Building Ray Dalio's "All Weather" ETF portfolio in Europe (2024)

The "All Weather" portfolio explained

Built to work in all economic conditions

Not every investment portfolio always performs equally well, in any economic conditions. Are you looking for a portfolio that is more stable in different circ*mstances? Are you happy to give up some returns for that? Then Ray Dalio's "All Weather" portfolio, which tries to take into account the broad economy, might be for you.

The economic cycle keeps spinning, with ups and downs, and this also impacts the financial market. So, using research work and historical data, models have been created that seek to respond to those changes.

Ray Dalio is a well-known investor who has created such models. He saw two macroeconomic parameters that are influential. On the one hand, the prices of goods that can rise (inflation) or fall (deflation). On the other hand, we are either in a growing economy or in a shrinking economy. Using these two parameters, Dalio identified four economic environments. At all times, we are in one of these environments. Ray Dalio therefore wanted to build a passive portfolio that performs well in all four economic environments and thus continues to perform.

To do so, he built a portfolio consisting of four different types of investments: stocks, bonds, commodities and gold. Each investment has its economic environments where it performs well, and where it performs less. For instance, commodities and gold perform relatively better during periods of economic growth and high inflation. By bringing these four components together in a portfolio of ETFs, there is always at least one of the funds that can somewhat offset the losses of the others. As a result, they somewhat neutralise each other's wild fluctuations, thus mitigating the effect of economic conditions on your portfolio.

Does it work?

Yes. Between 2005 and 2023, the portfolio has returned an average 6.6% per year:

It also performs well against a portfolio consisting of only stocks, such as the VWCE ETF. It has a lower average return, but it fluctuates less. This can be important if you find it difficult to mentally withstand volatility in your investments.

Who should invest in the "All Weather" portfolio?

The "All Weather" portfolio is a great choice for many investors. You should consider investing in the portfolio if:

1. You get emotional about losing money. For example, the "All Weather" portfolio fluctuates less than a portfolio consisting of only stocks. You get a steadier return on investment.
2. You want a simple and easy way to preserve your capital with decent growth. As we'll see, the portfolio is not too hard to set up with ETFs.
3. You want to diversify to spread risk. The portfolio is diversified across asset classes like stocks, long-term bonds, intermediate bonds, commodities, and gold.

Who should not invest in the "All Weather" portfolio?

On the other hand, you probably shouldn't invest in the "All Weather" portfolio if:

1. You want high growth. Those who are looking for higher returns and are willing to accept the corresponding higher risk might find the "All Weather" portfolio's returns underwhelming.
2. You are skeptical of a passive investment approach. In that case, you're better off with a more active approach.

How to build the "All Weather" portfolio with ETFs

Ray Dalio's "All Weather" portfolio is an investment strategy designed to perform well across different economic conditions. The idea behind the portfolio is that these asset classes have different correlations with each other and will react differently to various economic scenarios, such as inflation, deflation, economic growth, or recession. The goal of the portfolio is to generate consistent returns while minimizing risk, regardless of the economic environment. It typically consists of the following funds:

1. 30% stocks. Ray Dalio uses the . But we chose the MSCI World index, because it adds a diversification benefit as it invests in all developed markets, not just the US.
2. 40% long-term bonds. These are US government bonds with a maturity of more than 20 years.
3. 15% intermediate-term bonds. These are US government bonds with a maturity of 7 to 10 years.
4. 7.5% gold
5. 7.5% commodities

Concretely, you can build Ray Dalio's "All Weather" portfolio with the following ETFs:

You can analyse the portfolio using historical data on Backtest.

Drawbacks of the "All Weather" portfolio

The portfolio has two main drawbacks:

• It's relatively complex for a passive portfolio.
• It has a lower average return than a portfolio consisting of just stocks.

Relatively complex

With 5 ETFs, the "All Weather" portfolios is one of the more complex passive portfolios you can build. And unfortunately, that brings some downsides.

For a start: if your portfolio contains a lot of ETFs, the transaction costs of buying and selling add up, to the detriment of your returns. Especially when your assets are smaller, because then the fixed costs make up a larger percentage of the total investment. The higher costs also make it much harder to invest regularly. For example, if you invest 100 euros every month (which is an excellent habit), you soon risk paying 20 euros in brokerage fees.

Apart from that, the more funds you have in your portfolio, the more complicated investing becomes. This is because you then have to decide which ETFs to buy more of, how much you want to invest in each ETF and so on. This can take a lot of time, which, as a passive investor, is exactly what you don't want to spend on your investments.

A more complex portfolio like the "All Weather" portfolio is also harder to rebalance. The calculations become more complex and you risk paying higher fees to your broker again, because rebalancing requires transactions.

After a while, a diversified portfolio will naturally have some ETFs that perform well and some that do not (temporarily) as well. This is simply the consequence of diversification. You don't put all your eggs in one basket, so your various investments will inevitably perform differently in different market conditions. But you should not let this distract you and sell the ETFs that temporarily underperform. That is market timing, something we definitely want to avoid. What ultimately matters is the return of your overall portfolio.

Lower average return

In the past, bonds and commodities yielded less than equities. So here you are opting for less risk, but therefore also a lower average return, especially in the very long term.

Summary

We looked at the philosophy underlying Ray Dalio's "All Weather" portfolio. We saw how it has performed in the past, and we discussed how you can build it yourself with ETFs. Finally, we showed that it also has some drawbacks for the passive investor.

Questions you may have

Does Ray Dalio's "All Weather" portfolio still work?

Yes. It was designed to work under all economic conditions, so it certainly still works today!