{"id":683,"date":"2022-04-10T12:07:41","date_gmt":"2022-04-10T12:07:41","guid":{"rendered":"https:\/\/investorimpactlab.com\/?p=683"},"modified":"2022-04-26T06:06:40","modified_gmt":"2022-04-26T06:06:40","slug":"all-weather-portfolio","status":"publish","type":"post","link":"https:\/\/investorimpactlab.com\/all-weather-portfolio\/","title":{"rendered":"The All Weather Portfolio Review – Can it Face All Weathers?"},"content":{"rendered":"\n
Many investors have a constant question, “how to balance risk and profit?<\/strong>“. Now, at first glance, it seems like a vague question. It isn’t in our hands to balance risk and profit, right.<\/p>\n\n\n\n If you got a yes in your mind, I am afraid that you may be wrong here<\/strong>. You can control the risk profiles of your portfolio.<\/p>\n\n\n\n I accept that managing risk is not an easy thing to do. And most people will need a lot of research and practice to do so. Even many may fail in doing so. But it’s not about failing here. If you learn how to balance your portfolio that can weather the ups and downs of the market, then it will be a simple equation for you.<\/p>\n\n\n\n Moreover, one thing that can help you determine if you like a laid-back approach will be trying out the All Weather Portfolio. I’ll say it’s like The <\/strong>Collatz Conjecture<\/strong><\/a>, simple yet complex enough that it’s not everyone’s cup of tea.<\/strong><\/p>\n\n\n\n But, once you know the basics of this portfolio strategy, no one can stop you. The investment portfolio is built to have a stable performance during all market seasons. It can be the best investment strategy for those who love the hands-off approach.<\/p>\n\n\n\n If you are one of them, give this article a read and find out if All Weather Portfolio suits you or not.<\/p>\n\n\n\n It\u2019s an investment strategy designed by Ray Dalio. The All Weather Portfolio is also known as the ‘holy grail’<\/strong> of investing because it aims to do well in all economic conditions. <\/p>\n\n\n\n The strategy was first introduced by Bridgewater Associates. This strategy was titled “The All-Weather Portfolio.”<\/strong><\/p>\n\n\n\n In the method, Dalio suggested that investors could achieve consistent returns by investing in a mix of asset classes that had low correlations with each other. Dalio argued that this diversification would allow investors to weather any storm and still come out ahead in the end.<\/p>\n\n\n\n Diversification is also one of the principles of the All Weather portfolio. Dalio’s explanation on how a diversified portfolio can weather all storms was:<\/p>\n\n\n\n When the portfolio has diversified assets, it reduces the risk and reduces volatility. The All Weather Portfolio will do the exact thing. It will attempt to increase diversification with the inclusion of asset classes like bonds, stocks, commodities, and gold.<\/p>Ray Dalio<\/cite><\/blockquote>\n\n\n\n By this strategy, he tried to explain the perfect balance as all asset classes aren’t correlated. According to the portfolio, when the stocks tend to go down with the increase in bond rates, it should still provide good results.<\/p>\n\n\n\n The All Weather Portfolio invests in four asset classes- US stocks, long-term treasuries, intermediate-term treasuries, commodities, and gold.<\/strong><\/p>\n\n\n\n He insisted on investing in these asset classes because he believed that the value of assets gets affected by:<\/p>\n\n\n\n Based on this, he formed the market seasons that will be considered before investing.<\/p>\n\n\n\n According to him, these seasons should be considered before choosing a portfolio asset mix. And based on this season’s study, he created the All Weather Portfolio. A portfolio that minimizes the volatility<\/strong> successfully during all seasons through asset diversification.<\/p>\n\n\n\n The US stock market smashed an all-time high in 2017 when it closed above 21,000. This followed a 12-day run, the longest streak after a 13 days stretch of 1987.<\/strong> But it crashed in early 2020 due to the pandemic. This crash made many investors worried about their investment future as the stock market took a big hit. <\/p>\n\n\n\n But, the All Weather Portfolio still managed to give good results. The portfolio lost 3.74%, while the S&P 500 index plunged 34%<\/strong>. So, it is pretty evident that the portfolio can weather all storms and come out on top even during the most volatile market conditions.<\/p>\n\n\n\n Even though the portfolio did well in the past, there’s no guarantee that it will also perform well in the future. So, it’s always better to consult a financial advisor and keep the future conditions in mind before building a portfolio.