According to Ray Dalio, keeping all of your cash in a savings account isn’t a smart decision. That’s thanks, of course, to inflation, which slowly erodes the value of your money. Dalio, like any investor, thinks a better approach is to invest your money in a diversified portfolio of assets that will increase in value faster than inflation. 💡

“Know how to diversify into non-cash assets like stocks, bonds, and real estate. When you look at most portfolios, they have a very strong bias to do well in good times and bad in bad times.” – Ray Dalio

Dalio’s solution to the problem of a portfolio that simply rises and falls in line with the overall market is to spread out and balance the risks of each component investment.

And those who like the sound of that advice can construct their own All-Weather Portfolio using easy-to-invest exchange-traded funds (ETFs). Only do this, of course, if you personally believe the All-Weather Portfolio is a good strategy and it makes sense for you – that it meets your needs and is in line with your risk tolerance. On that note, also make sure you fully understand the risks that come with any form of investing and those particular to this strategy, such as the high bond allocation discussed above.

Got it? Then listen up, US-based investors – the following ETFs broadly mimic the specific asset classes:

• TLT (iShares 20+ Year Treasury Bond ETF) = Long-term Treasuries

• SPY (SPDR S&P 500 ETF Trust) = US stocks

• IEF (iShares 7-10 Year Treasury Bond ETF) = Intermediate-term Treasuries

• GLD (SPDR Gold Shares) = Gold

• DBC (Invesco DB Commodity Index Tracking Fund) = Other commodities

Remember, we know what the weightings of each of these ETFs are in the All-Weather Portfolio:

• 40% in long-term Treasuries

• 30% in US stocks

• 15% in intermediate-term Treasuries

• 7.5% in gold

• 7.5% in other commodities

To save you the legwork, here’s how you’d construct this portfolio if you wanted to allocate, say, $10,000 to the strategy (approximate ETF prices correct as of January 2020):

How frequently should you rebalance the portfolio back to its intended weightings? Dalio recommends annually, and this is how much of the backtesting has been done when reviewing the strategy’s performance.

Most European investors will find it a bit trickier to access the US ETFs listed above. Some similar alternatives, however – all listed on the London Stock Exchange and priced in US dollars – are:

• IDTL (iShares USD Treasury Bond 20+yr UCITS ETF): tracks long-term Treasuries

• CSPX (iShares Core S&P 500 UCITS ETF): tracks US stocks

• IDTM (iShares USD Treasury Bond 7-10yr UCITS ETF): tracks intermediate-term Treasuries

• IGLN (iShares Physical Gold ETC): tracks gold

• CMOD (Invesco Bloomberg Commodity UCITS ETF): tracks a diversified basket of commodities

It’s as simple as that. The only other thing to bear in mind when constructing your own All-Weather Portfolio is the cost of doing so. First are your broker’s trading fees when buying and selling ETFs – although sticking to annual rebalancing should help minimize those trading costs. Second, the ETFs themselves carry a fee to cover their operating expenses. This expense ratio is expressed as a percentage of the fund’s assets: for example, an ETF with a 0.50% expense ratio will deduct half a percent of your investment on an annual basis.

With that caveat, you’re all set to follow in Ray Dalio’s footsteps and put his Principles into practice. Just be sure to take an umbrella if you’re headed out for an All-Weather round on the course… ☂️

In this Guide, you’ve learned:

🔹 Ray Dalio is a successful investor who sticks to a series of investment principles, including cause and effect relationships, riding long-term trends, diversification, and being radically open-minded.

🔹 Strategic asset allocation is a sensible investment strategy, albeit one which aims to divide cash rather than risk – and that's the problem Dalio’s risk parity approach seeks to solve.

🔹 Dalio’s All-Weather Portfolio, constructed using risk parity weightings for certain stocks, bonds, and commodities, is designed to perform well in all economic environments.

🔹 The All-Weather Portfolio's historical risk-adjusted returns are impressive, but some put this down to it riding a decades-long bond bull market – which might not last forever.