Ray Dalio And The All Weather Way Of Investing

Ray Dalio founded Bridgewater Associates, one of the world’s biggest hedge funds with over $200 billion of assets under management. Bridgewater is famous for its All Weather Fund, which it built to weather any economic season. So let’s take a closer look at how Dalio invests, and how you could do something similar in your own portfolio through a basket of ETFs.

Ray Dalio’s early career

Dalio started out in the early 1970s as a clerk on the floor of the New York Stock Exchange. As luck would have it, this was around the time President Nixon took the US off the gold standard. That caused gold and other commodity prices to rip higher, with plenty of volatility along the way. It was the perfect environment for Dalio to get into commodities trading.

After getting his MBA from Harvard Business School in 1973, Dalio started a family and moved to Wilton Connecticut, where he traded out of a converted barn. He also did a brief stint as the Director of Commodities at Dominick & Dominick LLC, before joining Shearson Haydon Stone in 1974. There, Dalio helped farmers hedge their risk with commodities futures.

Bridgewater

Like most billionaires, Dalio wasn’t too keen on working for other people from the get go. He parted ways with Shearson and founded Bridgewater in 1975. Back then the firm wasn’t a hedge fund, but more of a wealth advisory firm for its clients. It also began publishing a market research report called Daily Observations, which piqued the interest of big institutional investors. Bridgewater signed Mcdonald’s as an early client, too. It was looking to hedge the price of chicken – the core input cost of its chicken McNuggets.  

Dalio’s All Weather Fund

Brigewater’s reputation grew with time, along with its success. And in 1996, Dalio launched the All Weather Fund: a defensive strategy that aims to chug along in any market environment. That means it’s typically lighter on stocks (~30%) than more aggressive portfolios, with more in bonds (~55%) and commodities (15%). Its strategy revolves around risky parity investing. 

There’s a fair bit of financial math behind risk parity investing, which I won’t get into here. But essentially, it’s a system to tell you what percentage each investment should take up in your portfolio – depending on how risky those investments are. In other words, you create a “risk-weighted” portfolio. So in the case of the All Weather Fund, it has more invested in bonds than stocks because bonds are (usually) less risky. 

Can you copy the All Weather Fund?

As you’d expect, it’s impossible to copy the exact All Weather Fund. For one thing, Bridgewater isn’t exactly giving away its holdings each day. And for another, it uses mathematical models, data, and systems that are well beyond the reach of us mere mortals. 

That said, Ray Dalio has given a rough approximation of the All Weather portfolio in interviews. The table below shows what that looks like, along with the reasons why it’s included in the portfolio.

And here are some ETFs that you can use to replicate the portfolio (depending on whether you’re a US or UK investor)…

How much would the portfolio have grown over the past decade?

Not that much, actually. The chart below compares the US ETF portfolio with the classic 60:40 portfolio since 2010. Both portfolios assume yearly rebalancing, so they start each year with the same weights. According to back-tested data from Portfolio Visualizer, a $10,000 investment in the All Weather portfolio would be worth $19,652 today. You’d have almost doubled your money, sure, but your wealth would’ve only grown by 5.23% per year on average. The 60:40 portfolio, meanwhile, would be sitting at $30,287, with an 8.72% average yearly return. 

In terms of risk, the All Weather fund held up better. The table below digs deeper into the numbers…

Should you consider using the All Weather portfolio?

Ray Dalio’s thesis is that the All Weather portfolio will grow steadily over long periods of time, in a range of market environments. And let’s face it, 14 years of back-testing isn’t such a long time. You’ve also got to consider that the 60:40 portfolio used for comparison has a big chunk (60%) in US stocks (S&P 500). And for the past decade or so, the US stock market has outperformed most other stock markets. The All Weather portfolio has a much lower allocation to stocks (30%) – and only about 60% of those are from American companies. 

As for the rest of the portfolio? 55% In bonds is a bit much, in my opinion. History shows that stocks tend to outperform bonds over long time frames (albeit with more volatility). So if you’re a long-term investor, it would make sense to hold more in stocks and less in bonds. Of course, if you’re closer to retirement age, then having a bit more in bonds might come in handy.

I do like how the portfolio has a decent chunk in gold and other commodities. But personally, I’d increase the gold weight a bit more (you can read why I think that here). I’d also throw in some bitcoin to give it some extra gas.

But as it stands, the All Weather portfolio is better suited for wealth preservation than wealth accumulation. 

If you want to learn more about Ray Dalio and his approach to life and investing, check out some of his books on Amazon by clicking the image below.

Key Takeaways

• Ray Dalio founded Bridgewater Associates, one of the world’s biggest hedge funds. The fund pioneered risk parity investing and uses it in its All Weather Fund.
• It’s near impossible to copy Bridgewater’s exact approach. But you can buy ETFs to get to something kind of close to it.
• The All Weather portfolio won’t shoot the lights out when it comes to returns, but it should do a good job managing risk in the long run.