An all-weather portfolio might help investors sleep better in times of volatile markets
Dark clouds are moving on the horizon, escalating US/China trade tensions, the Fed transition to monetary normalization and political uncertainty in the eurozone with Brexit and the German chancellor Angela Merkel departing means it is a good time to ask yourself whether you have an all-weather portfolio.
Could your all-weather portfolio cope with a 40% drop in stock prices?
Darren Winters zero’s in on the definition of an all-weather portfolio. An all-weather portfolio or fund are investments that tend to perform well during both favorable and unfavorable economic and market conditions.
All weather portfolio typically has flexible investment strategies that are diversified across asset classes and utilize alternative techniques, such as sector rotation or macro hedging, in order to manage for varying market changes.
As Darren Winters explains, all weather portfolio uses long and short strategies which are commonly used to produce gains in a seesaw market environments. These funds take both long and short positions and they enable the investor to buy investments he/she believe have upside potential and sell short securities he/she expects to depreciate in value. These funds tend to be overweight long positions in times of market gains and overweight short positions in times of market losses.
Ray Dalio’s Bridgewater all-weather portfolio strategy was developed in the 1970s
Ray Dalio observed market changes and potential return scenarios during the political turmoil from Richard Nixon’s presidency.
For more than three decades Ray Dalio’s Bridgewater hedge fund has been a reference to the all-weather portfolio strategy which exploits market movements for investor gains.
What are the four factors used by the hedge fund king, Ray Dalio to construct his all-weather portfolio?
Diversification reduces risks without reducing your return. Ray Dalio creates four quadrants to build his all-weather portfolio. First growth, 25% of the risk in equities, commodities, corporate credit, and Emerging market. Second inflation, 25% of the risk in IL bonds. Third, 25% of the risk in nominal bonds, IL bonds. Fourth, 25% risk in equities and nominal bonds. Ray Dalio then allocates (balances) capital according to the variables of rising/falling market expectations and Growth/Inflation.
“Diversification is a tremendous thing in improving your return to risk ratio, if you know that achieve balance and achieve balance is those four quadrants,” Ray Dalio.
See Ray Dalio “All-Weather Portfolio” video. “Cash is the worse returning asset class”, Ray Dalio
Other asset managers seek to construct an all-weather portfolio by purchasing stocks that don’t necessarily correlate with each other.
“We have tried to create all-weather portfolios. We want stocks that make a compelling case but don’t necessarily correlate with each other,” said Marc Pinto Portfolio Manager at the 16 billion dollar Janus Henderso fund.