The Dalio All Weather

Ray Dalio runs a highly successful multi billion dollar hedge fund, and is one smart cookie. In the investing community we are confronted with many portfolio choices. The Bogglehead approach is to use a concentrated stock portfolio to attempt to realize gains. I’ve written extensively about the danger in a concentrated stock portfolio, especially an inefficient concentrated portfolio like the BH3. The BH3 is an 80/20 stock bond portfolio with some global lipstick. If you characterize it any other way your kidding yourself.

I recently wrote an article about Harry Browne’s permanent portfolio and my efficient frontier mashup designed to further improve longevity and safety. Dalio created an All Weather portfolio which has some considerable homology to my Harry Browne mashup. Homology is a word that describes branching of entities from a common ancestor. I found it quite intriguing that my portfolio (sans BTC) is so similar to Dalio’s portfolio

My portfolio:

VTI 37% EDV 15% BIL 43% GLD 5%

Dalio’s

VTI 30% TLT 40% IEF 15% DBC 7.5% GLD 7.5%

Neither portfolio is concentrated in stocks. Mine has a cash position as the short term fixed component (which can be warehoused in interest bearing accounts), while Dalio uses short and long duration bond positions and Dalio has more exposure to commodities. My portfolio is on the efficient frontier with a 7% expected return and a 5% expected risk, Dalio has a 7.5% expected return and a 7.3% risk.

If you adjust the Dalio portfolio to sit on the EF the portfolio becomes:

VTI 35% TLT 18% IRF 42% and GLD 5% with an expected return of 7.6% and a risk of 6.3% very close to my 7%/5% portfolio.

If you Monte Carlo the efficient frontier adjusted Dalio portfolio you get:

This is a 30 year portfolio @ 4% withdrawal normal SORR. 9998/10,000 success rate.

This is 4% WR on a 50 year draw down. 97% success is very strong over 50 years at a 4% WR.

The reason I started looking at this is because a new attending contacted me in the PoF Facebook mentoring group about investing and I wanted to have alternatives with better risk profiles compared to what everybody else is doing. I have a hard time recommending something like an 80/20 mutual fund portfolio because of the problems with price discovery. One caveat is if bond yields go negative all bets are off. In that case I would probably stock up on gold and commodities DBA DBC and more GLD and dividend stocks. I can’t believe we are at a place where we even have to consider such a thing. The problem with this kind of portfolio is discipline. You have to be committed to staying the course. Because of the low volatility you won’t see monster upside years or monster losses. I would rebalance as needed.

This is truly an all season portfolio.

7 Replies to “The Dalio All Weather”

  1. Hey Gasem,

    I hear you about the rebalancing. That is all I have going for my so-called investments.

    I also loved how you pulled a million into the bottom of the market during the Financial Crisis. That’s golden!!

    And everyone says you can’t time the market.

    I know I can’t but I am not so silly as to think that there weren’t some who made out like bandits during the crisis.

    1. The most die hard buy and holder in fact is a market timer. If you retired 100% S&P 500 in 1989 your return was 7.1%/yr for 30 years. If you retired in 1999, your return has been 3.9%/yr over 20 years. You would need to more than triple your return over the next 10 years to get to 7.1% because you have to make up for poor growth AND compounding. That’s called market timing. So when people are arrogantly defending buy and hold’s superiority, they are merely blind to reality. The reason the 2 portfolios are different is 2 huge crashes occurred early in portfolio 2, while those crashes were late in portfolio 1’s time sequence. There’s something to be said therefore for avoiding crashes. When a train comes you stand aside and let the train pass. There is inherent wisdom in that. There is wisdom too in hurrying on your way once the train passes. The passage of the train slowed you down a bit

  2. Curious if you’ve ever looked at Bernstein’s Coward’s Portfolio and how it compares to yours and Dalio’s? Very interesting stuff.

    About 9 months ago (largely thanks to your writing and the seeds you’ve planted over the years), the wife and I began reconsidering and decided to de-risk our portfolio.

    Part of it was dumb luck – the market has been generous and we had less of a need to take risk thanks to unexpected good fortune.

