Understanding How All-Weather Portfolios Work

An all-weather portfolio is a diversified investment strategy designed to perform well across different economic conditions, including growth, recession, inflation and deflation. Popularized by hedge fund manager Ray Dalio, this approach typically allocates assets across equities, bonds, commodities and gold to balance risk and return. By spreading investments across asset classes with varying sensitivities to economic cycles, the portfolio aims to reduce volatility while maintaining steady growth.

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What Is an All-Weather Portfolio?

An all-weather portfolio is a portfolio that’s built to do well, regardless of changing market conditions. The concept was developed by 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 shifts due to factors 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:

30% is invested in stocks
40% is held in long-term bonds
15% is held in intermediate-term bonds
7.5% is allocated to gold
7.5% is allocated to commodities

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 portfolio 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 linked to inflation can also be a winner for investors during periods of falling prices.

How to Build 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)

You might allocate 30% to a 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.

Next, you could add an intermediate bond fund like iShares 3-7 Year Treasury Bond ETF (IEI) or the Schwab US Aggregate Bond ETF (SCHZ). You could also 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).

The last 15% could be invested in 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.

Pros and Cons of All-Weather Portfolios

No investing strategy is 100% foolproof, and the all-weather portfolio is no exception. Its advantages include ease of implementation, lower maintenance costs and broad diversification, making it an accessible option for many investors.

However, it also comes with drawbacks, such as the potential for underperformance during strong bull markets, exposure to interest rate risk due to its heavy bond allocation, and vulnerability to inflation.

Advantages of an All-Weather Portfolio

Easy to implement: Can be built using a few mutual funds or exchange-traded funds (ETFs), eliminating the need for picking individual stocks or bonds.
Lower maintenance costs: As a passive investing strategy, it requires minimal trading, reducing commission fees.
Lower expense ratios: Investing in index funds or ETFs typically results in lower management fees compared to actively managed mutual funds.
Diversification: Allocates investments across stocks, bonds, commodities and gold, creating a balanced portfolio that helps manage risk over time.

Disadvantages of an All-Weather Portfolio

Potential underperformance in strong bull markets: The limited stock allocation (typically 30%) may result in lower returns compared to portfolios with higher equity exposure.
Interest rate risk: A significant bond allocation (around 55%) can be negatively impacted when interest rates rise, reducing bond prices.
Inflation risk: Higher exposure to bonds may lead to diminished purchasing power if inflation rises and portfolio returns fail to keep pace.

Who Should Consider an All-Weather Portfolio?

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 seek above-average growth. 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.

Bottom Line

The 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 financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel 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.