An All Weather Portfolio To Protect Your Investments

What’s an All Weather Portfolio?

The concept of an all-weather portfolio is simple:  Building an investment portfolio comprised of different asset classes that can survive – and thrive – in any market environment.  Basically, the portfolio would be able to “weather” whatever financial storms the economy can throw at it. Whether it’s inflation, deflation, stagflation, a low or no growth economic environment, the All-Weather Portfolio can buffer the risks. The individual components may suffer in a particular set of economic conditions, but other components would perform well under the same set of economic conditions. As a result, the overall portfolio performs well over a period of time regardless of market environment.

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Financial Markets 101 – Which Investments Do Well in Different Types of Environments

Broadly speaking, three conditions move broader markets – inflation, deflation and economic growth. Inflation occurs when prices costs of living go up quickly (during the 1970s, rampant inflation occurred as the US dollar lost value and prices in things like oil, food, and housing rose rapidly).  Deflation occurs when prices decline (during the 1930s, prices went down quickly as demand for most things dropped as many people were unemployed).  Economic growth benefits companies and the economy as most people have jobs and can afford to purchase goods, which drive profits for companies, which encourages hiring and spending.

With this information as a backdrop, below is a summary of how different asset classes perform in different economic environments.

Asset Class – Economic Environment Relationship Summary

Asset Class Environment It Performs Well In
Stocks (equities) Low inflation; low and stable interest rate; steady economic growth
Bonds (fixed income) Deflationary (declining interest rate); weak economic growth
Real Estate (commercial and residential real estate) Inflationary; steady economic growth
Commodities (gold, silver, oil, industrial metals, agricultural products) Inflationary; strong economic growth; unstable currency (especially the US dollar)


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How to Build an All Weather Portfolio?

If you watch the video below, you’ll see Tony Robbins and Steve Forbes explain the components of an All-Weather Portfolio. This investment strategy has been used by different professional investors, but in this case, it was shared to Robbins by Ray Dalio, one of the foremost hedge fund managers in the fund, Founder of Bridgewater Associates, which manages over $150 billion of assets. Since inception in 1991, Dalio’s All Weather portfolio returned 21%/year before fees.

Backtesting the All-Weather Portfolio strategy found that in the past 75 years, the All Weather portfolio was right 85% of the time. 

Looking at the All Weather Portfolio and the Asset Class – Economic Environment Relationship Summary table above, you can see when the components of the All-Weather Portfolio work well. When the economy is doing well, Stocks and Commodities would perform well because demand for goods and services would be strong, boosting corporate profits, which drive stock prices. Also, since demand for goods is strong, there’d be demand for Commodities.

In an environment when the economy is weak and interest rates are declining (or could decline), Long and Intermediate Term Treasures would perform well. Interest rates and treasuries (government bonds) move in opposite directions. When interest rates rise, treasuries prices go down; conversely, when interest rates fall, treasuries prices go up. So again, in a weak economic (disinflationary or deflationary economic environment), bonds (treasuries) would perform well.  Interestingly to note, it’s U.S. government bonds that are used and not corporate bonds. During economic downturns, weaker corporations may default on their debt, whereas the US government treasuries are generally considered to be the safest government bonds globally. The U.S. has not defaulted on its debt even as it’s experienced several world wars, the Great Depression, rampant inflation in the 1970s, and the Global Financial Crisis of 2008-09.

In an inflationary environment, Gold and Commodities would perform well.  Without going into a discussion of economic theories on what causes inflation, we’ll note that historically, Gold and Commodities have performed well during inflationary periods as evident by the outperformance of Gold and Commodities during the 1970s and mid-2000s. The 7.5% allocated to Gold and Commodities in the All-Weather Portfolio are meant to protect the value of the portfolio in an inflationary environment.

On its own, each of these investment classes could perform poorly in certain economic environments. However, when blended together in the percentages suggested, the sum of the parts are greater than the individual parts, leading to preservation – and growth – of capital over time.

Watch this video about The All Weather Portfolio:


How to Invest in the All Weather Portfolio

Tactically, here are a set of investment vehicles one can use to construct in the All-Weather Portfolio.

In an interview with Dalio, Tony Robbins learned that the Dalio All-Weather invests in these asset classes in roughly these percentages:

  • Stocks: 30%
  • Long Term Treasuries: 40%
  • Intermediate Term Treasuries: 15%
  • Gold: 7.5%
  • Commodities: 7.5%

With this information as backdrop, one can, with the help of an experienced and registered financial advisor, formulate a plan to select ETFs or mutual funds to allocate to this strategy.

Risks and Challenges

That said, while the allure of the All Weather Portfolio is attractive, there are risks to adopting this portfolio. The conditions that led to the success of this portfolio during the 75 years period under study may not, and most likely will not, be duplicated. For example, this bond heavy portfolio was no doubt buoyed by the fall of interest rates from mid-high teens in the early 1980s to below 2% for 10 year treasuries currently. While rates could remain low for a few more years, the trend going forward is more likely up. Of course, if inflation occurs, that would benefit Gold and Commodities.

Also, Dalio uses leverage and uses many more asset classes. What Tony Robbins did was distilled a 3 hour interview into a portfolio strategy that can be fairly executed by the average Joe. There is merit to this simplified All Weather Portfolio strategy; one just needs to realize how Robbins’ version may differ and some of the economic drivers that led to its past success and how different conditions in the future could impact portfolio results.

Overall, there is immense value in learning about the concepts behind the All Weather Portfolio and it is one way to simplify the asset allocation process and invest in a strategy that has worked well in different environments over the past 75 years.

Additional Readings:

Check out this article on the background of the All Weather concept.

Read this debate on how the All Weather Portfolio.

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