Conservative Portfolio Investing
In the modern investment world, consumers have many different ways to put their capital to work.
Long gone are the days of simply splitting capital between stocks and bonds.
Nowadays, investors also have the choice to invest in many other arenas such as managed futures, commodities, real estate, precious metals and more.
One of the most successful investors of the modern age has to be Ray Dalio, founder of the world's largest hedge fund.
Dalio has been through all types of market scenarios including bull markets, bear markets, sideways markets and more.
His decades of market experience have led him to come up with an all weather portfolio, or a portfolio that is built to perform in any and all market situations.
Ray Dalio founded Bridgewater Associates in 1971.
Since its founding, Bridgewater has grown to become the largest hedge fund on the planet, currently managing some $140 billion of institutional money from pensions, endowments, central banks, foreign governments and others.
The Bridgewater all weather portfolio is a product of a simple question:
What type of portfolio could one hold that could perform well across a wide variety of environments, including a devaluation or something completely different?
Following decades of study, Bridgewater then created an investment structure that could be indifferent to discounted economic conditions.
Put simply, it would not matter whether the economy was performing well or performing below expectations, the portfolio could potentially see strong performance either way.
The portfolio was originally launched in 1996 and was intended for Dalio's trust assets.
What began decades ago as a series of questions has now blossomed into a movement.
The all weather portfolio and the concepts behind it have changed the way that the largest pools of capital manage their money.
The practical philosophy behind the portfolio suggests that it is not going anywhere and could remain a bedrock principle of large capital investment for decades or longer to come.
The construction of the all weather portfolio relies on a mixed bag of asset classes that can get through any economic storm.
The portfolio uses a mix of long-term and intermediate-term bonds, stocks, commodities and gold to achieve its desired results.
Now, you may be asking what makes this asset class different from any other recommended asset mix on the market?
The answer to that question is actually fairly simple:
The all weather mix contains asset classes that have performed well during all type of economic environment.
For example, during periods of heightened economic activity, the stock portion of the portfolio may outperform the bond portion which could lag behind.
During periods of slower economic activity, the bond portion may outperform the stock allocation.
The commodity and gold allocations of the portfolio may outperform during periods of rising inflation or geopolitical uncertainty.
During times of deflation, any declines seen in these assets may be offset by rising stock or bond prices.
Since it began being utilized, the all weather portfolio has shown excellent growth figures and the potential for great returns.
The portfolio has shown tremendous resiliency during both good times and bad.
In 2008, a year in which many hedge funds suffered major declines, the Bridgewater Pure Alpha fund rise by 9.5% net of fees.
The fund then went on to return 45% last year, marking the highest return of any hedge fund for the year.
Although the portfolio can exhibit excellent, above average returns, it does so with little volatility compared to other products or allocations.
What makes the strategy so smooth?
The combination of asset classes is what may keep the portfolio on stable footing, regardless of market or economic conditions.
The allocations contained within the strategy are designed to smooth out the bumps.
As one allocation rises, another may be on the decline.
Over time, however, the allocations may increase net returns while also keeping risk at acceptable levels.
This can make it much easier for investors to stay the course and to continue to invest more capital along the way.
The all weather portfolio reportedly has made money over 85% of the time between 1984 and 2013 and the losses it did see were on average less than 2%.
Back-testing showed similar results.
During the Great Depression backtesting, for example, the portfolio would have lost 20.55% while the broad market S&P 500 lost 64.4%.
In some years when the S&P suffered major declines, the strategy actually made money.
Once the portfolio has been set up, it may require periodic rebalancing in order to maintain the desired allocations.
Portfolio rebalancing is not as complicated as it may sound and can be done in a matter of minutes with a major broker.
In order to rebalance the portfolio, you need to calculate how much each allocation now takes up of the total portfolio.
For example, if stocks had a great year and your portfolio is now 50% in stocks, you will need to either add capital to the other allocations or sell shares to reduce the stock portion to the desired 30%.
Each year, you simply run the math and make sure each asset class makes up the desired portion: 40% long-term bonds, 30% stocks, 15% intermediate-term bonds, 7.5% gold and 7.5% commodities. That's it!
The all weather portfolio is designed to minimize risk while providing stable, above average returns.
The portfolio, while it does much of the work, will not do all of it, however.
It is up to each investor to add more capital on a regular basis and to rebalance their holdings on an annual basis.
Keeping some capital set aside to invest during the more challenging times can also pay off big.
Done consistently over time, this can add significant amounts to net returns while also smoothing portfolio volatility.
The all weather portfolio can be an excellent tool for assisting you in achieving your financial goals.
To the portfolio, however, you must add discipline, consistency and more funds in order to really maximize what the portfolio may provide.
Doing so over a long period of time can have a dramatic impact on the value of your portfolio.