Author :@RayDalio
Compiled by: He Tongxue
Bridgewater Founder I am at a stage in my life where my primary goal is to pass on the principles I have learned over the past 60 years—principles that have helped me and that I believe can also help others. I believe one of the most important investment principles I can convey is about what the "All Weather Portfolio" is and how to construct such a portfolio. I believe these principles are particularly valuable in risky times like the present.
For me, the most important thing for most investors is to have a portfolio that: a) is well-diversified/designed to achieve the highest possible return with minimal risk; b) does not require market timing. The reasons are: a) Although most people believe the safest investment is cash (such as short-term Treasury bills, or interest-bearing deposits like high-quality money market funds with near-zero default risk), because it does not default, these cash investments inevitably yield the lowest after-tax returns over the long term and perform particularly poorly during periods of high inflation—meaning they lose significant purchasing power. It is also true that b) almost all investors (including most seasoned professional investors) cannot effectively time the market, even if they think they can. Therefore, I believe that for most investors managing their own portfolios, investment should involve as little or even no market timing as possible.
The All Weather Portfolio is a passively held portfolio with expected returns significantly higher than low-risk assets like cash, but with risk much lower than high-risk assets like stocks and bonds, and this holds true in any environment. This differs from most portfolios—such as the classic 60/40 stock-bond portfolio, or those that perform well in good times and poorly in bad times. So to be clear, the All Weather Portfolio is a type of portfolio designed to achieve the above goals, not a specific investment product. It is more like a financial engineering challenge aimed at achieving this balance, from which investment products can be derived. My All Weather Portfolio is constructed in my own way, which I will briefly describe here and elaborate on later. Naturally, my approach has evolved and improved over time, and I have some ideas to make it even better. But anyone can implement it in their own way—perhaps I should hold a competition to see who can build the best method.
I will start by explaining how I developed my method and how it works.
About 30 years ago, I tried to create an investment strategy for my family so they could invest without my guidance after I passed away. I believed I needed a portfolio that could:
a) Provide returns significantly higher than cash (i.e., equal to or exceeding the classic 60/40 stock-bond portfolio);
b) Have lower risk than the 60/40 portfolio;
c) Not perform poorly in any specific type of economic environment;
d) Not require market timing.
In my view, the only way to achieve such an All Weather Portfolio was to hold a variety of diversified, higher-return but higher-risk investments, so that when combined, due to the mutual diversification effects among these asset classes, the overall portfolio would achieve the same high returns as individual assets but with lower risk. To achieve better diversification, I developed the concept of "Risk Parity"—that is, adjusting investments with different risk levels (i.e., different volatilities) by increasing the risk/volatility of low-risk/low-volatility investments and reducing the risk/volatility of high-risk/high-volatility investments, so that their risk levels become more balanced. Then I balanced my exposure to each asset class based on the most fundamental factors driving their returns. In other words, by understanding how each asset class responds to changing economic conditions (such as inflation and growth—for example, bonds perform poorly when inflation and growth rise, while inflation-hedging assets like gold, inflation-linked bonds, and commodities perform well), and by allocating equal risk in environments where inflation and growth rise and fall, I could create a passive strategic allocation portfolio that remains well-balanced across all economic scenarios. Thirty years later, I still firmly believe that having this core strategic portfolio is crucial. My All Weather Portfolio is my ideal, continuously held strategic asset allocation—i.e., the "beta" (asset class) portfolio. Although I also make many tactical bets based on my judgments about market trends to create "alpha," these are achieved by creating a well-diversified alpha portfolio, which I call the"Pure Alpha" strategy. (I won’t explain this method in detail now, as it would digress too far.)
I developed this All Weather method together with my excellent Bridgewater team, especially Bob Prince and Greg Jensen, who have been at Bridgewater for 40 and 30 years respectively and remain co-chief investment officers there. After building it, I found the method simple and straightforward enough that almost anyone could implement it, and I couldn’t imagine we would be paid for managing money for others using it. So I showed almost everyone I knew how to do it (and I still want to do this today), but to my surprise, many clients asked us to manage their money using this strategy. We launched it as a product, and naturally, it has evolved and improved since then. Bridgewater is now operating and optimizing it in their own way, and I am operating and optimizing it in my own way. The difference between us is: they manage All Weather accounts for others, while I only do it for my family and family foundation, while showing others how to do it.
Whether investors build their own All Weather Portfolio or have someone else do it, what I most hope is to help people understand how it works and give them the opportunity to apply it, so they can have confidence in achieving good returns without suffering unacceptable losses in market/economic environments that most people consider bad. I have written a lot about how to build my All Weather Portfolio and distributed it widely. (For example, if you want to systematically learn my investment principles, you can access them through the online course I collaborated on with the Singapore Wealth Management Institute:). In any case, I will soon write out my "recipe" to more clearly explain how you can build your own All Weather Portfolio, and I will share it once it is ready.
