"All Weather" Portfolios
Ian Kaplan
November 2021


This Python Jupyter notebook explores investment portfolios that have decent return (approximately 8 percent on average over the last ten years) and lower risk than the overall stock market.


If you are fortunate to have some cash available for investment you have to decide how to invest this cash (not making an explicit investment decision is a decision).

The US stock market, over the long term, has yielded good returns. Unfortunately it is an inescapable fact that risk and return are related. The returns provided by the stock market come with the risk of losses in your investment portfolio, at least in the short to medium term. At the time this notebook was written (November 2021) the stock market had dramatic returns after a COVID-19 inspired market crash. In such a time it is important to remember that there have been many periods where "the market" has had substantial downturns and low returns.

As any good financial adviser will tell you, your investment strategy should depend on your stage in life. Is retirement decades away, close or are you retired?

If your retirement is decades away, one of the simplest ways to achieve good investment returns is "dollar cost averaging" where you invest a certain amount every month in one or more low fee market index funds or ETFs.

When there is a market downturn your share purchase cost will be lower resulting in gains when the market recovers. Many people take advantage of dollar cost averaging by allocating a fraction of their salary for investment in their employer's 401K retirement plan.

If you are at or near retirement age then the inevitable market downturns are much less acceptable since you will not be able to take advantage of market cycles that could last for years.

This notebook explores conservative investment portfolios that have lower risk and lower correlation with the stock market (a.k.a., lower market beta). These are portfolios that may be appropriate for people who are retired or near retirement.

The portfolio that originally inspired this notebook is based on the Bridgewater Associates "All Weather" portfolio proposed by Bridgewater founder Ray Dalio. This portfolio is discussed in a Bridgewater promotional white paper The All Weather Story From the white paper:

What the average person needs is a good, reliable asset allocation they can hold for the long-run. Bridgewater’s answer is All Weather, the result of three decades of learning how to invest in the face of uncertainty.

The results in this notebook show that, in the last ten years (from 2021) the performance a portfolio that is similar to the Bridgewater "all weather" portfolio is no better than a simple 40 percent stock, 60 percent bond portfolio that is often recommended for those at or near retirement. This notebook shows a portfolio consisting of just two ETFs VTI (40%) and SCHP (60%) has less volatility than the "all weather" portfolio with returns that are only slightly lower.

The 40% market/60% bond mix is difficult to beat when it comes to risk and return. A number of dividend assets are examined in this notebook in an attempt to find a portfolio with higher return at a similar risk level. This search was not successful.

Most of the ETFs that were looked at in this notebook have only been in existence for about ten years. The past portfolio performance generally starts in January 2011 (or in some cases 2010).

The last decade has been a time of generally exceptional market returns. This has been driven at least in part by very low interest rates (sometimes rates close to zero). With fewer options for asset returns, money has flooded into the stock market, resulting in high market returns.

The results in this notebook suggest that 40% of the assets in "the market" and 60% in bonds yield the decent returns with lower risk. The market asset examined in this notebook is VTI, which is an ETF that mirrors the S&P 500.

I looked at a variety of other market ETFs (small cap, mid-cap, etc...) None of these had better return in the last ten years than VTI. One of the certainties in life is change and the market will not stay the same. A more diversified "market" asset, consisting of ETFs that hold value stocks for small and medium capitalization companies, along with an ETF holding foreign stocks would provide a way to deliver higher diversification for "the market" asset. I may look at the performance of a portfolio with a more diversified "market asset" in a future notebook.

The Bridgewater All Weather Portfolio

An analysis and practical examples of the All Weather Portfolio is published on the Optimized Portfolio web site The portfolio proposed on the Optimized Portfolio website (and used in this notebook) replaces Dalio's commodity assets with utilities.

Ray Dalio's All Weather Portfolio consists of the following assets:

A Portfolio of ETFs

The Optimized Portfolio article on Dalio's All Weather portfolio lists a set of ETFs (Exchange Traded Funds) that approximate Dalio's portfolio recommendation, replacing commodities with utility assets.

The ETFs that make up the Optimized Portfolio version of the all weather portfolio are outlined below.

All Weather Portfolio Weights

This ETF version of the All Weather portfolio is compared with a portfolio that only consists of the market (VTI) and bond assets (VGLT and VGIT). This make up of this 40% market/60% bond portfolio is listed below.

40/60 Stock/Bond Portfolio Weights

The ETFs in the portfolios are briefly described in the table below:

From etfdb.com and etf.com:

For this set of ETFs, earliest common start date is November 19, 2009

2X Leveraged ETFs

Leverage refers to using borrowed money to purchase an asset. Leverage increases both the potential profit if the asset increases in value and loss if the asset declines in value.

There are a number of ETFs that provide leverage for their asset class. The ETF selection here is from Optimized Portfolio. Due to the cost of leverage (e.g., borrowed money) the expense ratios for these ETFs is higher (expense ratios of 0.91 to 0.95 percent).

At the end of 2021 the stock market appears over priced and it seems inevitable that interest rates will rise. This suggests possible declines in both market funds and bond funds. In such an environment, leveraged ETFs may not be the best choice. A 40/60 stock/bond fund is included here to explore the impact of leverage.

