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All Weather Portfolio as a Universal Solution for Turbulent Markets

Asset allocation in the investment portfolio is not only a subject of theoretical discussions among experts in financial sciences. It…

All Weather Portfolio as a Universal Solution for Turbulent Markets

9th October 2023

Asset allocation in the investment portfolio is not only a subject of theoretical discussions among experts in financial sciences. It is also a practical problem that every investor should solve. Building a portfolio is like going to an unknown country in an adventure movie. If you predict all the circumstances, you will emerge victorious from the situation and significantly increase your capital. If you make a mistake, then possible losses on some assets will not be compensated by profits on others but can lead to the sale of the rest. To avoid such a situation, Ray Dalio, the famous American financial expert with extensive investment experience proposed the All Weather Portfolio methodology. Find out its details for possible use in your investment practice.

Is a Universal Solution for Building an Investment Portfolio Possible?

What makes a solution universal? First of all, it should give positive results when used in various situations. Let’s look at some universal solutions using examples from different spheres of financial activity.

Business

In business, the universal solution is to offer goods and services that will not leave you without income in any season of the year. For example, if you trade only heating batteries, you may be left without income during the warm season. Therefore, the store’s assortment should include goods that are purchased at this time of year.

Loans

When obtaining a loan, a universal solution would be a combination of short-term and long-term loans:

  • Short-term ones are obtained very quickly and easily and do not require careful checks. Therefore, they are suitable in situations of minor additional expenses. For example, on the Payday Depot platform, you can select a lender with the most lenient terms and receive money within 24 hours after the application is approved. This is very convenient when you need money for urgent expenses.
  • Long-term loans allow you to stretch out the repayment of the debt for a longer period, which is good for large loans.

Investment

Concentrated investing makes the person very vulnerable due to high risks. If the market fails, they may lose significant capital. Therefore, a universal solution here would be to complete your portfolio with such types of assets the price fluctuations of which may be in inverse proportion. For example, when choosing to invest in shares of companies, do not put all your money in the shares of one company. Spend some of your capital on purchasing shares of its closest competitor or industry that may undermine the success of this company.

How to Build an All Weather Portfolio?

The name of this approach perfectly reflects the goal that its creator set to reach. Ray Dalio sought to assemble a portfolio that would allow you to increase your capital in any market condition. This idea came to him back in the 1970s during Richard Nixon’s presidency, which was marked by serious economic fluctuations. Since its introduction to the public in 1996, a lot of optimistic data about its performance has been accumulated. That is why this type of portfolio has been attracting the attention of investors for more than 25 years.

The All Weather Portfolio is divided into 4 types of assets for effective risk diversification:

  • Stocks: if you want to assemble a universal investment portfolio, you need to prefer shares of large companies that feel confident in the market.
  • Bonds: here, you need to buy long-term and short-term bonds, both from the government and leading corporations.
  • Gold: this is a sought-after precious metal with a guaranteed profit that will hedge financial risks on other assets.
  • Commodities: these can be investments in commodities or in funds that specialize in investments in commodities.

The total share of gold and commodities should not exceed 15-25% of the portfolio, and the biggest part of it should be devoted to stocks and bonds.

What to Remember When Following the All Weather Portfolio Methodology

The task of forming an All Weather Portfolio is only the starting point for future success. The final result depends on how closely you monitor the markets to rebalance the portfolio in a timely manner. If the value of an asset has increased, you should not leave the situation as it is in the hope that it will not change. You should sell a certain portion of this asset to invest part of the funds in rebalancing the assets with a decreased share.

If you follow the principles proposed by Ray Dalio, you will not only diversify your risks but also create a basis for stable returns. As a result, you will have a perfect hedging tool for any market fluctuations that will allow you to maintain your balance no matter the weather in the markets.

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