Ray Dalio created the All-Weather Portfolio in the mid-1990s. He wanted to invest his and his family’s accumulated wealth in a way that would prosper regardless of the economic environment; a portfolio that “will do reasonably well 20 years from now even if no one can predict what form of growth and inflation will prevail.” Today, virtually all of Dalio’s family wealth is invested in the All-Weather Portfolio – and Bridgewater Associates also has around $80 billion of client cash invested in the strategy.

So what’s in it? Dalio spilled the beans on a basic version of the All-Weather Portfolio during an interview, and it consisted of the following:

• 40% in long-term Treasuries (US government bonds with over 20 years left till maturity)

• 30% in US stocks

• 15% in intermediate-term Treasuries (US government bonds with 7-10 years left till maturity)

• 7.5% in gold

• 7.5% in other commodities

You can see risk parity at play here. Bonds, which tend to have the least volatility, have the highest weighting in the portfolio. Stocks come second; while commodities, typically the most volatile investments, have the smallest weighting. Based on the above, the contribution to overall portfolio risk from each asset class is roughly the same. ⚖️

That explains the weightings – but why did Dalio choose these investments in particular? It goes back to his principles of cause-effect relationships, diversification, and the market undergoing long-term cycles. Dalio purposely wanted a portfolio spread across asset classes whose characteristics are best suited to different parts of the cycle, which Dalio defines in two dimensions: rising/falling economic growth and rising/falling inflation. These are the “causes” which lead to the “effect” of diverging asset class performance.

To illustrate this, let’s look at the three main asset classes that make up the All-Weather Portfolio: stocks, bonds, and commodities.

• During periods of rising economic growth, company profitability tends to increase and stocks do well. So do commodities: rising economic growth means increased demand for resources and higher commodity prices.

• During periods of falling economic growth, however, investors swap stocks for bonds as the latter offer a more dependable return. Central banks may also lower interest rates to help stimulate the economy – making existing bonds more attractive and also helping to push their prices up.

As for inflation, gold and commodities are real assets: physical assets with intrinsic value that become more popular when inflation is rising and eroding the extrinsic value of money. But when inflation is falling, bonds do well instead as the fixed amount of cash they offer investors becomes worth more. A $100 payout five years from now will be more valuable if the price of food and housing stays the same compared to a scenario where their prices double over that period.

So by having a diversified mix of these asset classes, and having each one contribute an equal amount to overall risk, the All-Weather Portfolio is designed to do well in all economic environments – at least in theory. That’s why it’s called “All-Weather”, after all… ☔

The biggest advantage of the All-Weather Portfolio is probably this resilience in different economic environments. Another is that its passive strategy doesn’t require you to predict future economic conditions: remember Dalio’s principle of being open-minded and accepting the fact that we don’t know what the future holds? It’s a buy-and-hold strategy that demands occasional rebalancing rather than frequent trading – again, reducing fees and protecting investors from their own worst enemy: themselves.

One of the All-Weather Portfolio’s drawbacks, though, is that it’s very US-focused – with no room for international stocks or bonds. And while the strategy has performed well over the long term, it’s occasionally experienced protracted stretches of underperformance – and has historically returned less than the S&P 500 index of the largest US stocks. Finally, as the savvier among you will have noticed, the portfolio has a very high allocation to bonds (55% in total) and may not perform well during a sustained period of rising interest rates.

The takeaway: 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.