Is the Ray Dalio All Weather Portfolio Right for You?

This Billionaire Investor is Worried. Here’s How He Suggests Weathering the Storm.

Despite warnings of an impending recession, the stock market has trended higher. Yet, not everyone is convinced things are looking up.

Among prominent thought leaders in the investing community, fewer are more bearish about the U.S. economy than famed investor and founder of hedge fund Bridgewater Associates Ray Dalio. 

With an estimated net worth of $20 billion, when Dalio speaks, investors listen. 

In March, Dalio warned that the “terrible imbalance” brought about by the Fed’s recent rate hikes would “have everybody losing money. And that is a pervasive situation that exists throughout the economy, the world economy, the U.S. economy.”

Last month he criticized Congress for negotiating a bipartisan deal on federal spending as a federal default loomed. Dalio stated on LinkedIn that raising the debt ceiling will take away any “meaningful limit on the debt…This will eventually lead to a disastrous financial collapse.”

While the iconic money manager’s words may strike some as overly pessimistic, he’s also known for helping investors navigate turbulent times with an approach to diversification he coined as the “All Weather Portfolio”. 

This article will examine the case for Dalio’s famed solution, with input from experts in determining which types of investors might want to consider implementing his approach.

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Four Seasonal Gains

Recent years have made investors weary of shocks to the global financial system. Black swan events such as the Covid-19 pandemic and the Russian invasion of Ukraine are reminders to expect the unexpected. 

Investing can be straightforward when times are good, but it’s how financial advisors and investors handle times of emergency that may set apart the best from the rest over the long term. 

Dalio’s strategy presents an enticing promise: consistent returns across market cycles. The key to unlocking its potential is avoiding being overly reliant on any single investment.

Asset classes respond differently to different economic conditions. By allocating broadly across assets, so the theory goes, a portfolio can better ride out the turbulence along the way and always returns some upside, even when things are bad. In this way, Dalio tries to minimize the impact of market volatility on overall portfolio performance.

However, skeptical financial analysts question whether his strategy can live up to its name in a rapidly-changing world. While Dalio’s approach may provide shelter from market storms, its efficacy is contingent on the assumption that historical relationships between asset classes persist. Nonetheless, this portfolio offers investors an intriguing alternative to the classic defensive allocation of a 60/40 stock/bonds split.

The stock market, like the weather, is notoriously hard to predict. And, just as climate change is making the weather patterns wilder, Dalio sees changes in the global order as setting the stage for greater macroeconomic volatility in the years ahead. 

Like the seasons, Dalio identifies four main business cycles that broadly determine market performance: expansionary, overheating, contractionary, and rebound. Adjusting to seasonal changes thus involves a careful mix of stocks, bonds, commodities, and inflation-indexed securities.

“At a high level, Mr. Dalio is providing diversification – while many people will utter that word, fewer know how to implement it,” says Randy Kurtz, CIO of Upper Left Wealth Management. 

“In any environment, some of your portfolio should be positioned to rise, and some should be positioned to fall.”

There is a price to pay for harmonizing the biggest leaps and dips of the market. This is not a tech-heavy, VC-fuelled tech growth rocketship play. Even compared to the broader market, the All Weather Portfolio lags somewhat. It has returned 4.8% annually (adjusted for inflation), trailing the S&P 500’s inflation-adjusted 6.3% annualized returns over a half-century time horizon (between 1973-2022). That 1.5% gap, when compounded over decades, can make a huge difference to a portfolio.

This is why Dalio’s approach may be best suited for defensive investors looking to keep their winnings rather than grow their portfolios further. 

“For clients who have ‘made it’ and are more concerned with losing it than becoming wealthier, diversification is the name of the game,” says Kurtz. “You should take diversification as far as practical. If you believe an asset will behave differently from your portfolio, you should likely own at least one dollar of it.”

Spreading your allocation thinly across asset classes may combat volatility. According to Portfolios Lab, the portfolio currently has a volatility score of just 2%, more than one percentage point more stable than the market benchmark S&P 500 index.

Yet according to some financial advisors, there are alternative ways to diversify that may deliver similar or better results. 

“An alternative strategy could be the Modern Portfolio Theory (MPT) approach, which emphasizes diversification but also takes into account the correlation between asset classes to optimize risk and return,” says Jorey Bernstein, CEO & Founder of Bernstein Investment Consultants. “Other alternatives might include a momentum strategy (buying assets that have shown an upward trend), value investing (buying undervalued assets in hope of price correction), or sector-specific investing based on current market trends and future forecasts.”

Dalio’s strategy offers investors a compelling option, especially for those at the preservation rather than accumulation phase in their investment journey. In diversifying to mitigate risk, Dalio attempts to smooth out the bumps in the road for the investors. 

Regardless of whether or not you adopt his strategy, Dalio’s investing principles can stimulate investors to question their assumptions, which may lead to improved investing acumen over the long run.

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Disclaimer: This article is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

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