Ray Dalio's all weather portfolio

quirkydeptless

Portfolio image as requested. I use the Hargreaves & Lansdown Watchlists. This one was set up with £100K and a Jan 1st 2019 start, for no particular reasoned apart from that's the date I chose for my virtual portfolio set.

Of course too short a time scale to judge properly by, but it gives me a sense of the portfolio in comparison with others I have set up from various suggestions I stumble across on the internet.

Also note that the ETFs are distributing, so any income and re-investment is not included. Also there is no re-balancing. So on reflection, my way of looking at things kind of sucks, but I do it anyway :-D

DiggerUK

Thanks quirkydeptless, I've heard of similar passive strategies before, now you have put some meat on the bones. 

To get 10%+ pa is not derisory considering what we have been through; the figures going forward with this recession will be the acid test. 

How it matches up to the threatening depression is the 64 thousand dollar question now..._

Linton

bowlhead99 said:

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.

For how long is a total return on gilts of 5% sustainable with Yield to Maturities approaching zero and running yields from interest well below 5%?  What happens then?

Albermarle

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%. 

Same comment as above really , surely this will not be repeated over the next one to three years ?

dont_look_now

Albermarle said:

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%. 

Same comment as above really , surely this will not be repeated over the next one to three years ?

Well, it might. I wouldn't bet on it, in the sense that I wouldn't put most of my money in gilts. (I wouldn't short gilts, either, though — even if I knew how to .)

But putting part of a portfolio in gilts, alongside equities, can improve the portfolio's stability or performance (or the trade-off between stability and performance). If you held gilts when equities crashed in Feb-Mar, your gilts would have risen, and you could have rebalanced from gilts to equities. So that would both have made your portfolio more stable, and boosted its performance. That's what matters to an investor, not the performance of gilts held by themselves.

OTOH, putting 55% of a portfolio in gilts, with the majority of that being in long-term gilts, does feel like it's over-exposing the portfolio to the risk of disappointing returns from gilts.

Thrugelmir

dont_look_now said:

Albermarle said:

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%. 

Same comment as above really , surely this will not be repeated over the next one to three years ?

That's what matters to an investor, not the performance of gilts held by themselves.

OTOH, putting 55% of a portfolio in gilts, with the majority of that being in long-term gilts, does feel like it's over-exposing the portfolio to the risk of disappointing returns from gilts.

Equities themselves have been known to disappoint in the past and generally underperform the return on cash for a long period of time. 

bowlhead99

Linton said:
For how long is a total return on gilts of 5% sustainable with Yield to Maturities approaching zero and running yields from interest well below 5%?  What happens then?

Who knows. I am not saying they are a great investment. I would be inclined to agree with Malthusian's comment on a 'Gov bonds vs cash within a portfolio' thread some two and a half years ago that "In current economic conditions, government bonds are for institutional investors who don't have access to loss-leading cash accounts or the FSCS"; I've made some comments on similar lines in recent years.

However, it's relevant to this thread that two or three years ago people were saying that the good cash accounts will achieve better returns than gilts without the risk of capital loss. And they are still saying it today. While in the meantime, a typical gilt fund returned 5% per year for three years, and cash didn't.  So, cash does not seem to 'achieve the same thing' with lower risk. Yes it has lower market risk, as its capital value doesn't change other than in real terms, but can't 'achieve the same thing' in certain market conditions which are positive for UK govt bonds, because its capital value can't change.

The topic of this thread is about a portfolio holding multiple components, each of which could deliver a return in its own right but will not be 100% correlated with the others.  Cash is not something that would be expected to deliver even a breakeven real return, so it wouldn't make a lot of sense to hold it as a component of an investment 'diversified portfolio'.  Long dated gilts are not expected to deliver much return... but they might. An 'all weather' portfolio is presumably about facing the unknown. Cash may be useful for that, if you think that the portfolio on average will fall in value and you can use the cash to top up if you can outsmart the market and figure out when to time your entry to the market. But cash would not be growing, while it's cash. It's utility is simply being able to allow you to participate in opportunities you might otherwise pass up.

Albermarle said:
surely this will not be repeated over the next one to three years ?
Albermarle said:

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 

It's worth noting that five years ago people were talking about how bonds were coming off a thirty year bull run and that you shouldn't expect the same barnstorming returns from them, as they were (just as you are saying today) 'not the investment that they used to be', 'can not go on forever', etc etc.  Aberdeen Standard's Sterling Long-dated Government Bond fund has done 50% over those five years and all of the 30+ other funds in the IA UK gilts or IL-gilts sector with a five year track record (excluding the couple previously mentioned which focus on short dated bonds) have done 20%+ over the course of the five years.

If bonds are going to yield nothing or negative and have a baked-in capital loss when you or your fund manager sells or redeems them, then you are probably better off with cash. But the bit I have a small issue with is saying that cash achieves the same thing as gilts, just because it looks like you might get a similarly low return using today's numbers.  The profile of returns is of course quite different. So cash or gilts will do different jobs, rather than being fungible. It's perhaps difficult to see from current values what job for a retail investor is best left to long-dated gilts, given their prospects.  But people would have said a year ago, 'why use gilts when you can just hold cash' and then watched from the sidelines as they missed out on a 5-10%+ rise in bonds just as equities were tanking.

sixpence.

@quirkydeptless Btw I am a bit suspicious of what the guy in the video is saying (although I've watched his other stuff and he seems cool). Basically. I don’t know enough about bonds to know if the application of U.K bonds is not exchangeable with USA bonds (his whole argument is that Dalio’s technique can’t be applied to a U.K investor) but it seems obvious to me that he should have just used a world equity tracker.

Did you use anything special to pick the bond ETFs you chose? What made you decide on them?

If you made a lump sum 100K investment in Jan 2019 then I think this is actually a really positive result. People might argue that you could have got the same with a VLS 100 but why hold a less diversified portfolio for no reason? Some might argue that you don’t have to rebalance it, but I think rebalancing can actually be a good strategy for accumulating wealth over time especially when your assets are negatively correlated (as they are in Dalio’s portfolio).

@Malthusian can you please explain what you mean by forex trade? I have this suspicion that UK bonds aren’t as diversified as US ones because the US represents such a large part of the market. 

Note: guys this is called an ALL WEATHER portfolio. So the point is not that it gets the best returns over the time but that it doesn’t drop so dramatically. We can all say no that we wouldn't mind if our investments dropped 50-70% but it would be a lot nicer if they only went down -8% or whatever. 

I also think that this may be the antidote to any psychological temptation to try and time the market. 

@bowlhead99 Dalio basically says holding cash is dangerous because of inflation. Frankly, I agree. Have a 1-3 emergency fund and then fricking save + invest, lads. 

I am setting up a VLS watchlist now with something similar to what quirky has and another one with:

• 85% in a VLS 60
• 15% in a gold ETF

My reasoning behind this strategy is the following: 

• This portfolio is 34% bonds and these are a mix of UK long and short term and also global bonds
• It is 51% in world equities
• The gold will act as a diversifier and you could move it into the VLS 

I'm also going to copy quirky because I want to watch what happens in the drop, although there is a lot of statistical data to show that this is a good portfolio, I want to see it for myself. 

Thrugelmir

sixpence. said:

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? 

Read any serious investment book or consult a decent investment manager. You'll find that negative correlation of assets is a key factor in any good portfolio construction. It's impossible to predict which asset class maybe top of the class in any given period of time. The all weather portfolio minimises currency exposure for the US investors it's targetted at. Where capital preservation is the objective. 

sixpence.

What do people think of hedged vs unhedged with regards to GBP currency risk?