Bridgewater Associates founder Ray Dalio: The concept and operating mechanism of the All Weather portfolio

Author: @RayDalio

Compiled by: He Tongxue

As the founder of Bridgewater Associates, I'm currently at a stage in my life where my primary goal is to share the principles I've learned over the past 60 years—principles that have helped me and that I believe can help others. I believe one of the most important investment principles I can convey is about what an "All Weather Portfolio" is and how to build such a portfolio. I think these principles are especially valuable in today's risky times.

For me, and for most investors, the most important thing is to have a portfolio that is: a) sufficiently diversified/well-designed to generate the highest possible return with minimal risk; and b) requires no market timing. The reasons are: a) While most people consider cash (such as short-term government bonds or high-quality money market funds with near-zero default risk) to be the safest investment because it doesn't default, these cash investments inevitably yield the lowest after-tax returns in the long run and perform particularly poorly during periods of high inflation—meaning they lose significant purchasing power. Equally true is b) that almost all investors (including most seasoned professionals) are incapable of effectively timing the market, even if they believe they can. Therefore, I believe that for most self-managed investors, market timing should be minimized or avoided altogether.

The All Weather Portfolio is a passively held portfolio that is expected to return significantly higher than low-risk assets like cash, but with significantly lower risk than high-risk assets like stocks and bonds, in any environment . This differs from most portfolios—such as the classic 60/40 stock/bond portfolio, or those that perform well in good years and poorly in bad years. So to be clear, the All Weather Portfolio is a type of portfolio that achieves the above objectives , not an investment product. It's more like a financial engineering challenge to achieve this balance, upon 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 in more detail later. Naturally, my approach has evolved and improved over time, and I have some ideas for making 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 approach.

I'll start by explaining how I came up with my method and how it works.

About 30 years ago, I was trying to create an investment strategy for my family so that they could invest even after I passed away, without my guidance. I felt I needed an investment portfolio that could:

a) Provides returns significantly higher than cash (i.e. equal to or exceeding the classic 60/40 stock/bond portfolio);

b) Risk is lower than the 60/40 portfolio;

c) It will not perform poorly in any particular type of economic environment;

d) No market timing is required.

In my view, the only way to achieve this all-weather portfolio is to hold a variety of diversified, higher-return but also higher-risk investments. When combined, these assets achieve the same high returns as individual assets, but with lower risk, due to the diversification effect between them. To achieve better diversification, I propose the concept of "risk parity"—adjusting investments with different risk levels (i.e., different volatility) by increasing the risk/volatility of low-risk/low-volatility investments and decreasing the risk/volatility of high-risk/high-volatility investments, thus aligning their risk levels and achieving better balance. I then balance my exposure to each asset class based on the most fundamental factors driving returns across them. In other words, by understanding how each asset class responds to changing economic conditions (such as inflation and growth—for example, bonds underperform when inflation and growth are high, while inflation-resistant assets like gold, inflation-linked bonds, and commodities perform well), and allocating equal amounts of risk in both rising and falling inflation and growth environments, I can create a passively strategically allocated portfolio that remains well-balanced across all economic scenarios. Thirty years later, I remain convinced that having this core strategic portfolio is crucial. My all-weather portfolio is my ideal, continuously held strategic asset allocation—a "beta" (asset class) portfolio. While I also create "alpha" through numerous tactical bets based on my judgment of market trends, this is achieved by creating a highly diversified alpha portfolio, which I call the "Pure Alpha" strategy. (I won't explain this method in detail now, as that would be too far off-topic.)

I developed this 24/7 approach with my excellent Bridgewater team, especially Bob Prince and Greg Jensen , who have worked at Bridgewater for 40 and 30 years respectively and are still co-chief investment officers there. After it was built, I found the approach simple and straightforward enough that almost anyone could implement it, and I couldn't imagine being paid for doing this by managing other people's money. So I showed it how to do it to almost everyone I knew (and I still want to), 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 been evolving and improving ever since. Bridgewater now operates and optimizes it in their own way, and I operate and optimize it in my own way. The difference between us is: they are managing 24/7 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 entrust it to someone else, my primary goal is to help people understand how it works and have the opportunity to apply it, giving them the confidence to achieve good returns without suffering unacceptable losses in what most people perceive as a poor market/economic environment. I've already written extensively 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've developed in partnership with the Singapore Wealth Management Academy.) In any case, I will soon be writing my "recipe," explaining more clearly how you can build your own All Weather portfolio, and I will share it once it's finished.