What Is an All Weather Portfolio? Is it Right for You?

All weather portfolio

An all-weather portfolio is about much more than just saving for a rainy day. Also called an all-seasons portfolio, the idea is to build a diversified portfolio that can weather whatever economic storm comes your way.

Let’s dive into what an all-weather portfolio actually is, who created it and why, how it has performed since its creation, whether an all-seasons portfolio is right for you, and how to build one in your own investment accounts.

What is the all weather portfolio?

First created by hedge fund manager Ray Dalio, the all-weather portfolio is a mix of investment assets designed to expose investors to a variety of different sectors while mitigating risk.

He called it the “all-weather fund” because he wanted to create an asset mix that could withstand any economic climate and perform consistently whether markets are stable or in turmoil.

After he created the first version of the All Weather Portfolio (AWP) in 1996, it rose to popularity in 2014 when Tony Robbins interviewed Dalio for his book MONEY Master the Game.

What an all weather portfolio aka all seasons portfolio consists of

Let’s take a look inside the all-weather portfolio. It is structured as follows:

  • 40% long-term bonds: Treasury bonds that mature within 10-30 years
  • 30% stocks: Individual U.S. and/or international stocks or stock funds (Index funds or ETFs)
  • 15% intermediate-term bonds: Bonds that mature within 2-10 years
  • 7.5% commodities: Commodity markets typically include things like oil, agricultural commodities, and precious metals; you can invest in these via commodity ETFs
  • 7.5% gold: Don’t just think physical gold; you can also invest in gold-specific commodity ETFs

As you can see, the portfolio is very bond-heavy and light on the stocks. Whether this is a good thing or a bad thing depends on your investment goals, as we’ll get into shortly!

Does the all weather portfolio perform well?

The most important factor in any portfolio, of course, is its performance. You certainly wouldn’t want to jump on board a portfolio that consistently goes down every year!

When you look at the all-weather portfolio on Portfolios Lab, you can see that from 2010-2020, the AWP returned an annual average of 8.27%. Compare that to the S&P 500 stock market index, which has averaged 13.6% over the same time period—over 50% higher growth than the AWP.

Now, you might be thinking “but wait—we haven’t really had a recession during that time!” And you’re right! Since the all-seasons portfolio was designed to withstand downturns, it is important to see how the performance compares in a bear market.

Although the AWP itself didn't exist during the Great Depression, people have back-tested it to see how the asset mix would have performed historically. The results showed that while the S&P lost 64.4% in the Depression, the AWP would have only lost 20.55%.

Now let’s fast-forward around a century to the volatility of 2020, which is still fresh on our minds! At its lowest dip, the S&P was down around 30%, while the Dalio AWP never lost more than 4%. And after the subsequent recovery, the AWP ended the year up almost 17%, while the S&P trailed it slightly at 16%.

So, what are the main takeaways to this data?

  1. The all-seasons portfolio is more recession-proof than stock-heavy portfolios.
  2. However, over the long term, you pay for this extra safety by sacrificing growth potential.

The question now becomes: is this a tradeoff you should be willing to make?

Is the all-weather portfolio right for you?

Let’s quickly break down some pros and cons to the all-seasons portfolio.

Pros

  • It’s more stable during downturns and recessions.
  • It’s diversified across different sectors of the economy (stocks, bonds, and commodities).
  • Having commodities in the mix helps to hedge against inflation (since commodity prices tend to rise with inflation).
  • The historical performance is slow but steady.
  • It’s easy to “set it and forget it.”

Cons

  • Lower risk also means lower potential rewards. A bond-heavy portfolio can’t usually compete with stock portfolios during high-growth years.
  • While less risky than stocks, bonds are also subject to their own set of risks, including interest-rate risk (where their value can decline as interest rates rise) and inflation (where your bond rate of return could be outpaced if inflation grows faster).
  • Commodities do hedge against inflation, but they’re also one of the most volatile asset classes, as they can be dependent on uncontrollable factors like weather and accidents. This is why not all investors like to include commodities in their portfolios.

It’s important to note that there’s no such thing as a perfect portfolio that will suit every investor’s needs. If there was a portfolio mix that offered high growth and safety and inflation hedging, every hedge fund and investor in the world would use it!

Who the all weather portfolio is for

So, with all of this in mind, the all-weather portfolio is better for:

  • Investors who are older or close to retirement and don’t want to risk losing value in a recession
  • People who are prone to panic-selling during crashes (a stock-heavy portfolio can require nerves of steel some years!)

It’s not so good for those who:

  • Prioritize higher growth and accept taking on more risk to get it
  • Are young and have plenty of time to outlast and recover from recessions
  • Want their portfolio to grow quickly enough to help them retire early

Want to explore an all-weather portfolio? Let’s see how you could make your own in a few simple steps!

How to build an all-seasons portfolio

Not every all-seasons portfolio looks the same—it’s more of a general guide than an exact blueprint of which specific stocks, bonds, or funds to buy.

Because of this, you have some wiggle room to choose your own mix. The simplest way to do this is by choosing a combination of index funds and ETFs (exchange-traded funds).

Let’s look at some examples of funds you can buy for each asset class in the all-weather portfolio!

Long-term bond funds

  • iShares Core 10+ Year USD Bond ETF (ticker: ILTB)
  • SPDR® Portfolio Long Term Corp Bd ETF (ticker: SPLB)
  • iShares 10+ Year Invmt Grd Corp Bd ETF (ticker: IGLB)

Stock funds

  • Vanguard Total Stock Market Fund (ticker: VTSAX on Vanguard or VTI for the ETF version on other investing platforms)
  • Fidelity ZERO Large Cap Index Fund (FNILX)
  • Vanguard Total World Stock ETF (ticker: VT)

Intermediate-term bond funds

  • iShares Intermediate Govt/Credit Bond ETF (ticker: GVI)
  • Schwab US Aggregate Bond ETF (ticker: SCHZ)

Commodity funds

  • Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (ticker: PDBC)
  • First Trust Global Tactical Commodity Strategy Fund (ticker: FTGC)
  • iShares GSCI Commodity Dynamic Roll Strategy ETF (ticker: COMT)

Gold funds

  • SPDR Gold MiniShares Trust (ticker: GLDM)
  • Aberdeen Standard Physical Gold Shares ETF (SGOL)
  • GraniteShares Gold Trust (BAR)

Create an all weather portfolio that works for you!

If you want to create your own all-weather portfolio, all you have to do is choose some of these funds (or others like them) and split them up into the percentages outlined by the AWP. This can be as simple as picking 5 funds (one from each asset class).

Let’s say you start with $10,000. You would put $4,000 into a long-term bond fund, $3,000 into a stock fund, $1,500 into intermediate bonds, $750 into a commodity fund, and $750 into a gold fund.

Does the all-weather portfolio sound like it isn't right for you at this point in your life? Check out our article on The 3-Fund Portfolio to see if that’s a better fit!

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