All-Seasons portfolio from Ray Dalio.

What should be a successful investment portfolio in any economic environment? Renowned investor, founder and manager of hedge fund Bridgewater Associates, Ray Dalio, has developed an asset allocation system that can weather any financial storm and deliver consistent returns over the long term.

Dalio called this portfolio All-Seasons. Some call it the All-Weather Briefcase.

Ray Dalio said that he did not want the fortune he earned to disappear after his death. On the contrary, it is what prompted the investor to draw up a portfolio that can work successfully without his participation for the benefit of the family.

Portfolio principles

The founder of Bridgewater worked with a team of experts to calculate what changes in economic conditions are causing asset movements. As a result, correlations have remained essentially unchanged for hundreds of years, Dalio said.

Several factors were taken into account: economic growth/decline and inflation/deflation. Then, Dalio identified four investment strategies effective in a specific context and drew up the required asset allocation.

The all-season portfolio based on risk parity uses only long positions. Therefore, the portfolio does not hedge risks by entering short positions. Instead, investments in bonds, gold and commodities are used for protection.

The investment concept of the All-Season Portfolio has become widespread. For example, the size of investments in this strategy within the framework of the Dalio fund, Bridgewater Associates, is more than $ 80 billion.

What inside

Ray Dalio advises making a portfolio in the following proportions:

• 40% long-term bonds
• 30% stocks
• 15% medium-term bonds
• 7.5% gold
• 7.5% commodities.

According to Dalio, the portfolio does not contain cash – this is the most unsuccessful form of long-term investment.

The portfolio needs rebalancing. When one of the segments demonstrates high profitability, it is necessary to sell part of its assets and move the proceeds to other segments to restore the original ratio. Rebalancing should be doing at least once a year.

Results

Based on the example of investments of $ 10 thousand since 2007, the All-Season Portfolio strategy shows lower profitability than investments in the S & P500 index. However, it demonstrates greater resilience during a downturn, which it designs to do.

The maximum fall was 12%, while the S&P fell by more than 50%. The average annual profitability of the strategy was 7.82%. In the worst year, the portfolio posted a loss of -3.25%.

The strategy also demonstrates sustainability over a longer historical perspective. Over the past 40 years, the portfolio has suffered losses only six times, with the average loss in the period up to 20013 not exceeding 1.5%.

US Portfolio

In the US market, a portfolio might look something like this:

• To buy long-term bonds, you can purchase the iShares 20+ Year Treasury Bond ETF (40% of the portfolio);
• The purchase of the Vanguard Total Stock Market ETF is suitable for adding a diversified set of stocks (30% of the portfolio);
• ETF IEF iShares is suitable for purchasing medium-term bonds (15% of the portfolio);
• ETF SPDR Gold Trust will go to purchase gold (7.5% of the portfolio);
• PowerShares DB Commodity Index Tracking Fund (DBC) or ETF iShares Global Materials are suitable for purchasing commodities (7.5% of the portfolio).

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