I throw this article out for discussion purposes ... is it worth following? ...
About a year and a half ago I wrote an article analyzing the ‘All-Weather’ portfolio developed by hedge fund manager Ray Dalio at the request of Tony Robbins. This multi-asset strategy was put together as a simple, but effective, way for everyday investors to own a combination of stocks, bonds and commodities. The whole point of this was to maximize diversification, minimize volatility, and enhance long-term returns.
One of the easiest ways for investors to implement the All-weather portfolio is with exchange-traded funds (ETFs). Just five holdings will provide a highly diverse, low-cost, and easy-to-track account. My previous example utilized the following ETFs with the allocation guidelines developed by Mr. Dalio:
It’s common knowledge that behavioral choices, more so than investment choices, are the reasons that investors fail to achieve their goals or underperform a benchmark. This portfolio style requires very little attention other than annual or semi-annual rebalancing.
Flash forward nearly eighteen months, and it is interesting to note that the returns of the All-weather portfolio have hit a stumbling point. From 9/26/16 through 3/17/18, the portfolio has produced a net gain (with dividends included) of +5.56%. For comparison purposes, the iShares Growth Allocation ETF (AOR) has gained +16.50% over that same time frame.
The key driver of this underperformance is a risk that I pointed to in the original article. Namely that the overweight allocation to long-duration Treasury bonds would be a drag on performance if interest rates were to rise, and they did. TLT and IEF have fallen -9.38% and -5.78% respectively during this period. Those two funds represent 55% of the total portfolio and as such are going to be responsible for a significant portion of the total return.
Furthermore, there has been little in comparative offset from the commodity side of the portfolio. GLD has mostly meandered sideways with a total return of -2.39%, while DBC has managed to squeak out a modest gain of +14.21%.
The real winner over this stretch has been VTI, which jumped +30.61%. The uptrend in stocks has been the only inflationary aspect of the portfolio that has allowed it to appreciate by any meaningful measure.
Some investors may be immediately put off by the lackluster returns of this strategy in the most recent past. However, it’s worth remembering that the whole point of this model is to produce substantial gains over long periods. That means enduring short flights of underperformance with the expectation that future returns will ultimately improve.
Investors that continually chase performance in only the top asset classes will find themselves jumping in at the tail end of every cycle. This likely reduces real returns and the confidence in a sound investment strategy using global markets.
The Bottom Line
There are plenty of holes that can be shot in the all-weather portfolio when viewed through a critical lens. It’s too bond-heavy, it’s overly diversified, there is no international allocation, etc...
The flip side is that it contains many sound investment principles that are tough to beat for those with an extended time horizon and who are more risk adverse. It’s worth remembering that the fortitude to stick with a consistent investment strategy through thick and thin is one of the hallmarks of a successful investor.
https://www.nasdaq.com/article/why-the-allweather-portfolio-has-stumbled-cm937170
About a year and a half ago I wrote an article analyzing the ‘All-Weather’ portfolio developed by hedge fund manager Ray Dalio at the request of Tony Robbins. This multi-asset strategy was put together as a simple, but effective, way for everyday investors to own a combination of stocks, bonds and commodities. The whole point of this was to maximize diversification, minimize volatility, and enhance long-term returns.
One of the easiest ways for investors to implement the All-weather portfolio is with exchange-traded funds (ETFs). Just five holdings will provide a highly diverse, low-cost, and easy-to-track account. My previous example utilized the following ETFs with the allocation guidelines developed by Mr. Dalio:
- 30% - Vanguard Total Stock Market ETF (VTI)
- 40% - iShares 20+ Year Treasury ETF (TLT)
- 15% - iShares 7-10 Year Treasury ETF (IEF)
- 7.50% - SPDR Gold Shares ETF (GLD)
- 7.50% - PowerShares DB Commodity Index Tracking Fund (DBC)
It’s common knowledge that behavioral choices, more so than investment choices, are the reasons that investors fail to achieve their goals or underperform a benchmark. This portfolio style requires very little attention other than annual or semi-annual rebalancing.
Flash forward nearly eighteen months, and it is interesting to note that the returns of the All-weather portfolio have hit a stumbling point. From 9/26/16 through 3/17/18, the portfolio has produced a net gain (with dividends included) of +5.56%. For comparison purposes, the iShares Growth Allocation ETF (AOR) has gained +16.50% over that same time frame.
The key driver of this underperformance is a risk that I pointed to in the original article. Namely that the overweight allocation to long-duration Treasury bonds would be a drag on performance if interest rates were to rise, and they did. TLT and IEF have fallen -9.38% and -5.78% respectively during this period. Those two funds represent 55% of the total portfolio and as such are going to be responsible for a significant portion of the total return.
Furthermore, there has been little in comparative offset from the commodity side of the portfolio. GLD has mostly meandered sideways with a total return of -2.39%, while DBC has managed to squeak out a modest gain of +14.21%.
The real winner over this stretch has been VTI, which jumped +30.61%. The uptrend in stocks has been the only inflationary aspect of the portfolio that has allowed it to appreciate by any meaningful measure.
Some investors may be immediately put off by the lackluster returns of this strategy in the most recent past. However, it’s worth remembering that the whole point of this model is to produce substantial gains over long periods. That means enduring short flights of underperformance with the expectation that future returns will ultimately improve.
Investors that continually chase performance in only the top asset classes will find themselves jumping in at the tail end of every cycle. This likely reduces real returns and the confidence in a sound investment strategy using global markets.
The Bottom Line
There are plenty of holes that can be shot in the all-weather portfolio when viewed through a critical lens. It’s too bond-heavy, it’s overly diversified, there is no international allocation, etc...
The flip side is that it contains many sound investment principles that are tough to beat for those with an extended time horizon and who are more risk adverse. It’s worth remembering that the fortitude to stick with a consistent investment strategy through thick and thin is one of the hallmarks of a successful investor.
https://www.nasdaq.com/article/why-the-allweather-portfolio-has-stumbled-cm937170
