Why Ray Dalio’s All Weather Portfolio is Relevant for Over 50s Too!
One of my pet peeves about the personal finance and investment industry is that it seems to be entirely focused on the “invest early and let compound interest work for you” school of investing.
Now, don’t get me wrong! There is nothing wrong with this approach, in principle. In fact, this is exactly what I have recommended to my kids and grandkids. It’s just that with so much focus being put on super long-term investing that it’s easy for older adults to feel left behind.
So, today, I want to talk about one long-term portfolio strategy that, on the surface, seems perfect for Millennials… but that I personally believe is an approach that our generation should consider (or at least understand).
Of course, none of the information in this article is financial advice, but, I hope that it gives you something to discuss with your own financial advisor.
First, I’ll give a quick summary of the All Weather Portfolio strategy. Then, I’ll return to the 2 reasons that I believe this strategy could be of interest to older investors, like us.
What is the All Weather Portfolio Strategy?
Simply put, the All Weather Portfolio strategy is a mix of different investment types (stocks, bonds and commodities) that is designed to do well in a variety of economic environments. By “do well,” I mean that the portfolio should have minimum volatility (not too many big ups and downs) while still having the potential for returns close to the total stock market.
The portfolio, which was designed by the legendary hedge fund manager, Ray Dalio, is balanced to perform well in all 4 economic “seasons,” as Dalio calls them. The seasons that he planned for include:
- Higher than expected inflation
- Lower than expected inflation (or deflation)
- Higher than expected economic growth
- Lower than expected economic growth.
In order to accomplish this, Dalio used a combination of stocks, government bonds, gold and commodities. Specifically, here are the percentages of each asset class that Tony Robbins mentioned in his best-selling book, “Money: Master the Game.”
- 40% Long-term U.S. Treasury bonds
- 30% Stocks
- 15% Intermediate-term U.S. Treasury bonds
- 7.5% Gold
- 7.5% Commodities
So, how well has this strategy performed over time? Quite well actually!
According to Robbins, “The [All Weather] strategy has produced just under 10% annually and made money more than 85% of the time in the last 30 years (between 1984 and 2013).”
To put this in perspective, returns for the S&P 500 tend to hover around 11% – 12%, depending on which period you look at.
The difference here is the volatility. From 1984 – 2013, the S&P 500 was down 6 times with an average loss of 15%. During the same time, the Ray Dalio’s All Weather Portfolio was down just 4 times with an average loss of just 1.9%.
So, why should you, as an older investor, take the time to evaluate this strategy with a financial professional? There are two big reasons to consider.
Are We Looking at Financial Safety in Retirement All Backwards?
The conventional wisdom states that the older we get the more “conservative” we should be with our investments. Traditionally, this has meant shifting more of our money out of stocks and into bonds as we age.
There are a few challenges with this way of thinking.
First, this strategy is based on an implicit assumption that stocks and bonds are not correlated (do not rise and fall together). As we saw during the Great Recession, this is not necessarily the case. It is very possible that stock and bond prices fall together.
Second (and perhaps most importantly), our life expectancy is getting longer all the time. This means that, unlike just one or two generations ago, we need to assume that our money will need to last 20-30 years (depending on our health and other personal factors, of course.) Small differences in rates of return over these kinds of time periods make a huge difference!
I know so many seniors that switched to all government bonds or AAA corporate bonds when they retired. These people just wanted a predictable income in retirement. Sure, they might only get 4-5% a year, on average… but, they wanted to be able to sleep at night.
So, I can’t help but wonder whether a great many of us would be better served by keeping most of our money in something like the All Weather Portfolio. This way, we would have a decent chance at getting near to stock market returns without taking on too much additional volatility risk.
Of course, as they always say at the end of any investment commercial on TV, “Past performance is not an indicator of future results.” But, I hope that this gives you something to discuss with your own financial planner.
Can We Help Our Kids and Grandkids to Build a Better Future?
It’s no secret that Millennials are weary of the stock market. In fact, according to a new study by Bankrate, only 23% of people aged 18-37 said that the stock market was the best place for them to put money that they didn’t think they would need for 10 years of longer.
On the one hand, I don’t blame Millennials for being nervous about putting their money into equities. After all, the Great Recession happened during their most formative years.
On the other hand, Millennials are exactly the generation that could benefit most from compound interest. Regardless of what happens in the short term, it is very, very (yes that’s two very’s!) unlikely that the S&P 500 not outperform every asset class over the next 40-50 years.
When I suggested to my son that he investigates this approach, he was, perhaps unsurprisingly, a little skeptical. But, after reading Tony Robbins’ book on money and doing his own research he decided to switch the majority of his non-401k savings to a All Weather Portfolio that he constructed from low fee ETFs (Exchange Traded Funds).
The other thing that I did recently was to set up a $1,000 investment account for my 2-year old grandson. Care to guess how much this will be worth when he turns 65 if the All Weather Portfolio strategy that I used returns an average of 10% a year? Just north of $400,000!
Could I give him a better return if I just invested in the S&P 500 exclusively? Almost certainly! But, my plan is to use this account to explain some investment principles to my grandson when he reaches his teenage years.
Ultimately, he will be able to make the decision when he turns 18 how to invest the money. But, I will insist that the money not be touched until he reaches retirement age.
Where to Go to Find Out More About the All Seasons Portfolio
If you are looking for more information about the All Seasons Portfolio, I highly recommend checking out Tony Robbin’s book, Money: Master the Game.
In addition to presenting all of the back-tested numbers for this portfolio, Robbins presents a number of other investment strategies that may be of interest to you.
If after talking with your financial advisor, you decide to construct your own All Seasons portfolio from ETFs, you may want to check out this article.
What do you think of the All Weather Portfolio approach – either for older adults or our kids and grandkids? Would you consider using a similar approach as a part of your own investment strategy? Why or why not?