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A few years ago, I came across an interview with Bill Gates, who recommended Principles ↗ (non-affiliated), a book written by Ray Dalio. In Principles, Dalio introduced the concept of all-weather funds (AWFs), designed to perform well across various economic conditions. This inspired me to test if a portfolio consisting of five Exchange Traded Funds (ETFs) could offer similar potential stability.
Key Takeaways
- All-weather funds aim to perform in any market condition, but replicating this with a simple ETF portfolio presents challenges.
- While diversification can reduce volatility, it may not fully shield against major market downturns.
- Limited back-testing suggests that achieving true “all-weather” resilience with ETFs may be unrealistic.
The AWF Concept and ETF Selection
An all-weather fund, as Dalio envisioned it, is meant to perform well in all types of economic environments—be it inflation, deflation, or economic growth or contraction. His firm, Bridgewater Associates, was one of the first to create such a model based on extensive historical data and back-testing using computers.
The selection of my ETFs are based on a general consensus of the research that I performed across multiple websites and videos. However, please note that this isn’t an exact replication of Dalio’s original design, as Bridgewater’s strategy remains proprietary.
Dalio’s AWF strategy typically balances assets to reduce volatility and maximize stability. By diversifying across asset classes like stocks, bonds, gold, commodities, and cash equivalents, the AWF aims to weather different economic conditions.
How nice would it be to sleep soundly at night without worrying about how your portfolio would hold up under any circumstances? When inflation is running high, the value of your gold ETF might rise. When interest rates drop, the value of your bond ETF might rise. When the dollar declines, the value of your commodities ETF might rise. And so forth, at least in theory.
Using the Backtest Portfolio Asset Class Allocation tool at Portfolio Visualizer ↗ (non-affiliated), I compared these five ETFs against the S&P 500 ETF, SPY, to see how a simple AWF might have performed in recent years:
| Ticker Symbol | ETF Name | Allocation |
|---|---|---|
| VTI | Vanguard Total Stock Market ETF | 30% |
| VGLT | Vanguard Long-Term Treasury ETF | 40% |
| SCHR | Schwab Intermediate-Term US Trs ETF | 15% |
| IAU | iShares Gold Trust | 7.5% |
| COM | Direxion Auspice Broad Cmdty Strat ETF | 7.5% |
Comparing Performance: AWF vs. S&P 500
Using Portfolio Visualizer, I back-tested the performance of this 5-ETF basket against SPY, the popular ETF that tracks the S&P 500. Unfortunately, the free version of Portfolio Visualizer only allowed data from January 2018 onward, so I’m limited to a shorter timeframe than Bridgewater’s decades of data. Here are the results:
| Metric | Sample Portfolio | SPDR S&P 500 ETF Trust |
|---|---|---|
| Start Balance | $10,000 | $10,000 |
| End Balance | $13,984 | $23,802 |
| Annualized Return (CAGR) | 5.03% | 13.53% |
| Standard Deviation | 9.25% | 17.20% |
| Best Year | 17.19% | 31.22% |
| Worst Year | -18.57% | -18.17% |
| Maximum Drawdown | -20.73% | -23.93% |
| Benchmark Correlation | 0.71 | 1.00 |
A few things stand out to me:
- Standard Deviation: The AWF showed a lower standard deviation compared to SPY, meaning it had somewhat smoother returns.
- Worst Year: The AWF’s worst year was not significantly different from that of SPY.
- Maximum Drawdown: Despite the diversification, the maximum drawdown—representing the largest loss from peak to trough—was only slightly better than that of SPY.
You can see the full results, including the Portfolio Growth graph, here ↗. Feel free to modify the AWF portfolio with your favorite ETFs. I’ve found that commodity ETFs can vary quite a bit in their performance.
These findings challenge the idea that we—not including Ray Dalio—can build an “all-weather” ETF portfolio capable of consistently smooth returns in all market environments.
A Realistic Takeaway
From this analysis, it appears that while we can reduce volatility through diversification, creating a fund that truly performs well in all economic climates may not be realistic with ETFs alone, especially within the last 6 or 7 years. The AWF may have some advantages in stabilizing returns, but it also mirrors SPY’s susceptibility to market downturns.
For investors seeking stability, this is a reminder of the limitations of back-tested models. They provide valuable insight but often lack the robustness of more sophisticated, proprietary setups like Bridgewater’s original model.
Final Thoughts
In conclusion, while the concept of an AWF is compelling, achieving it with widely available ETFs has its limitations. The real lesson might be in seeking a balance of assets that matches our personal financial goals and risk tolerance, rather than pursuing the elusive “all-weather” portfolio.
Diversification remains valuable, but it may not be a foolproof shield against every market storm.
If you’re concerned with market volatility, but desire to participate in long-term market gains, see our blog Buffered ETFs Protect Your Portfolio from Market Volatility for an investing approach that might appeal to you.
And remember, it’s always a great idea to chat with your financial or tax advisor to make sure your decisions are right on track and aligned with the latest guidelines and laws.