Now that you know the logic behind the All-Weather Portfolio and what it contains, the natural follow-up question is: just how successful has it been?

Strategy performance tracker AllocateSmartly has compiled robust data on the portfolio’s historical performance, even projecting it back to 1970. While looking at this in isolation is all well and good, it’s more informative if we compare performance to a benchmark. And seeing as we’re particularly interested in the relative success of risk parity asset allocation, we’ll compare it to the basic 60/40 strategy that invests 60% in US stocks and 40% in US government bonds.

Measured over the past 50 years, the All-Weather Portfolio generated an average annual return of 9.5% – virtually identical to the 60/40 benchmark’s 9.6%. But it managed this while taking on significantly less risk. The All-Weather Portolio’s volatility – a measurement of the instability of an investment’s performance – was 7.9% over the same period, significantly lower than the 60/40 portfolio’s 9.8%. Taken together, this means that the All-Weather Portfolio generated a higher investment return per unit of risk. ✅

Having said that, volatility can be a flawed measure of risk. That’s because the statistic, which is calculated as the standard deviation of investment returns, includes both upside volatility (higher returns than average) and downside volatility (lower returns than average). Investors should welcome upside volatility and be worried about downside volatility – but as a standalone measure, volatility doesn’t discriminate between the two.

So how else can we measure risk? One investor favorite, especially when assessing individual investment strategies, is maximum drawdown (MDD). This measures the largest peak-to-trough decline in the value of a portfolio, as illustrated below. Knowing the worst loss a strategy’s previously experienced can be telling: a 50% drawdown, after all, means your portfolio would have had to then double in value just to get back to where it was! 😬

The All-Weather Portfolio’s MDD over the past half-century was a relatively modest 13%, resulting from a stretch of poor performance in the early Eighties. Significantly, that 13% MDD was less than half the 60/40 benchmark’s 30%. But as with all these backward-looking statistics, there’s nothing to stop the All-Weather Portfolio from experiencing a larger peak-to-trough loss of 13% in the future.

The last thing we’ll consider is the strategies’ comparative robustness. Over the entire 50-year period, the All-Weather Portfolio lost money in only six calendar years – with the largest annual loss occurring in 1994, when it lost 5%. In other words, the strategy made money 88% of the time – while the 60/40 benchmark only managed it in 80% of those years. Furthermore, the latter’s largest annual loss was 18% in 2008 – understandable, considering US stocks declined almost 40% that year. The All-Weather Portfolio, with its larger allocation to safe government bonds, actually ended the annus horribilis of 2008 up 3%.

It all sounds impressive – but what’s the catch? One of the main criticisms of the All-Weather Portfolio’s historical performance is that much of its success came from riding the decades-long bond bull market. Recall that 55% of the portfolio is invested in bonds that have enjoyed a nice upwards run since 1980 – as can be seen in the graph below, which shows the yield of 30-year Treasury bonds (remember, bond prices move inversely to yields).

And this is important to consider when it comes to predicting the strategy’s future performance. Mathematically speaking, bond yields simply cannot go much lower. That means there’s a good chance that the solid returns bonds have brought investors over the past few decades won’t continue. And should there be a meaningful rise in bond yields, falling bond prices would dent the All-Weather Portfolio’s performance – although this could be partially offset elsewhere. For example, if bond yields climb due to stronger economic growth, then the portfolio’s stock allocation would likely do well. Alternatively, if bond yields climb due to rising inflation, the portfolio’s commodities allocation may do better. But no one can predict the overall result with any certainty – it’s just a risk you’re going to have to accept. 🎲

The other thing to mention is that the All-Weather Portfolio is based on the theory that bonds and stocks are negatively correlated in the long term: if one does poorly, the other performs well. But should this relationship break down at some point in the future, then during times of turmoil the strategy could suffer a one-two punch from both its stock and bond investments…

The takeaway: 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.