Ray Dalio’s All Weather Portfolio: How To Properly Diversify Your Investments And Lower Risk

Ray Dalio has often suggested his All Weather portfolio as an investment option for individual investors looking to achieve good returns for low risk. It was a portfolio allocation popularized in Tony Robbin’s book, MONEY Master the Game: 7 Simple Steps to Financial Freedom. And over the long term, it has shown an impressive history of delivering consistent returns with half the risk of less of traditional stock investment portfolios.

How does the All Weather portfolio achieve this?

Short answer: diversification.

Here’s how Dalio described the impact of diversification, what he calls the Holy Grail of investing:

“That simple chart struck me with the same force I imaging Einstein must have felt when he discovered E=MC2: I saw that with fifteen to twenty good, uncorrelated return streams, I could dramatically reduce my risks without reducing my expected returns. It was so simple but it would be such a breakthrough if the theory worked as well in practice as it did on paper. I called it the “Holy Grail of Investing” because it showed the path to making a fortune. This was another key moment in our education.

We were startled by the results. On paper, this new approach improved our returns by a factor of three to five times per unit of risk, and we could calibrate the amount of return we wanted based on the amount of risk we could tolerate. In other words, we could make a ton more money than the other guys, with a lower risk of being knocked out of the game — as I’d nearly been before.

The success of this approach taught me a principle that I apply to all parts of my life: Making a handful of good uncorrelated bets that are balanced and leveraged well is the surest way of having a lot of upside without being exposed to unacceptable downside.”

Now, while you might not have as many uncorrelated return streams as Dalio, you can still mimic very similar returns by investing in uncorrelated (or low-correlation) asset classes within a portfolio.

One example of how that can be achieved is the All Weather portfolio asset allocation:

30% Total Stock Market
40% Long Term Bonds
15% Intermediate Bonds
7.5% Commodities
7.5% Gold

An average investor can easily replicate this with a combination of low-cost index fund ETFs:

30% Vanguard Total Stock Market ETF (VTI)
40% Vanguard Long-Term Bond ETF (BLV)
15% Vanguard Intermediate-Term Bond ETF (BIV)
7.5% iShares S&P GSCI Commodity-Indexed Trust (GSG)
7.5% iShares Gold Trust (IAU)

Now of course this is only one example of using diversification across asset classes to reduce portfolio risk. Another example that is similar to how I am currently investing my own stock portfolio (which you can view via the second description link) is the Golden Butterfly portfolio.

Hopefully, this gives you a better appreciation of the value diversification can have in reducing portfolio risk and give you some practical examples for how you can implement greater diversification within your own investment portfolios.

If you have any questions about the content in this video or suggestions for future videos, please share them in the comments below!

DISCLAIMER: This video is a resource for educational and general informational purposes and does not constitute actual financial advice. No one should make any investment decision without first consulting his or her own financial advisor and/or conducting his or her own research and due diligence. There is no guarantee or other promise as to any results that may be obtained from using this content. Investing of any kind involves risk and your investments may lose value.

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Michael Jay - Value Investing

[ChristopherAbelman]

Several of the biggest market experts have been voicing their opinions on exactly how awful they think the next downturn would be, and how far equities may have to go, as recession draws closer and inflation continues well above the Fed's 2% objective. I'm trying to build a portfolio of at least $850k by the time I'm 60, therefore I need suggestions on what investments to make.

[anna-brazz]

If you had $250k, which investments would you go for in terms of maximizing returns and mitigating risks? I'm semi-retired and only work 7.5 hours weekly. Looking for opportunities in the market that can fetch me millions, then I can retire.

[IsabellaAriaum]

"Diversifying your portfolio is planting different crops—some grow faster, others take time, but together they thrive."

[cortez]

My portfolio of 200k is not increasing any more than 5% and we seem to be facing a massive crash now. I cant tell where the market is headed, perhaps I should just sell off and avoid the panic, or are there specific ways I can mitigate risk and benefit from a crash?

[WilliamTurner-odij]

I was adviced to diversify my portfolio among several assets such as stocks and bonds since they can protect my portfolio for retirement of about $170k. I need advice: Do I keep contributing to my portfolio in this unstable market or do I look into alternative sectors?

[johndeanconway]

In such times as this, you’ve got to make sure you consider having a diverse investment strategy. Your portfolio should have exposure to different areas of the market, including small or large-caps of ETF index, international stocks, grade bonds and alternatives like currency market (forex & digital-ledger) as this will help manage the overall risk on your portfolio.

[Andrew_Stotz]

I remember seeing this video a while ago and then I couldn’t find it in today while scrolling around on YouTube I found it again. Thanks so much for your excellent videos you really do a good job of explaining things

[DividendGrowthInvesting]

Really informative! I wish you had a podcast on spotify.. I would listen to your videos in the car on my commute to work.

[carlbowden]

As I'm now 60 I'm looking for more conservative ways to invest. This helps, end of year approaching time to rebalance some assets.

[fabianstoll]

Backtesting bonds is tricky because interest rates are dropping since the 80s.

[David-josy]

Dear Michael, thank you so much for this great synthesis. A question, earning and living (I.e. spending) in the Euro-zone, how does the forex risk affect this asset allocation, given it’s mostly denominated in USD? How would you deal with this matter? Many thanks, David

[gerardoacuna]

Michael: Excellent video, very helpfull to understand Dalio's portfolio.

[Larold_Jr]

Thx bro. Great info. I'm in my mid 30s and my risk tolerance is very low. I do invest aggressively with my retirement plan that is offered through my workplace but I like this all weather portfolio for my personal portfolio. I'm going check out your golden butterfly portfolio video next.

[TheTechCguy]

I love diversifying investments! Based! ❤️❤️🙏💯

[TheGreatTradingBros]

Great video Michael! Really enjoyed it. Ray is something special and his advice is priceless.

Also thanks for the portfolio charts suggestion.

[CapitalWorksPro]

A note about Money, Master The Game: great principles, but this all weather portfolio assumes you have a weak stomach and will sell as you see your investments tank 40% and lock in your losses. However, if you can just keep buying while things are doom and gloom, you will eventually see significant gains as the market recovers. Locking in losses is what kills investors, not the drops. You dont jump out of a roller coaster upon its descent from its peak, you stay until the ride is over.

Michael, you can achieve the 7.5% weights to gold and commodities by creating an outer pie weighted at 15%, then placing gold and commodities equally within the pie at 50%

[cyberstar]

Your a star for goving the breakdown. If I could double like i would!

[bobg]

Excellent presentation with really good visuals. I also like the specific examples as to what to buy. Good job.

[jennifergonzalez]

You're great. Thank you so much for your videos

[ahmed_mak]

You got yourself a subscriber in the first minute of the video. VERY STRUCTURED AND STRAIGHT TO THE POINT!!