2x leveraged ETFs

Earliest common date for the leveraged ETFs: January 19, 2010

Some observations on the All Weather Portfolio

Portfolio Weights and Peformance

Two of the assets, VGLT and VGIT, for the unleveraged portfolio and UBT and UST for the leveraged portfolio are treasury bond ETFs. This gives the All Weather portfolios a weighting of 55% in treasury bonds and 30% stocks, with 15% in other assets (utilities and gold).

The All Weather portfolio allocation is close to the retirement portfolio allocation recommend by Charles Schwab (see Structuring Your Retirement Portfolio) for ages 60 to 69 (35% stocks, 60% bonds and 5% money market). A discussion of broad portfolio allocation strategies is published on the Optimized Portfolio site (see Portfolio Asset Allocation by Age)

This notebook shows that the contribution of the Gold ETFs (IAU) and the utility ETFs (VPU) are not significant compared to a 40/60 stock/bond portfolio, in terms of volatility and return. The "secret sause" of the All Weather portfolio doesn't deliver much, if anything in terms of return and lowered risk.

The AOM ETF is described as a conservative mix of assets. This notebook briefly looks at whether the AOM ETF could replace the 40/60 stock/bond portfolio investigated here.

AOM: iShares Core Moderate Allocation ETF

AOM is one of four iShares Core target-risk ETFs. The fund is a fund-of-funds that invests exclusively in a global portfolio of iShares ETFs with 40% allocation to equity and 60% allocation to fixed income.

Close vs Adjusted Close Prices

Many of the assets in the portfolios investigated in this notebook pay a dividend. Factoring in this dividend is critical to arriving at a correct portfolio evaluation. This requires properly applying the asset close price and adjusted close price.

The close price for a stock is the market price of the stock at the end of a trading day. This is the (approximate) price that the asset can be purchased for in the market.

The adjusted close price is the end of market stock price adjusted for a variety of "corporate actions" which include dividend payments and stock splits. The return on the asset adjusted close price is used to calcuate portfolio value.

Yahoo Finance Adjusted Close Price Calculation

Dividend multipliers are calculated based on dividend as a percentage of the price, primarily to avoid negative historical pricing.

For example (from yahoo.com):

An example of the ETF YYY showing both the close price and the adjusted close price.

As the table above show, an ETF that is similar to YYY is PCEF. Unlike YYY, PCEF has not lost as much share face value, although the yield is less (adjusted for costs, PCEF's yearly return is 4.34% vs. 6.65 for YYY).

The close price and adjusted close price for PCEF are plotted below. For comparison purposes the time period is the same as the previous plot.

Asset return over time

The simple return for a time period t is:

$\ R_t = \large \frac{R_t - R_{t-1}}{R_{t-1}} = \frac{R_t}{R_{t-1}} - 1$

The portfolio value calculated via continuously compounded returns is:

$\ portfolio\ value\ = V_t = V_{t-1} + V_{t-1} \times R_{t} $

where $\ V_{0} = initial\ investment $

Verifying the Asset Return Calculation

The portflio return is calculated by iteratively applying the asset return from the initial portfolio value.

For a stock with no dividends and no splits the asset value calculated via continuously compounded returns should be the same as the close price. An example of a stock without dividends is Google (Alphabet), symbol GOOGL.

The Google daily returns are plotted above.

All Weather Portfolio Allocation

A portfolio allocates a percentage of the investment cash to each asset categry which is used buy shares in each of the assets. There are no fractional shares, so the amount invested may be less than the total amount of cash.

Rebalancing the Porfolio

The All Weather portfolio has 30% of it's assets in a stock market ETF (VTI: Vanguard Total Stock Market for the unleveraged portfolio and SSO: ProShares Ultra S&P 500 for the leveraged portfolio. If the overall stock market is changing in value, the value of these ETF shares will increase or decrease and the percentage of the portfolio held in "the market" will increase or decrease as well. To maintain a 30% share in the stock market asset the portfolio may need to be rebalanced.

Portfolio rebalancing is usually done either quarterly, every six months or yearly:

There are potential short term capital gains taxes from rebalancing a portfolio in a period under a year and a day, but they should not be significant.

All Weather Portfolio without rebalancing

The plot below shows the portfolio value without rebalancing. In this case the initial portfolio is purchased using the "all weather" percentages and the portfolio is allowed to grow without rebalancing.

Over time the fraction of the portfolio invested in the market index fund is likely to move outside of the 30% allocated to the market index if the portfolio is not rebalanced.

The plot below shows the percentage of the portfolio invested in the market, without portfolio rebalancing.

The "all weather" portfolio is designed to limit exposure to market downturns. The plot above shows that the market exposure grows as the percentage of the market asset increases.

Portfolio rebalanced every quarter

The plot below shows the portfolio rebalanced every quarter.

The portfolio is very volatile. The asset percentages in the all weather portfolio are:

To verify that the portfolio rebalancing is producing the right asset percentages, the asset percentages are plotted below.