    Our crime was youth – when I look back at the exuberance of my initial asset allocation and intended glide path, it was obvious I’d placed some hypertrophic genitalia on the table that I did not need to expose.

    Now, the codpiece is back in a more protective position.

    With gratitude for that and your continued meditations,

    CD

    1. Youth is not a crime. Failure to attain wisdom is. Wisdom is a middle age kind of past time. It happens when you finally look beyond the 2×4 that keeps whacking you and realize it’s your hand holding the board. I reviewed Bernstein’s Coward. It’s basically a 60/40 portfolio and it’s major diversification is based on that. EF visualizer says 7.6 return for 9% risk The equivalent portfolio on the efficient frontier is 33% large cap, 50% short term, 17% REIT for a 7.6% return and a 7% risk. If you get paid the same money why take more risk. You can sub some gold for treasuries and get the same profile.

      Cod pieces are good. Golden cod pieces are just showing off.

  3. Hi Gasem,
    Some ideas that I have been exchanging on Big ERN’s blog site in the comments to his My thoughts on the “Upcoming Recession” make reference to your earlier posts on his site and here in yours. Here is a summary that has to do with Asset Allocation to hedge against Demand shock Recessions (e.g. 2008-9 and most of the recent ones) and Supply-shock Recessions (e.g. 1973 oil crisis Recession):

    1. I agree with what you state here for your current plans and useful comparison to Dalio’s Asset Allocation. This is useful for planning purposes for me. I am in a similar situation yours in age, retirement situation, and in concerns about preserving capital in case of equity bear market despite spending dividends and interest, and needing to withdraw some capital to cover yearly expenses (YE). So, I want to hedge my account against both a demand-shock recession (DSR) and a supply-shock recession (SSR) while still leaving room for growth in the equity part (like you have written “ride the bull (market)”. Here is my plan explained in a fashion that should be easily modified by others to check their down-side risk in either type of Recession.
    2. So with 30 yearly expenses (YE) worth of investments (after subtracting SS Pension and other pension from total yearly expenses) (a 3.3% withdrawal rate) , and with a 60% equity/40% bond portfolio (I am at the beginning stages of using a 60% equity going to 100% Equity glide path (per ERN’s SWR Part 20 post), this yields 18 YE’s worth of equity, and 12 YE’s worth of bonds.
    3. Let’s assume there is a recession (either a demand-shock recession (DSR) or a supply-shock recession (SSR).) If I have half of my bonds in LT treasuries (preferably in STRIPS (e.g. EDV (Vanguard Extended duration Treasury Index ETF, 24-year duration)), and the other half in Money Market (e.g. BIL like you use) , then I have 6 YE’s of EDV and 6 YE’s of Money Mkt.
    4. In case of a DSR, I will spend EDV while Equities are below previous peak. EDVs will increase in value in a DSR scenario. For example, 2% reduction in 30 yr. Treasury Rate (e.g. 3.5% to 1.5%) will increase the value of EDV by 48% due to the 24-year duration. (This kind of a rise happened in August of this year.) So, I will have ~ 9 YE’s to spend. My spending (after accounting for SS pension and other pension) is partly supported by dividends and interest, let’s say 2% of investments so I have 30 YE’s * 2% = 0.6 YE’s covered. (Note that dividends and bond interest are essentially independent (not correlated) (orthogonal as you have said in earlier post) from equity market values. So, I need to finance 0.4 YE’s from sale of my investments which will be EDV in a DSR scenario. To see how long the YE’s will last, I divide 9 YE’s by 0.4 YE’s per year (needed) and get 22.5 years’ worth of expense coverage. (I realize I have not taken into account inflation so approximately let’s say I have 15 years’ worth of expense coverage.) I also realize I am spending dividends and so the downturn in equities can last longer than if I reinvested dividends.) In any case 15 years’ worth of expense coverage is a good amount of “insurance” against needing to sell equities in a DSR scenario.
    5. In case of a supply-shock recession (SSR), I will spend Money Market (e.g. BIL) as Kirsten suggested recently while Equities are below previous peak. Money Market will maintain its nominal value in an SSR scenario. So, I will have ~ 6 YE’s to spend. Again, my spending (after accounting for SS pension and other pension) is partly supported by dividends and interest, let’s say 2% of investments so I have 30 YE’s * 2% = 0.6 YE’s covered. I need to finance 0.4 YE’s from sale of my Money Market in an SSR scenario. To see how long the YE’s will last, I divide 6 YE’s by 0.4 YE’s per year (needed) and get 15 years’ worth of expense coverage. (I realize I have not taken into account inflation so let’s say I have 10 years’ worth of expense coverage.) I also realize I am spending dividends and so the downturn in equities can last longer than if I reinvested dividends.) In any case 10 years’ worth of expense coverage is a reasonable amount of “insurance” against needing to sell equities in a DSR scenario avoiding the worst years of selling equities low, but probably not all the recession since without reinvesting dividends, equities could be below there peak for about 20 years.
    6. If I assign probabilities of 60% to a slow growth equity scenario with no recession, 30% to a DSR scenario, and 10% to SSR scenario, I can roughly foresee my probability of having to sell my equity stake during a DSR or SSR downturn (a measure of down-side risk) . [These probabilities are based on some qualitative comments that Kirsten has written, and Vanguard publication referenced below.] And I can also estimate my total worth after 25 years (i.e. at passing away) which will then be used for legacy since I will be using a using a 60% equity going to 100% Equity glide path per ERN (Kirsten’s) SWR Part 20 post.
    7. Therefore, I have based my plans for Asset Allocation on ERN’s SWR Part 20 post and on the Joe Davis, PhD (Econ) and teams forecasting that they update yearly in December on Vanguard Website. 2019 forecast (published on 6 December 2018) has this link https://investornews.vanguard/vanguard-economic-and-market-outlook-for-2019-down-but-not-out/.
    8. But I have taken a more conservative approach than an 80% equity/20% bond AA at 60%/40% which is more toward your 37% equity/58% bond/5% GLD.
    9. The challenge is always to purchase EDV and GLD when they are low. They are not right now but were from Jan 2017 to Oct 2018 (especially EDV). I sold 70% of my EDV in August at peak and am now looking to repurchase when EDV goes below 115 (~ equivalent to 3.5% yield on 30-year government bonds) .
    10. So, looking forward to more good information from you and Kirsten and from Joe Davis and team at Vanguard. And the useful discussion that take place on these websites.