<\/p>\n\n\n\n Moreover, there are some good things and some bad<\/strong> but not so bad things about this portfolio that I have listed below.<\/p>\n\n\n\n The All Weather portfolio has various advantages that make it a good choice. So let’s look at some of the positives of this portfolio.<\/p>\n\n\n\n The All Weather portfolio is a low-cost investment approach. The reason is that building an ETF portfolio is inexpensive. The brokerage firms mostly sell them commission-free or at a very minimal expense ratio. <\/strong><\/p>\n\n\n\n This helps reduce the total cost of the portfolio and increases the chances of positive returns. Moreover, only the GSG’s expense ratio is slightly high at 1.25%<\/strong>. Otherwise, ETFs like VTI have only a 0.3% expense ratio<\/strong>.<\/p>\n\n\n\n Diversification is the backbone of this portfolio. The portfolio consists of various asset classes like bonds, stocks, commodities, and gold, providing good diversification. This reduces the overall portfolio risk. It also provides stability during volatile market conditions.<\/p>\n\n\n\n The All Weather Portfolio is a very transparent investment approach. The reason is that all the investments are held in exchange-traded funds(ETFs). So, the investors can easily check what they are holding without going through complex reports. Also, as all the holdings are public information, it helps to keep track of things. <\/p>\n\n\n\n Why I say that it’s easy to implement is because of the ETFs. You just have to buy the ETFs and perform rebalancing in the All Weather Portfolio. You can rebalance ETFs yearly or quarterly based on your preference. And you can rebalance easily using your brokerage account.<\/p>\n\n\n\n The shallow risk of this portfolio is due to its large proportion of defensive assets that benefit when stock prices fall and non-correlated assets. There’s a good chance the All Weather Portfolio won’t lose all money. Treasury bonds, for example, typically rise when stock prices plummet, and gold and other commodities frequently do so as well.<\/p>\n\n\n\n If this portfolio forfeits the money by any chance, then it is a problem with our investment plan. Why is it so? Because the portfolio holds assets known as saviors during the worst time, i.e., bonds.<\/p>\n\n\n\n The portfolio holds a large percentage of commodities. These commodities in the asset mix help build a barricade against increasing inflation. This happens because the price of a commodity usually rises with inflation.<\/p>\n\n\n\n The All Weather Portfolio has some disadvantages also. So let’s take a look at some of the negatives of this portfolio.<\/p>\n\n\n\n As the portfolio is designed to do well in all market conditions, it will not be able to outperform in certain situations. For example, stocks usually do better than other asset classes during an economic boom. But as the All Weather Portfolio has a large percentage of bonds and other defensive assets, it will not be able to give good returns during such periods. <\/p>\n\n\n\n During declining interest rates, the value of bonds held in the portfolio declines. It’s the market rule that bonds always act opposite to the interest rates. And this becomes a problem in the case of All Weather Portfolio. It’s a problem because, in this portfolio, you will dedicate 55% of the assets to bonds<\/strong>. <\/p>\n\n\n\n So, the portfolio will expose you to higher interest rate risk than you can afford<\/strong>. Moreover, increased investment in bonds also increases the inflation risk<\/strong><\/a>. Rising inflation affects the purchasing power if the portfolio’s performance is below expectations.<\/p>\n\n\n\n The performance of the weather portfolio is quite good as it has been able to provide positive returns in most market conditions. However, there was a period when the portfolio didn’t do well<\/strong>, and that was during the interest rate decline. In this case, the value of bonds in the portfolio declined. Hence, the portfolio’s overall return was affected.<\/p>\n\n\n\n Further, its performance based on various factors is explained below:<\/p>\n\n\n\nKey Takeaways<\/h2>\n\n\n\n
About the All Weather Portfolio <\/h2>\n\n\n\n
The All Weather Portfolio Strategy<\/h3>\n\n\n\n
Can the All Weather Portfolio \u201cWeather\u201d the Stock Market? – A Review<\/h2>\n\n\n\n
Positives<\/h3>\n\n\n\n
1. Low-Cost Investment Approach<\/h4>\n\n\n\n
2. Diversification<\/h4>\n\n\n\n
3. Transparency<\/h4>\n\n\n\n
4. Simple Implementation<\/h4>\n\n\n\n
5. Low-Risk Structure<\/h4>\n\n\n\n
6. Tends to Hedge Against Inflation<\/h4>\n\n\n\n
Negatives<\/h3>\n\n\n\n
1. Performance in Certain Situations<\/h4>\n\n\n\n
2. Interest Rate Decline<\/h4>\n\n\n\n
Historical Performance of the All Weather Portfolio<\/h2>\n\n\n\n
Composition<\/h3>\n\n\n\n