Ray Dalio is a highly successful investor and manages the world's largest hedge fund, Bridgewater Associates. With one of his investment options, the All Weather Fund, Dalio emphasizes a large percentage of bonds, and it's seems to work well during economic downturns. Enough so, that I decided to take a look at the strategy's potential long-term performance from a historical perspective. As they say, past performance doesn't guarantee future results, but it's still the best way to compare this fund to other investment types, so that's what I decided to use.
Generally, the all weather fund breaks down like this
In my model of the all weather fund, I decided to use the last 30 years to accurately represent market fluctuations, bubbles, and recessions. For stocks, I used the annual returns from the S&P 500 including the dividends. This strategy might work better for professionals who can better identify undervalued companies, by for my investing purposes the S&P 500 is as good a bet as any. For other commodities, I used the annual returns for crude oil to simplify the model.
The all weather fund lives up to its name during economic downturns. In the model over the past 30 years, the biggest all weather fund loss would have been -6.48% in 2008. 2008 was also the worst year for the S&P 500 with a return of -36.55%. The all weather fund model posted a loss in only 5 total years, with 2008 being the only year with a loss of more than -3%. The S&P 500 posted negative returns in 6 years, and in all of them, the return was worse than -3%. We might be able to infer that the S&P 500 could be at risk for larger short-term losses than the all weather fund.
The all weather fund does appear to deter against risk quite well, but it also hinders growth. The best annual return for the all weather fund was observed in 1995 with a return of 22.21%. 1995 was also the best year for the S&P 500 with a return of 37.20%, and from 1990 through 2019 the S&P 500 posted gains of greater than 22% in 9 of the 30 years. So while the S&P 500 does experience larger losses than the all weather fund, it also has the potential to see substantially more gains.
This holds true over the 30 year period overall as well. Starting with $10,000 in the all weather fund in 1990 we reach a value of $82,816 in 2019 without any additional contributions. This comes out to an annual return of 7.3%. With $10,000 in the S&P 500 in 1990, we see the balance grow to $168,412. The annual return for the S&P 500 over that time was 9.9%. The difference in return rate might not seem drastic here, but the balance of the $10,000 put in the S&P 500 is over twice the balance of the all weather fund.
So we've established that there's a difference over a 30 year time frame, but what if you're looking for a faster return? What if I want to retire in the next 10 years, and I don't want to wait 30 years for my money to mature? Over the last 10 years, the difference is even more drastic. Since the start of 2010, the all weather fund would yield a paltry 6.31%. $10,000 in 2010 would have grown to a measly $18,439. For the S&P 500 however, the return is more than double at 13.44%. $10,000 would have grown to $35,291. Now I will note that we're in one of the longest bull markets on record, and aside from a few weeks in 2018 and the recent downturn from the coronavirus, we've never seen the stock market this hot, but that could be a sign of the times as well. The fed has already said they'll do whatever it takes to keep the stock market afloat. Maybe that's just the reality of today's american economy.
The all weather fund is designed for larger institutions, and Ray Dalio doesn't even accept money from private investors, which explains why he hedges so strongly against large losses. The all weather fund could be a great solution for institutions, like pension funds, who have consistent withdrawals, and can't afford large losses, but for my own personal investments, I won't be making consistent withdrawals for several years, and can stomach larger losses while I increase my long-term returns. When I get to the point where I'm 2-3 years away from retirement, then I might start shifting my strategy to preserve principle and guard against losses, but while I'm actively building my portfolio, and increasing my earnings and net worth, I will continue to invest in assets that grow at a faster rate.