There was a request from some of my subscribers to continue to educate them as we go on this journey of making money together. So here goes….this is my attempt at doing that.
In this first of what will hopefully be several in the series; we will talk about the All Weather Portfolio and why that was the basis of my algorithmic trading algorithm many moons ago.
The All Weather Portfolio is a diversified asset mix first introduced by hedge fund manager Ray Dalio and popularized in Tony Robbins’s book MONEY Master the Game: 7 Simple Steps to Financial Freedom.
The portfolio consists of stocks (30%); Long Term Bonds (40%); Intermediate Bonds (15%); Gold (7.5%) and Commodities (7.5%)
Why this mix? Because this combination of assets will do well in any economic scenario: Bull Market, Bear Market, Recession, Inflation, Deflation etc.
We have talked earlier about why these assets do well….going back to my analogy about money and water. Money has only a few defined paths to flow into…..stocks where you lend money to companies, bonds where you lend money to the government and commodities and assets when you don’t trust anyone.
Look up these links if you want to learn more about the all weather portfolio…
https://www.iwillteachyoutoberich.com/blog/all-weather-portfolio/
http://www.lazyportfolioetf.com/allocation/ray-dalio-all-weather/
Here is the performance of the all weather portfolio compared to the market
Portfolio 1 above is the All Weather Portfolio.
Portfolio 2 is a portfolio consisting of 60% stocks and 40% bonds
Portfolio 3 is a all stocks portfolio
All values are from 2007 onwards.
Take a look at the returns. A 60:40 stocks and bonds portfolio had the highest return; but also a 25% drawdown
The All weather portfolio had a lower return; but a significantly lower drawdown as well. Sharpe ratio is the highest at 0.94
If you are looking for a steady portfolio which can do consistently well year on year; the All Weather Portfolio delivers. It even delivered a 3% return in 2008 when stocks crashed.
For all of you with 401K accounts through your company with restricted options; this is the model you would want to adopt. Keeps your money safe in any scenario.
As of our Risk Parity algorithm, this was the starting point for Midas; our AI Robo-Advisor. We then implemented layers on top of this to generate higher returns; while keeping the risk low.
