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Understanding How All-Weather Portfolios Work


Pie chart on paper chartsIf you prefer a laid-back approach to investing, building an all-weather portfolio may be right for you. All-weather portfolios are designed to perform well during all seasons of the market, whether that means an economic boom or a bust is underway. This type of portfolio could be suited to an investor who prefers a more hands-off approach – though it isn’t necessarily right for everyone. Understanding how an all-weather portfolio works can help you to decide if it makes sense for you. A financial advisor can help you put together a portfolio that will do relatively well throughout a variety of economic circumstances.

What Is an All-Weather Portfolio?

All all-weather portfolio is a portfolio that’s built to do well, regardless of changing market conditions. The concept was developed by Ray Dalio, a billionaire investor and founder of Bridgewater Associates, the largest hedge fund in the world.

The premise is simple: Diversify investments in such a way that a portfolio can perform consistently during periods of economic growth as well as periods of economic stagnation. The all-weather portfolio follows a passive investing strategy, in that it doesn’t require investors to make any major asset allocation shifts if the market because of things like increasing volatility or rising inflation.

Instead, Dalio designed the all-weather portfolio to allow investors to realize stable returns throughout a changing market environment. Specifically, this portfolio strategy is designed to help investors ride out four specific types of events:

  • Inflationary periods marked by rising prices
  • Deflationary periods marked by falling prices
  • Bull market periods when the economy is growing
  • Bear market periods when economic growth begins to slow down

Dalio’s view is that surprises are what drive price movements in the market. The all-weather portfolio was developed to offer investors insulation from those surprises.

How an All-Weather Portfolio Works

The all weather portfolio works based on certain expectations Dalio and his team had about the relationship between asset class performance and changing market environments. Specifically, they looked at whether different asset classes rise or fall, based on whether the economy is growing or shrinking and inflation is rising or falling.

This led them to develop an ideal asset allocation that would allow investors to benefit whether the market is moving up or down. Here’s how the all-weather portfolio allocation breaks down:

  • 40% is held in long-term bonds
  • 15% is held in intermediate-term bonds
  • 30% is invested in stocks
  • 5% is allocated to commodities
  • 5% is allowed to gold

So why this particular mix? In theory, this is the asset allocation that should allow investors to continue realizing steady returns while minimizing losses, regardless of the market environment.

The all-weather portfolio takes a much different approach than age-based allocations, a three-fund portfolios or the old school 60/40 portfolio split. Instead of looking at age and life expectancy, sticking with just a few funds or choosing a simple percentage-based split, the all weather portfolio is more nuanced.

So in theory, the stock portion of the portfolio should do well in bull markets when stock prices are rising. In a bull market that’s characterized by rising inflation, investors would be bolstered by their intermediate-term bond and commodities holdings. Equities and bonds not liked to inflation can also be a winner for investors during periods of falling prices.

All-Weather Portfolio Pros and Cons

Coins on a checkered board

No investing strategy is 100% foolproof and the all-weather portfolio is no exception. There are both advantages and disadvantages associated with using this approach to invest. On the pro side, this type of investing strategy is relatively easy to implement. You could establish an all-weather portfolio using just a handful of mutual funds or exchange-traded funds. There’s no need to pick individual stocks or bonds and even index funds will work.

An all-weather portfolio can also be less costly to maintain. Because this is a passive investing strategy, there’s no active trading required. That means you’re paying fewer commission fees to your brokerage. And if you’re using index funds or exchange-traded funds (ETFs) to invest, those may carry lower expense ratios than traditional mutual funds.

Diversification is also simplified with all-weather portfolios. By investing in stocks, bonds, commodities and gold you can build a well-rounded portfolio. This can help you to manage risk over the long term.

There are some cons, however. While the stock portion of the portfolio can do well during periods of rising economic growth, the portfolio as a whole may underperform. That’s because stock allocation is limited to just 30%. Someone who’s investing 80% or 90% of their portfolio in stocks, on the other hand, is likely to see bigger returns during economic boom periods.

Interest rate risk is something else to consider when allocating such a larger percentage of a portfolio to bonds. Bond yields and interest rates have an inverse relationship. Dedicating 55% of your portfolio to bonds may expose you to more interest rate risk than you’re comfortable with. Higher inflation risk can also be problematic when investing a larger percentage of holdings in bonds. Rising inflation can cause purchasing power to shrink if the portfolio performs below expectations.

So, who is an all-weather portfolio good for?

Generally speaking, this type of portfolio may be better suited to investors who prefer a passive approach and want to avoid buying or selling at the wrong time. When investing biases kick in, it can be very easy to sell in a panic, which can result in losses. An all-weather portfolio effectively short-circuits that since you’re sticking with the same asset allocation over time.

On the other hand, you may not prefer the all-weather approach if you’re looking for above-average growth from your portfolio. In that case, you may be better off leaning toward a more active investing strategy or at the very least, a portfolio that has a larger allocation to stocks.

How to Create an All-Weather Portfolio

Building an all-weather portfolio simply means choosing the right mix of mutual funds, index funds or ETFs. This is something you can do through an online brokerage account. Again, the target asset mix is:

  • 30% stocks
  • 55% U.S. bonds
  • 15% hard assets (gold and commodities)

So you might choose one stock index fund like the Vanguard S&P 500 ETF (VOO) or the iShares Core S&P 500 ETF (IVV). This gives you exposure to all the stocks in the S&P 500. You could then add an intermediate bond fund like iShares 3-7 Year Treasury Bond ETF (IEI) or the Schwab US Aggregate Bond ETF (SCHZ). Next you could add a long-term bond fund like the Vanguard Long-Term Corporate Bond ETF (VCLT) or the T. Rowe Price Institutional Long Duration Credit Fund (RPLCX). Finally, you could add a commodities fund like the Invesco DB Commodity Index Tracking Fund (DBC) or the SPDR Gold Shares fund (GLD) to round things out.

Those are just examples of funds you could use to construct your all-weather portfolio. When choosing which funds to include, you’d want to consider the underlying makeup of each fund and what it owns, as well as the expense ratio you’ll pay. And of course, it makes sense to consider the fund’s risk profile and past performance as well.

The Bottom Line

Oldder couple with financial advisorThe all-weather portfolio offers a diversified approach to passive investing through the changing seasons of the market. This type of portfolio might appeal to so-called couch potato investors who aren’t necessarily interested in active trading or just want a straightforward, set-it-and-forget-it way to build wealth over time.

Tips for Investing

  • Consider talking to a financial advisor about the merits of an all-weather portfolio and whether it may be right for you. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Use SmartAsset’s asset allocation calculator to understand your risk profile and what types of investments are right for your portfolio.
  • Whether you choose an all-weather portfolio or something else, it’s important to consider your personal risk tolerance, timeline for investing and overall goals. Rebalancing and tax loss harvesting are also important for managing investments held in a taxable brokerage account. Portfolio rebalancing means adjusting your asset allocation periodically to ensure that it’s still aligned with your goals and risk appetite. Tax-loss harvesting involves selling stocks at a loss to offset capital gains. Both can be done inside a brokerage account, though either one may be done for you automatically if you’re investing through a robo-advisor.

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