Remember the 'All-Weather' Portfolio? It's Having a Killer Year

In 2014, Tony Robbins introduced the world to the ‘All Weather’ portfolio as constructed by renowned hedge fund manager Ray Dalio. Also known as the ‘All Season’ strategy, Dalio proposed a mix of multiple asset classes that together can survive virtually any storm.

The key components and weights of this strategy are the following:

30% in U.S. stocks

40% in Long-term U.S. Treasury Bonds

15% in Intermediate-Term U.S. Treasury Bonds

7.50% in Gold

7.50% in broad Commodity basket

The end result is a diverse group of inflationary and deflationary investments that that work to lower volatility and potentially enhance returns over the long-term.

Now at first glance, this asset allocation may seem somewhat recklessly overweight fixed-income. This is especially true when you consider that 40% of the portfolio is dedicated to long-term Treasuries with a duration of 20 years or more. That’s a whole lot of interest rate risk that would drag significantly on the portfolio in the event rates begin to meaningfully rise.

Yet on the flip side, it produces a sound counterbalance to the inflationary commodity, precious metals, and stock assets. In fact, the intermediate and long-term Treasury bond exposure is one of the reasons this portfolio model is having such a fantastic year.

Using exchange-traded funds as a proxy for the underlying structure of the All Weather portfolio is one of the best ways to examine its real-world performance. The following list of funds can be used for investors who want to back-test or even directly invest in this strategy:

30% Vanguard Total Stock Market ETF (VTI) +7.21% YTD

40% iShares 20+ Year Treasury ETF (TLT) +15.96% YTD

15% iShares 7-10 Year Treasury ETF (IEF) +7.26% YTD

7.50% SPDR Gold Shares ETF (GLD) +25.71% YTD

7.50% PowerShares DB Commodity Index Tracking Fund (DBC) +9.81% YTD

Year-to-date total return through 9/26/16: +12.30%

This compares favorably against the 30-year average annualized back-tested return of 9.72% from 1984 through 2013. The performance of the All Weather portfolio has also bested a typical 60/40 mix of stocks and bonds. One such benchmark, the iShares Core Growth Allocation ETF (AOR), is +6.33% so far this year.

Several key characteristics stand out when examining the individual and collective performance of the model this year. The foremost observation is that every single component is firmly seated in positive territory for 2016. You would typically expect a greater level of divergence between commodities, bonds, and stocks over longer time frames. The diverse mix of asset classes makes it common for individual return metrics to vary widely from year to year, yet cohesively smooth out volatility.

Furthermore, the two biggest winners this year are defensive asset classes in gold bullion and long-term Treasuries. Together these make up nearly 50% of the overall portfolio. Stocks are trading within a tight measure of all-time highs, but haven’t been the primary driver of above-average returns in 2016.

There is a lot to like about how this strategy has performed over both long and short-term time frames. However, there is also much to debate about expectations for future returns, particularly in fixed-income.

Long-term interest rates in the United States hit all-time lows in 2016 and have been in a steadily declining trend over the last three decades. This has created a strong tailwind for high quality bonds including Treasuries, mortgage, municipal, and investment grade corporate securities. In fact, TLT has posted average annualized returns of +8.48% over the last 10-years.

That has been a huge contributing factor to the benefits of this portfolio performance. Moving forward, investors must weigh the potential for continued strength in long-duration bonds versus the consideration of below-average returns. A prolonged period of sideways or rising interest rates would stymie the growth of this strategy.

There are also other areas that can be adjusted or bolstered to individual investor preferences. For instance, this current example lacks any meaningful exposure to international stocks or bonds. A global approach would ultimately enhance diversification and potentially boost returns if those markets outperform the United States.

The bottom line is that the All Weather portfolio has been a proficient and low volatility approach to investing over multiple time frames and will likely still attract many supporters. Nevertheless, all strategies should be examined for their strengths and weaknesses to understand why they perform as they do and what alternatives may be available.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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