    1. A clarifying edit in Item 6:
      I can roughly foresee my probability of having to sell part of my equity stake during the later part (10 + yrs into) of a DSR or SSR downturn.

    2. Hi TM,
      Not sure of your age but I’m 67. So the difference between Karsten and me is about 25 years. If you have to make 1M last 25 years vs 50 years the amount of risk you need to take is much less for an equivalent % chance of portfolio success. My analysis shows pretty much if you get half way in and your retirement on track it doesn’t matter what you do. On a 30 year retirement it takes longer than 15 years to kill your money by making a small mistake.

      I like a 2 portfolio approach, a high risk portfolio and a low risk portfolio. If you start with 1M and your WR is 4% separate the portfolio into 2 parts. A 800K portfolio and a 200K portfolio. Risk the high risk portfolio at 80/20 and the low risk at 15/85. 4% on 800K is 32K but you can probably do 36K on the high risk portfolio. If the crash comes you close the high risk to withdrawal and open the low risk, and maybe drop the WR a little bit. Let’s say the market drops in half. The low risk portfolio will drop from 200K to 185K and you will have 6 years of living expense available. The high risk portfolio has gone from 800K to 500K. Re-balance back to 80/20 which would be 400K stock 100K bonds and re-balance every year. Once the market recovers you can switch back to the high risk portfolio for WR. If the market was down 3 years and you spent 35K/yr you would have spent 105K and have 80+K in a few years you would once again have enough for another 3 years of recession.

      This way you are not pulling money out of the high risk when it’s low (sell low) and you pull money out of the low risk when it’s essentially at parity. The economy is in recession about 25% of the time (7.5 years of a 30 year retirement) This technique should cover at least 6 years maybe more of recession preserving the high risk from SORR. By having a low risk account you effectively immunize yourself from SORR

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