. It is easy to recreate using ETFs and has low fees, making it a low-cost investment. The nature of the portfolio also allows for a hands-off approach with little management if desired.

The All Weather Portfolio's asset allocation

The All Weather Portfolio is a well-diversified, low-risk portfolio designed by Ray Dalio to "weather" any economic environment. The portfolio is based on the risk-parity-based All Weather Fund from Bridgewater Associates, the hedge fund Dalio founded.

The All Weather Portfolio is designed to survive all economic environments by using different types of assets that perform differently during different economic "seasons". Dalio proposes that four things affect asset value: rising economic growth, declining economic growth, higher than expected inflation, and lower than expected inflation.

Based on these factors, Dalio identifies four economic "seasons" with particular assets corresponding to each:

• Higher than expected inflation
• Lower than expected inflation
• Higher than expected economic growth
• Lower than expected economic growth

The All Weather Portfolio asset allocation is as follows:

• 40% Long-Term Treasury Bonds
• 30% Stock Market
• 15% Intermediate-Term Treasury Bonds
• 15% Commodities

To build the portfolio, investors can use low-cost Vanguard funds and ETFs. For example:

• 30% VTI
• 40% VGLT
• 15% SCHR
• 8% GLDM
• 7% BCI

To diversify internationally, investors can replace VTI (Vanguard's total US stock market ETF) with VT (Vanguard's total world stock market ETF).

The All Weather Portfolio's historical performance

The All Weather Portfolio is a well-diversified, low-risk portfolio designed by Ray Dalio, the founder of Bridgewater Associates, to perform well in all economic climates. It is intended to be relatively simple and easy to implement, with a mix of stocks, bonds, commodities, and currencies. The core of the portfolio is a combination of 30% stocks, 40-55% long-term bonds, 15% intermediate-term bonds, and 7.5-15% commodities.

As of September 2024, in the previous 30 years, the Ray Dalio All Weather Portfolio obtained a 7.79% compound annual return, with a 7.42% standard deviation. It suffered a maximum drawdown of -20.58% that required 33 months to be recovered.

The Sharpe ratio of the portfolio, which measures risk-adjusted performance, is 2.09, suggesting a balanced approach to risk and return. The portfolio has a medium risk, signifying moderate fluctuations in value, and is suitable for investors with a balanced approach to risk and return who are seeking steady growth while tolerating some level of volatility.

The All Weather Portfolio is designed to be rebalanced regularly to maintain its target allocations. Quarterly rebalancing has been shown to be the most effective strategy for this portfolio.

The All Weather Portfolio's risk-adjusted performance

The All Weather Portfolio is a well-diversified, low-risk portfolio designed by Ray Dalio, the founder of Bridgewater Associates. The portfolio aims to perform well in various economic conditions and is constructed using a mix of stocks, bonds, and commodities. The specific investments within each category can vary, but the overall allocation is meant to be relatively stable over time through regular rebalancing.

One of the key principles behind the All Weather Portfolio is the concept of "risk parity," which seeks to balance risk across different asset classes rather than maximising returns from any single asset. The goal is to create a portfolio that can weather market volatility and provide consistent returns over the long term.

Risk-Adjusted Performance Metrics:

The Sharpe ratio for the All Weather Portfolio, as of October 2024, is 2.09. This value takes into account price changes and dividends from the past year and indicates that the portfolio's risk-adjusted performance is in line with the majority of portfolios. This suggests a balanced approach to risk and return, making it suitable for a broad range of investors.

Drawdowns:

The maximum drawdown for the All Weather Portfolio was 24.28%, which occurred on October 20, 2022. The portfolio has not yet recovered from this drawdown. As of October 2024, the current drawdown is at 5.45%.

Volatility:

The volatility of the All Weather Portfolio, as of October 2024, is 1.72%. This represents the average percentage change in the portfolio's value over the past month.

Comparison to Benchmarks:

When compared to the S&P 500, the All Weather Portfolio has demonstrated lower volatility and higher risk-adjusted returns. This indicates that the portfolio is effective in weathering market storms.

Suitability:

The All Weather Portfolio is particularly attractive during periods of market turmoil, especially for investors with a low-risk tolerance and those primarily concerned with capital preservation. It may be a good choice for retirees or those approaching retirement, as it provides a hands-off approach with relatively low volatility and drawdowns.

However, it's important to note that the All Weather Portfolio will likely underperform stocks in a rising market. This portfolio is designed for investors seeking steady growth while tolerating some level of volatility.

How to create your own All Weather Portfolio

The All Weather Portfolio is a fund first created by Ray Dalio of Bridgewater Associates, the world's largest hedge fund. The idea behind the portfolio is to create a portfolio that can be held for life, allowing investors to invest through economic growth and stagnation while also thriving during good and bad times.

The All Weather Portfolio is designed to be a globally diversified portfolio that can perform well in various market conditions. The portfolio is intended to be relatively simple and easy to implement, with a mix of stocks, bonds, commodities, and currencies.

Step 1: Understand the Core Principles

The All Weather Portfolio is based on the concept of "risk parity," which seeks to balance risk across different asset classes rather than maximising returns from any particular asset. The goal is to create a portfolio that can weather market volatility and provide consistent returns over the long term.

Step 2: Determine the Asset Allocation

The core of the All Weather Portfolio typically consists of:

• 30% stocks
• 40% long-term bonds
• 15% intermediate-term bonds
• 15% commodities

However, the specific investments within each category can vary depending on your preferences and risk tolerance. For example, you can choose between long-term and short-term U.S. bonds, or different types of commodities such as gold, oil, or agricultural products.

Step 3: Choose Your Investments

When selecting the investments for your All Weather Portfolio, consider the following:

• Stocks: You can choose a broad market stock ETF such as the Vanguard Total Stock Market ETF (VTI) or focus on specific sectors or regions.
• Bonds: Select a mix of long-term and intermediate-term bonds from reliable issuers, such as national entities or highly-rated companies. Examples include the iShares 20+ Year Treasury Bond ETF (TLT) and the iShares 7-10 Year Treasury Bond ETF (IEI).
• Commodities: Consider investing in a commodity ETF such as the Invesco DB Commodity Index Tracking Fund (DBC) or choosing individual commodities like gold or oil.

Step 4: Implement the Portfolio

Once you have determined your asset allocation and selected your investments, it's time to implement your All Weather Portfolio. You can do this by purchasing the chosen investments in the appropriate proportions through a brokerage account or investment platform.

Step 5: Rebalance Periodically

To maintain the desired asset allocation, remember to rebalance your portfolio periodically. This typically involves buying or selling certain investments to return your portfolio to its original percentages. The frequency of rebalancing can vary, but quarterly or annual rebalancing is common.

Step 6: Monitor and Adjust as Needed

While the All Weather Portfolio is designed to be a long-term, set-it-and-forget-it type of portfolio, it's important to monitor your investments and make adjustments as necessary. Market conditions, economic trends, and your personal financial situation may change over time, requiring you to re-evaluate your asset allocation and investment selections.

By following these steps, you can create your own All Weather Portfolio that aligns with your investment goals and risk tolerance. Remember to stay informed, be patient, and consider seeking advice from a financial professional if needed.

Frequently asked questions