Bridgewater Associates Founder Ray Dalio: The Concept and Operation Mechanism of the All-Weather Portfolio

Author: @RayDalio

Translation: He Tongxue

Bridgewater Associates Founder. I am currently at a stage in life where my main goal is to pass on the principles I have learned over the past 60 years—principles that have helped me and that I believe can help others—to more people. I believe one of the most important investment principles I can share is about what an “All Weather Portfolio” is and how to build such a portfolio. I think these principles are especially valuable in today’s risky environment.

For me, the most important thing for most investors is to have a portfolio that: a) is fully diversified and carefully designed to achieve the highest possible returns with the least risk; b) does not require market timing. The reasons are: a) although most people believe the safest investment is cash (such as short-term government bonds or high-quality money market funds with near-zero default risk) because it won’t default, these cash investments will inevitably produce the lowest after-tax returns over the long term and perform poorly during high inflation—losing significant purchasing power. Similarly, b) almost all investors (including most seasoned professionals) cannot effectively time the market, even if they believe they can. Therefore, I think most self-managed investors should minimize or avoid market timing.

An All Weather Portfolio is a passive investment portfolio expected to yield returns much higher than cash or other low-risk assets, but with risk far lower than stocks and bonds, regardless of the environment. This differs from most traditional portfolios—like the classic 60/40 stock/bond mix or those that perform well in good years and poorly in bad years. To be clear, an All Weather Portfolio is a type of portfolio designed to achieve the above goals, not a specific investment product. It’s more like a financial engineering challenge aimed at balancing these factors, which can then be used to develop investment products. My version of the All Weather Portfolio is built in my own way, which I will briefly describe here and elaborate on later. Naturally, my approach has evolved and improved over time, and I have ideas to make it even better. But anyone can implement it in their own way—perhaps I should hold a contest to see who can build the best approach.

Let me start by explaining how I developed my method and how it works.

About 30 years ago, I tried to create an investment strategy for my family so they could invest independently after I pass away, without my guidance. I believed I needed a portfolio that could:

a) Provide significantly higher returns than cash (equal to or exceeding the classic 60/40 stock/bond mix);

b) Have lower risk than the 60/40 portfolio;

c) Perform well in any economic environment;

d) Not require market timing.

In my view, the only way to achieve such an All Weather Portfolio is to hold a diversified mix of higher-return, higher-risk investments, which, when combined, produce the same high returns as a single asset class but with lower overall risk due to diversification. To improve diversification, I introduced the concept of “Risk Parity”—adjusting investments across different risk levels (volatilities) by increasing exposure to low-risk/low-volatility assets and decreasing exposure to high-risk/high-volatility assets, so their risk contributions are balanced. Then I balanced my allocations based on the fundamental drivers of each asset class’s returns. In other words, by understanding how each asset class responds to changing economic conditions (like inflation and growth—e.g., bonds underperform when inflation and growth rise, while inflation-hedging assets like gold, inflation-linked bonds, and commodities perform well), and allocating risk equally across environments of rising and falling inflation and growth, I could create a passive strategic portfolio that remains well-balanced across all economic scenarios. Even after 30 years, I still believe this core strategic approach is essential. My All Weather Portfolio is my ideal, long-term strategic asset allocation—what I call the “Beta” (asset class) portfolio. While I also make tactical bets based on my market outlook to generate “Alpha,” these are achieved through a fully diversified Alpha portfolio, which I call “Pure Alpha” (I won’t go into detail here as it would be off-topic).

Together with my excellent Bridgewater team—especially Bob Prince and Greg Jensen, who have worked at Bridgewater for 40 and 30 years respectively and remain co-CIOs—I developed this All Weather approach. Once it was complete, I found it simple and straightforward enough that almost anyone could implement it. I couldn’t imagine we would be paid for managing others’ money to do this, so I showed almost everyone I knew how to do it (and still want to). To my surprise, many clients asked us to manage their funds using this strategy. We launched it as a product, which has naturally continued to evolve and improve. Bridgewater now operates and optimizes it in their own way, and I do the same in mine. The difference is: they manage All Weather accounts for others, while I only do it for my family and family foundations, and also show others how to do it.

Whether investors build their own All Weather Portfolio or delegate it, my greatest hope is that people understand how it works and have the opportunity to apply it, so they can confidently achieve good returns without unacceptable losses in most market/economic environments that others might consider terrible. I’ve written extensively about how to build my All Weather Portfolio and distributed this knowledge widely. (For example, if you want to systematically learn my investment principles, you can access an online course I built in partnership with the Singapore Wealth Management Institute.) Anyway, I will soon write out my “recipe”—a clearer guide on how you can build your own All Weather Portfolio—and will share it once it’s ready.