All-Weather Portfolio
A balanced asset allocation designed to perform in any economic environment
Strategy Type
Core Stability
Risk Level
Low to Moderate
Time Horizon
Long-Term (5+ years)
Ideal For
Risk-Averse Investors
What is the All-Weather Portfolio?
The All-Weather Portfolio is an investment strategy developed by Ray Dalio, founder of Bridgewater Associates, one of the world's largest hedge funds. The strategy is designed to perform reasonably well in any economic environment—growth, recession, inflation, or deflation—by balancing exposure to different asset classes that respond differently to economic conditions.
Unlike traditional portfolios that are heavily weighted toward stocks and bonds (which perform well in growth and low-inflation environments but struggle in others), the All-Weather approach recognizes that economic conditions change unpredictably, and a truly resilient portfolio must be prepared for all scenarios.
Key Benefits
- Reduced Volatility: Historically experiences much smaller drawdowns during market crashes compared to traditional portfolios.
- Consistent Performance: Designed to deliver more stable returns across different economic environments.
- Peace of Mind: Helps investors stay the course during market turbulence, avoiding emotional decision-making.
- Simplicity: Requires minimal maintenance with annual rebalancing, making it accessible to most investors.
The Four Economic Environments
The foundation of the All-Weather Portfolio is the recognition that there are four possible economic environments, created by the combination of two key factors: economic growth and inflation.
The Four Scenarios
| Economic Environment | Description | Asset Classes That Perform Well |
|---|---|---|
| Rising Growth + Low Inflation | Economic expansion with controlled inflation | Stocks, Corporate Bonds |
| Rising Growth + Rising Inflation | Economic expansion with increasing inflation | Commodities, Inflation-Protected Securities |
| Falling Growth + Low Inflation | Economic contraction with low inflation (recession) | Long-Term Government Bonds |
| Falling Growth + Rising Inflation | Economic contraction with high inflation (stagflation) | Gold, Inflation-Protected Securities |
The All-Weather Portfolio allocates assets to perform adequately in each of these environments, ensuring that regardless of which scenario unfolds, your portfolio has exposure to assets that will help offset losses in other areas.
Portfolio Allocation
The classic All-Weather Portfolio consists of the following asset allocation:
Asset Allocation
| Asset Class | Allocation | Purpose |
|---|---|---|
| Long-Term Treasury Bonds | 40% | Performs well during economic contraction and deflation |
| Stocks (U.S. Index) | 30% | Performs well during economic growth with low inflation |
| Intermediate-Term Treasury Bonds | 15% | Provides stability and income |
| Gold | 7.5% | Hedge against inflation and currency devaluation |
| Commodities (Broad Basket) | 7.5% | Performs well during inflation and supply shocks |
Implementation Notes:
- Long-Term Treasury Bonds: 20+ year Treasury bonds (TLT ETF or similar)
- Stocks: S&P 500 Index fund or Total Stock Market Index (VTI, SPY, or similar)
- Intermediate-Term Treasury Bonds: 7-10 year Treasury bonds (IEF ETF or similar)
- Gold: Physical gold, gold ETF, or gold miners ETF (GLD, IAU, or similar)
- Commodities: Broad commodity index fund (DBC, PDBC, or similar)
The portfolio should be rebalanced annually to maintain these target allocations, as different assets will perform differently over time.
Historical Performance
The All-Weather Portfolio has demonstrated remarkable stability during major market downturns. Below is a comparison of how it performed during some of history's most significant market crashes compared to the S&P 500:
| Market Crisis | All-Weather Return | S&P 500 Return | Notes |
|---|---|---|---|
| 2020 | 10.2% | -18.1% | COVID-19 Crash |
| 2008 | -3.9% | -37.0% | Financial Crisis |
| 2000-2002 | 5.8% | -43.1% | Dot-com Crash |
| 1987 | 8.5% | -33.5% | Black Monday |
| 1973-1974 | -2.7% | -48.2% | Oil Crisis |
Key Insights:
- During the 2008 Financial Crisis, when the S&P 500 lost 37%, the All-Weather Portfolio lost only 3.9%.
- During the COVID-19 crash of early 2020, the All-Weather Portfolio actually gained 10.2% while the S&P 500 dropped 18.1%.
- Over long periods (1984-2019), the All-Weather Portfolio has delivered an average annual return of approximately 8-9%, with much lower volatility than a traditional 60/40 portfolio.
- The maximum drawdown (peak-to-trough decline) for the All-Weather Portfolio has historically been around 12%, compared to over 50% for the S&P 500.
Implementing the All-Weather Portfolio
Step-by-Step Guide
- Choose your investment platform: Select a brokerage that offers low-cost ETFs or index funds for each asset class.
- Select appropriate ETFs or funds: For each asset class, choose a low-cost, liquid ETF or index fund that provides the desired exposure.
- Allocate your capital: Distribute your investment according to the recommended percentages.
- Set up a rebalancing schedule: Plan to rebalance your portfolio annually to maintain the target allocations.
- Monitor and adjust: While the All-Weather Portfolio requires minimal maintenance, it's still important to review its performance periodically.
Pro Tips:
- Consider implementing the strategy in tax-advantaged accounts to minimize tax implications of rebalancing.
- For larger portfolios, consider using Treasury Inflation-Protected Securities (TIPS) as part of your bond allocation for additional inflation protection.
- If you're concerned about the current high valuations of long-term bonds, you might consider a modified allocation with a slightly lower bond percentage until interest rates normalize.
- For non-U.S. investors, adapt the strategy using equivalent assets available in your country, maintaining the same economic environment exposure.
Common Misconceptions
Myth: The All-Weather Portfolio Underperforms in Bull Markets
Reality: While it's true that the All-Weather Portfolio won't capture all of the upside during strong bull markets, it still delivers solid returns during these periods. Its real advantage is maintaining those returns during downturns when traditional portfolios suffer significant losses.
Myth: Gold and Commodities Are Unnecessary Components
Reality: Many investors underestimate the importance of inflation hedges. Gold and commodities provide crucial protection during inflationary periods and currency devaluations, scenarios where both stocks and bonds may struggle simultaneously.
Myth: The Strategy Is Too Conservative for Young Investors
Reality: While younger investors can theoretically tolerate more volatility, the psychological benefits of a stable portfolio shouldn't be underestimated. The All-Weather approach helps investors stay invested during market turbulence, potentially leading to better long-term outcomes than a more aggressive portfolio that triggers emotional selling during downturns.
Who Should Use the All-Weather Portfolio?
The All-Weather Portfolio is particularly well-suited for:
- Risk-averse investors who prioritize capital preservation
- Retirees or near-retirees who cannot afford significant drawdowns
- Investors who experience anxiety during market volatility
- Those who want a "set it and forget it" approach with minimal maintenance
- Investors concerned about inflation and economic uncertainty
Variations and Modifications
Golden Butterfly Portfolio
A variation that adds small-cap value stocks and reduces bond duration for potentially higher returns while maintaining stability. The allocation is: 20% Total Stock Market, 20% Small Cap Value, 20% Long-Term Bonds, 20% Short-Term Bonds, and 20% Gold.
Global All-Weather Portfolio
Expands the equity portion to include international developed and emerging markets for greater geographical diversification. This can help mitigate country-specific risks and capture global growth opportunities.
Leveraged All-Weather
For more sophisticated investors, a modest amount of leverage (typically 1.5x to 2x) can be applied to the All-Weather allocation to enhance returns while still maintaining lower volatility than a traditional 100% equity portfolio.