Ray Dalio's all weather portfolio

sixpence.

Ray Dalio invented this portfolio called the all weather portfolio. It basically spreads risk via asset allocation by choosing asset classes which negatively correlate with each other. Seen a couple of interviews with him and he seems very gifted and like he genuinely cares about people. What do folk on here think Ray's all weather portfolio? 

masonic

You mean this one:

Stocks 30%
Intermediate US Bonds 15%
Long term US Bonds 40%
Gold 7.5%
Commodities 7.5%

The commodities exposure is questionable and it is lower equities than even relatively cautious investors would typically hold. I wouldn't be keen on holding that quantity of long dated bonds or bonds in general, but at least the gold exposure is high but not excessive.

dont_look_now

The thing about these "all weather" portfolios, and the like, is that they aim to benefit (or suffer) roughtly equally from equities or bonds doing well (or badly). And equities are a lot more volatile than bonds. As a consequence of which, they have to hold a lot more in bonds than in equities (so that a strong bull/bear market in bonds will have approximately as large an effect on their porfolio as a strong bull/bear market in equities).

But do you really want to hold so much more in bonds than in equities? This strategy is really designed for people who have more capital than they know what to do with, and want to preserve its value (which doesn't even make sense to me: I mean, what is the point in preserving it, if you have more than you know what to do with in the first place?! Why not use the surplus capital to do some good in the world instead?). But unless you have that much capital to start with, if instead your aim is to grow your capital (and future savings from income) significantly, then is this of any relevance to you? A higher allocation to equities is more likely to drive significant positive returns.

sixpence.

Cheers @masonic for sharing the allocations! I have to be honest: I understand gold a bit but I don't really understand the value of investing in other commodities, so I cant really comment on that. I get the gold allocation though

@dont_look_now Yes I have been thinking about the low equity allocation too. Dalio's argument is that the average investor doesn't understand the extent of equity risk, because they are three times more risky than bonds. 
I am also wary that this might be a terrible recession, or even a depression, and it would be quite to be able to sleep at night more soundly. I know investing is risky and we have to prepare for big losses and resolve not to sell but this could be really intense.
A part of me is wondering how we could tailor this to make it heavier in equities, whilst preserving Dalio's main diversity principle.

dont_look_now

sixpence. said:

@dont_look_now Yes I have been thinking about the low equity allocation too. Dalio's argument is that the average investor doesn't understand the extent of equity risk, because they are three times more risky than bonds.

Seems a bit of a specious argument. Does the average investor really understand the risks of bonds, then?

To take a broader view, an equity allocation is not only balanced by other financial assets such as bonds and cash (and gold, if you insist ), but also by things such as owning your own home, building up entitlement to guaranteed pensions (obviously State Pension, and also any DB pensions if you get the chance), and human capital (i.e. your future earning power; which is also something you may be able to invest in).

quirkydeptless

Reposting this link which someone posted earlier where the Portfolio is reviewed from the perspective of a UK investor.

https://www.youtube.com/watch?v=5T-rc90MGBE

I wouldn't want to use the FTSE 100 though.

I set up a virtual portfolio based on this to view it for my own interest with

40%    GLTL     SSGA SPDR ETFS Europe I plc Barclays Cap 15+yr Gilt
30%    VWRL     Vanguard Funds plc FTSE All-World UCITS ETF
15%    VGOV    Vanguard Funds plc UK Gilt UCITS ETF GBP
7.5%    SGLN    iShares Physical Metals plc Physical Gold ETC
7.5%    CMOP     Invesco Markets plc Bloomberg Commodity UCITS ETF A GBP

Other investments are available

Albermarle

There is quite a lot of opinion that bonds are not the investment that they used to be . A long upwards run bolstered by QE can not go on for ever is the usual comment made . Short term gilts are solid  but with almost zero return . Longer term gilts and corporate bonds seem to be out of favour and cash is the favoured stabiliser at the moment.. I can not say I fully understand bond markets either but just repeating apparently informed opinion , which of course not everyone will agree with .

DiggerUK

@quirkydeptless, out of interest, what are the scores on the fantasy doors of your virtual portfolio..._

Malthusian

sixpence. said:

@dont_look_now Yes I have been thinking about the low equity allocation too. Dalio's argument is that the average investor doesn't understand the extent of equity risk, because they are three times more risky than bonds.

Anyone who puts 55% of their money in bonds definitely doesn't understand the extent of bond risk. (And a UK investor who blindly imitated Dalio's US-based portfolio would effectively be betting 55% of their portfolio on a forex trade.)

"US bonds" appears to mean Treasuries in the original portfolio (US equivalent of gilts). The only reason any UK retail investor holds gilts is because a) the financial industry can collect ad valorem fees on them which they can't on best-buy cash accounts b) the religious belief that an investor holding 60% equities and 40% cash has been missold a 100% equity portfolio. (B is how the industry and its regulator justify A.)

For retail investors, best-buy cash accounts achieve the same thing as gilts with lower risk and higher return.

Commodities, in which he recommends investors put 15%, are even higher risk than equities and have zero expected reward.

Sticking all your money in VLS 100% would weather all weathers as long as you didn't cash it in.

sixpence.

quirkydeptless said:

Reposting this link which someone posted earlier where the Portfolio is reviewed from the perspective of a UK investor.

https://www.youtube.com/watch?v=5T-rc90MGBE

I wouldn't want to use the FTSE 100 though.

I set up a virtual portfolio based on this to view it for my own interest with

40%    GLTL     SSGA SPDR ETFS Europe I plc Barclays Cap 15+yr Gilt
30%    VWRL     Vanguard Funds plc FTSE All-World UCITS ETF
15%    VGOV    Vanguard Funds plc UK Gilt UCITS ETF GBP
7.5%    SGLN    iShares Physical Metals plc Physical Gold ETC
7.5%    CMOP     Invesco Markets plc Bloomberg Commodity UCITS ETF A GBP

Other investments are available

Can you share the website on which you did this? And maybe some screen shots of how it's doing please?
I also would use a global equity tracker. 

bowlhead99

Malthusian said:

Sticking all your money in VLS 100% would weather all weathers as long as you didn't cash it in.

If you will never be converting it back to cash, it doesn't really matter whether the investments have any value or not, so VLS100 is no worse or better than 60 equities 40 bonds, 60 equities 40 cash, 30 equities 55 bonds 15 gold and commodities, 100% commodities, etc

For retail investors, best-buy cash accounts achieve the same thing as gilts with lower risk and higher return.

Is that strictly true? For example of the ~40 funds in the IA UK gilt and index-linked gilt sectors that have a three year track record, the middle fund (i.e. position 20 out of 40) delivered a total return of over 15% over the last three years and only 3 funds had less than 12.8% (the ones that deliberately hold short duration gilts). Likewise over one year to yesterday, only 4 out of 41 funds gave a total return lower than 3.8% with the median fund being over 5%. 

Trying to put, say, £50k in the best buy cash accounts a year ago or three years ago you would not have got a 'higher return' than 5% a year. You would certainly have had people on the boards here tell you to avoid gilts because they offered return-free risk instead of risk-free return, just as they still say that today.   There is lower risk of investment losses with cash, but it's not true to say it 'achieves the same thing' - it doesn't provide the opportunity for any capital appreciation, for one.

Likewise you would have also had people say that gold was useless as a diversifier as there was no expected reward, though those people who did hold it as a diversifier would not have been disappointed with the returns over one or three years which were somewhat uncorrelated with the returns from equities.