All about Ray Dalio’s “All Weather” investing technique

Every investor wants his or her money to compound steadily. That is a truism, which applies to people across all age groups. But many investors are also inherently risk averse and want little or no volatility in their portfolios.  

Let’s say you are starting out in your 20s and are looking to grow your wealth as quickly as possible. You do not want your corpus to be wiped out in one swoop in a market crash.

Now, let’s assume you are in your 30s, and are likely looking to find the best avenues to invest the pot of money you have accumulated thus far, and build on your net worth to graduate to that coveted millionaire status. You may be seeking financial freedom and even an early retirement, and so want your wealth to be protected from undue volatility.  

Those in their 40s and 50s are most likely to want to not only gain in wealth, but also ensure a secure and peaceful retirement for themselves and their spouses. On top of that, they also want to make sure that they can put their kids through college, have enough money to pay their medical bills, some more on the side to pay for holidays and other expenses, and then some more to leave their progeny a decent inheritance.

Wherever you may be at your life stage and whatever be your goal, what you need is an investment strategy that can generate stable and consistent returns over a long period of time.

To be sure, we are not aiming to generate the best in class returns here. Instead, we are looking to mitigate risk over the long term, in order to protect your capital while generating reasonable returns that can keep beating inflation over a long period of time.

In other words, the goal here is to get wealthy slowly, but steadily, while at the same time, protecting one’s capital.

The All Weather Portfolio

Designed by legendary billionaire investor Ray Dalio, the founder and co-chair at Bridgewater Associates, the ‘All Weather’ strategy is tailored to perform well across different economic conditions. Dalio’s strategy seeks to generate consistent returns while seeking to mitigate and minimise risk, irrespective of the prevailing economic conditions at any given time.

The All Weather portfolio is really quite simple and intuitive to construct. Although allocations can vary, Dalio’s strategy typically consists of the following asset allocation mix:

30% in pure equity (stocks)
40% in long term bonds and other stable debt instruments
15% in intermediate term bonds
7.5% in gold and 
7.5% in other commodities

The main idea behind Dalio’s All Weather portfolio is that all of these asset classes are correlated differently with each other. They will, therefore, be expected to react differently to economic scenarios like growth or recession, inflation or deflation.

In simple terms, this means that none of these asset classes have a direct correlation with the others, so when one falls, the others do not necessarily have to follow suit. In fact, some may even have an inverse correlation, effectively providing the portfolio with an effective hedging mechanism. Such a portfolio is designed to provide a stable long-term yield, without the need to time the market or predict future returns.

So, what sort of returns can you hope to achieve with the All Weather portfolio?

Well, this depends on the geography you are based out of or investing in.

Dalio chooses the S&P 500 as the index with which to benchmark returns. As of August 2024, this medium risk investing technique delivered a 7.65% compounded annual return, with a 7.43% standard deviation, over a 30 year period. But these returns are relevant to the US markets.  

An average investor in India could expect slightly higher returns from their All Weather portfolio, as markets here have tended to deliver higher returns than their peers in the US and Europe over the past few years. In fact, over the last 15 years, Dalio’s All Weather portfolio in the Indian context has delivered an annualised return of more than 9.5%, and has actually outperformed the Nifty 50 index.

Now, as we said, while these may not be the highest returns that you can hope to expect, these are stable returns where your portfolio’s downside is protected. In other words, while the All Weather portfolio will likely deliver returns in line with the broader index during a bull run, when the markets turn bearish, your portfolio will likely not fall as much as the broader market.

How should an All Weather investor behave temperamentally?

An investor looking to build an All Weather portfolio should accept that there is no winning asset class across all times. Such investors should be mindful of the fact that different asset classes perform differently across different times. This is because assets are cyclical. So, at times equity performs better than debt, while at other times gold, debt and commodities can outshine equities. 

A common misconception is that an All Weather portfolio outperforms under all conditions and scenarios. The goal of an All Weather portfolio is however not to outperform but to be prepared for any economic downturn or calamity.

Dalio goes on to define which assets work best in each economic environment. According to him, in periods of inflation, one should go for gold and commodities; bonds perform the best when prices are down; during periods of economic expansion, growth stocks are the best choice and in times of recession, an investor should prefer bonds.

Also, an investor looking to clone Dalio’s method, should always rebalance their portfolio on an annual basis, as not doing so can have a bearing on the final return. While doing this however, one should always keep the tax implications in mind.

So, while the All Weather portfolio may fall short of beating benchmark indices, where it wins is in beating volatility.

So, how can you build yourself an All Weather portfolio?

Crafting such a diversified portfolio, can take some doing, at least when you are starting out. A good asset allocation strategy involves balancing risk with return in order to make the portfolio as resilient to shocks as possible. One needs to strategically allocate resources across asset classes based on time horizons, investment goals and one’s risk tolerance. One needs to do all of these, while minimising volatility in the portfolio.

One can create an All Weather portfolio either by investing via passive means such as mutual funds and exchange traded funds (ETFs) or by actively holding a direct diversified portfolio of stocks, bonds, gold and commodities.  

The mutual fund route-

If one chooses to take the mutual fund route, one can use the systematic investment plan (SIP) method, which is best suited for building an All Weather portfolio. In fact SIP investing fits perfectly in the theme, as it chips away at the extreme highs and lows, and therefore helps smoothen returns. It can reduce volatility as well as help increase the post tax returns without having to do much work around it.  

One can also invest via dynamic asset allocation mutual funds or balanced advantage funds. These funds typically mix debt, gold and equity to give an All Weather flavour to wealth creation, with automatic rebalancing.

The ETF route-

 Dalio himself uses five different exchange traded funds or ETFs for the portfolio he recommends. In the Indian context, one can use the following allocation mix:

30%-- Nifty 500 or BSE 500 ETF
40%-- G-SEC/ Bharat Bonds etc (;ong term)
15%-- G-SEC/ SDL/ PSU Bonds (medium term)
7.5%-- Gold ETF
7.5%-- Nifty Commodities ETF

A combination of such passively managed instruments should do the trick and help the investor achieve good risk adjusted returns and ride through the rough and tumble of the Indian economy over the next few decades.

The small case route-

 Another option is to invest via a bunch of All Weather small cases offered by various financial services firms in the country.

Low beta stocks-

Savvy investors can also look at investing directly into what are called low beta stocks which are the least volatile of the lot. These are defensive stocks that don’t move as much as the broader market and often act as safe assets in volatile times. Typically these are companies in sectors such as FMCG, pharma, IT services, consumer staples, healthcare, utilities etc, which have a stable, evergreen demand for their products and services.

The Barbell strategy-

Finally, one can invest using what is called the Barbell strategy, which involves using two extreme methods of investing. Such a strategy typically involves investing in both value and growth or momentum stocks at the same time, in a bid to ensure that two opposing forces counteract each other and the portfolio is able to achieve moderate returns at low volatility. 

Conclusion

So, as you can see whether you are a young person, starting out in life, a middle aged investor or even one approaching retirement or living out your post-retirement years, Dalio’s investing formula can be your best bet. While you may not max out on the returns, if executed right, you will certainly build yourself a stable, low volatile portfolio that will ensure your wealth remains protected and keeps getting compounded for the decades ahead.