Investing for All Seasons

Investing for All Seasons


I love perusing message boards, and a recent conversation on the All Seasons portfolio mentioned in Tony Robbins’ recent book naturally piqued my interest.  It’s based on the highly respected work of Ray Dalio (of Bridgewater All Weather Fund fame), but pared down to a form that a normal non-institutional investor can easily implement themselves.

With a focus on wide diversification and risk parity for a variety of economic climates, the fundamental theory behind the All Weather Fund has always appealed to me.  So it was refreshing to find a simplified version endorsed by Dalio to compare against other lazy portfolio options.

Tony Robbins’ published explanation is sufficiently motivational and certainly does not disappoint.  With his calculated 9.7% average return and a worst down year of only 3.9%, what’s not to like?  But one thing immediately sticks out for me that deserves discussion.  For a portfolio called “All Seasons” and designed to do well in all economic conditions, only looking at returns since 1984 (the “modern period” in his terms) glaringly excludes a significant season from his analysis — the frigid 1970’s.  Marked by ridiculously high inflation and skyrocketing interest rates, the 70’s were on par with the great depression in wealth-destroying conditions for many investors.

So how might the All Seasons portfolio perform over… all seasons?  Let’s take a look.

All Seasons CAGR Pixel Chart

The Pixel chart displays every investing period starting between 1972 to 2014, allowing us to see the larger historical picture at a glance.  The first thing you’ll notice is the block of red in the top ten years of the chart — that’s what winter really looks like!  The second is thing to note is the stats since 1972 when compared to 1984.  Adjusting for both inflation and the notable investing winter, the average return was 5.5% instead of 9.7%.  And the worst year was down 11.7% instead of 3.9%, with a longest drawdown of 10 years.  One can easily see how only looking at nominal results since 1984 would greatly alter the conclusions.

That said, it’s important to note that these are actually fine results that fall right in line with many other lazy portfolios, and I’m not at all suggesting that the All Seasons portfolio is a poor choice.  I like that it is broadly diversified with uncorrelated assets, I appreciate the low volatility, and I think that it would be a fine choice for many investors.  And while I agree with some critics that holding such a large percentage of long term treasuries may skew the overall returns since 1984, I think that the above chart somewhat diffuses their call for reducing exposure.  After all, the portfolio actually did pretty darn well in the 70’s even with 30-year rates blowing up from 8% to 15% between ’77 and ’82.  Compare that to the Classic 60-40 with more stable intermediate bonds:

Classic 60-40 CAGR Pixel Chart

Or the Total Stock Market with no bonds at all:

Total US Stock Market Returns by Period Pixel Chart

The 70’s were a tough time for many portfolios, and there’s no shame in that.  But look at the 2000’s and the long term treasuries really shined.  I imagine many stock investors over that timeframe wished they had taken a more diverse approach in retrospect.

When evaluating a portfolio for all seasons, it’s important to take a look at the big picture and not to sugarcoat the results.  But at the same time, don’t be too quick to dismiss a good portfolio just because you think one asset is due for a correction.  Take the time to study a little history, and the resiliency of diverse portfolios may surprise you.

So as you browse portfolios and play with the calculators, be sure to be honest with yourself about what you see and to think about how you’d react not only in the good times but also in the bad.  Because constantly churning portfolios is almost guaranteed to lose you money, any portfolio you’ll remain comfortable with when the chill hits is likely a keeper.  I believe the All Seasons Portfolio is a worthy addition to the lineup, and hope it spurs thought and discussion about how other portfolios might weather the seasons as well.