What Is An All-Weather Portfolio And Why Do You Need One?

An all-weather portfolio – also known as an all-season portfolio – is not just about saving for a rainy day. It is the concept of building a diversified portfolio that can weather or survive any economic storm that comes along.

If you prefer a passive approach to investing, an all-weather portfolio might be the right investment for you. All-weather portfolios are carefully designed to perform well during all phases the markets go through – bull markets, bear markets and anything in between. The all-weather portfolio is suited to investors who prefer a less hands-on approach.

Naturally, every investor wants their portfolio to do well in any market conditions, so why would you not want an all-weather portfolio? Well, it is not for everyone. Some investors prefer the exhilarating highs and lows of the market – for various reasons. You need to understand how an all-weather portfolio works in order to decide if it is right for you.

What The Ray Dalio All-Weather Portfolio Consists Of

The concept of the all-weather portfolio was developed by billionaire investor Ray Dalio, the founder of Bridgewater Associates, the world’s largest hedge fund.

The idea is to diversify investments in a way that the portfolio can perform consistently during periods of economic growth and periods of economic stagnation alike. Because it is passive in nature, investors do not need to make major asset allocation shifts if the market shows volatility or rising inflation, for example.

Dalio designed the all-weather portfolio so investors could realize stable returns throughout a changing market environment, including stocks, bonds, and commodities.

The all-weather portfolio will allocate more to bonds and less to stocks. The wealth advisor is not necessarily looking to optimize the total returns but rather to create a portfolio which allows the investor to “sleep well at night” (i.e. smaller drawdowns and good risk-adjusted returns).

The portfolio is based on performance since the 1940s, so investors’ preferences will not be clouded by what is known as ‘recency bias,’ where we often forget past economic performance.

Many all-weather portfolios are now made up of:

  • 40% long-term Treasuries
  • 30% US stocks, S&P 500
  • 15% intermediate-term U.S. Bonds
  • 7.5% gold
  • 7.5% commodities, commodity index tracking fund.

Does The All Weather Portfolio Perform Well?

As appealing as an all-weather portfolio sounds, it can lag when compared to other investment approaches – especially when the markets are in a bull run. Such a portfolio can help you weather market volatility; this is the price you pay for investing. With risk comes return. While an investment may perform better when the market is down, it may not perform as well as other – more aggressive – investments when the market is up.

The annual returns for an all-weather portfolio have been lower than those for stocks, but the max drawdowns, on the other hand, are significantly smaller. It must be considered a defensive portfolio. During the financial crisis in 2008/09, Covid-19 in 2020, and the 2022 bear market, it has outperformed stocks.

Who The All Weather Portfolio Is For

The all-weather portfolio is for long-term investors. The time horizon for the portfolio is not years but decades long. It is not a get-rich-quick scheme, and investors in these are almost guaranteed to underperform in bull markets (for stocks).

However, investing in such a portfolio is right for certain investors who want to protect their assets by outperforming falling markets. You are also less likely to commit behavioural errors in the investment process. It is often an intelligent portfolio for retirees or those close to retirement because of the estimated smaller drawdowns.

Your investment advisor can tell you more about this investment tool. Nour Private Wealth (NPW) is a Canadian company with a team of wealth advisors servicing clients across seven provinces. Contact NPW for more information on an all-weather portfolio.

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