Can You Handle An All-Weather Portfolio?

The internet is buzzing this week about an article written by Tony Robbins touting an “all weather” portfolio developed by famed hedge fund investor Ray Dalio. While Tony is certainly a polarizing figure and life coach, the real meat of this story is in the structure of an investment plan to ride out any storm.  

The summation of the strategy is that investors should balance their risks by investing in a diversified base of stocks, bonds, and commodities to ride out anything the market throws your way. By doing so you are able to sidestep concerns of inflation, deflation, growth trends, and other cyclical forces taking an adverse toll on your returns.

He recommends a portfolio of 30% U.S. stocks, 15% intermediate-term treasury bonds, 40% long-term treasury bonds, 7.5% gold, and 7.5% commodities. The overweight nature of bonds is designed to counteract the volatility of stocks and commodities, which he implies is an area that many people take too much risk with. Additionally he recommends that you rebalance the portfolio on a regular (at least annual) basis.

Over a historical 30-year time frame from 1984 to 2013, the portfolio produced stellar results of nearly 10% per year with the worst down year being 2008 when the model dropped just 3.93%. Those are impressive and consistent returns with very little downside volatility.

Ben Carlson of the blog, A Wealth of Common Sense, did an excellent review and back test of the strategy through multiple time frames that is worth a read as well.

For those that are interested in implementing this strategy, take a look a the following 5 ETFs:

Vanguard S&P 500 ETF (VOO)
iShares 7-10 Year Treasury Bond ETF (IEF)
iShares 20+ Year Treasury Bond ETF (TLT)
SPDR Gold Shares ETF (GLD)
iPath Dow Jones-UBS Commodity Index Total Return ETN (DJP)

These are funds with low expenses, established track records, high liquidity, and cover the essential components of the all weather portfolio.  However, there are many other alternatives that may make more sense depending on your experience or preference.

While it may seem easy on the surface to implement a portfolio of this design, especially using low-cost ETFs, I have some concerns about this strategy that might not make it perfect for everyone.

Concern #1:  Investor Psychology

It’s easy to say on paper that you can handle the volatility and want that promised 10% return going forward, but its another thing to experience it in real life. During periods of stock market downturns, inflationary cycles, and other stumbling blocks you are going to see individual investments in that portfolio produce adverse results.

The premise is that one investment zigs, while the other zags and they offset each other in a complementary manner. However, most investors aren’t disciplined enough to hold GLD and DJP through the last three years as they drop like a stone.  In addition, you will be buying more on the way down to stay in line with your asset allocation objectives, while selling down the stocks and bonds that are performing well.

You have to be 100% committed and disciplined to the portfolio over a long period of time in order for it to produce the type of results that you desire.  In my experience, the majority of investors are more short-term focused and pay too much attention to the price swings of individual positions. This leads to performance chasing and asset allocation shifts at inopportune times.

Concern #2: Regular Rebalancing

Rebalancing the portfolio on a regular basis is another key component of this strategy that many investors don’t take the time to do. They like to let their winners run and cut their losers quickly.  In order to produce a successful outcome, you will be forced to reduce exposure to the strongest performers and buy more of the funds that are lagging their peers.

Staying in line with the correct asset allocation targets allows for each holding to affirmatively offset its peers at the appropriate times. One advantage of this methodology is that it can be more tax efficient than trading on a whim. You just have to be more proactive about this chore in order for it to succeed.

Concern #3: Investment Selection

Investment selection is something I find to be lacking in this strategy as well. There is no mention of international investments for instance.  One option to consider is splitting the 30% stocks into 15% VOO and 15% Vanguard FTSE All-World ex-US ETF (VEU) or iShares MSCI EAFE ETF (EFA). That would provide an additional level of diversification, while still maintaining a similar asset allocation profile.

I would avoid adding in other sector or alternative areas of the market as they may produce unintended consequences. The goal is to stay simple and broad with your exposure to produce the most efficient returns and make things easy to track.

The Bottom Line

The bottom line is that this style of passive investing with regular rebalancing takes more grit and determination than you might think. One option to consider is hiring an advisor as an objective fiduciary to implement this plan on your behalf. Alternatively, there are many other multi-asset investment strategies that produce solid results with low volatility. The key is finding your style and what you will be able to live with over the long haul.

Disclosure: FMD Capital Management, its executives, and/or its clients may hold positions in the ETFs, mutual funds or any investment asset mentioned in this post. The commentary does not constitute ...

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