Diversification without borders: the magic of the All-Weather portfolio

“There is no more profitable investment than knowledge.” – Benjamin Franklin, American politician, scientist, and inventor.

Newton and the South Sea Company: the genius that failed to diversify

Sir Isaac Newton is undoubtedly one of the greatest geniuses humanity has ever produced. The man who deciphered the laws of motion formulated the law of gravity and laid the foundations of modern mathematical calculus. His contributions to science transformed mathematics, physics, and astronomy and forever changed our understanding of the world and the universe. Newton could accurately calculate how the planets orbited the Sun, predict the trajectory of comets, and understand the invisible forces that govern the cosmos.

However, there is one law that Newton could never master: human irrationality in financial markets.

The year was 1720 when England was in the throes of speculative fever. The South Sea Company captured the imagination of investors, promising immeasurable riches thanks to its exclusive privileges in trading with the South American colonies. People, from nobles to merchants, bought shares in the company in the hope of doubling or tripling their fortunes overnight. It was a time of unbridled euphoria, and no one wanted to be left out.

Newton was initially cautious. Using his analytical mind, he invested a moderate sum in the Company and, when the stock rose, sold at a significant profit. So far, the scientist has applied the logic and reasoning that had made him a legend.

As the Company’s stock continued to rise, the rumor of easy riches took hold in London. Newton, for all his genius, could not resist. He saw friends and acquaintances become immensely wealthy in a matter of weeks, and his human nature betrayed him. Convinced that the share price would continue to rise, he reinvested, this time with a much larger sum, risking a significant part of his fortune.

Newton did not know that he was not calculating planetary orbits this time but facing the unpredictability of collective madness. The South Seas bubble burst as quickly as it had grown. Within days, stocks plummeted, and thousands of investors were ruined. Among them is Sir Isaac Newton. What had been a “safe” investment turned into a financial catastrophe.

Legend has it that, after losing the equivalent of millions of today’s dollars, Newton muttered bitterly:

“I can calculate the motion of celestial bodies but not the folly of men.”

Newton’s great lesson

Newton’s story is a brilliant reminder of our vulnerability as investors. If someone with a mind capable of calculating the orbits of celestial bodies could succumb to speculation and overconfidence, what can be said of ordinary investors?

The moral is clear: don’t put all your eggs in one basket. Diversifying investments, spreading risk, and protecting against the unexpected is not just a strategy but a necessity. It doesn’t matter how brilliant our minds are if we forget that the market is unpredictable, wild, and full of surprises like the sea.

The Ray Dalio Story: Lessons from Failure

In the summer of 1982, Ray Dalio, one of the brightest and most ambitious investors of the day, was sitting in his office at Bridgewater Associates, watching the market with the confidence that only recent success can bring. He had spent years perfecting his analysis building his reputation, and his firm was starting to become a Wall Street benchmark. Then, he saw it clearly: the global economy was on the verge of collapse. He confidently announced it, convinced of his vision, and went further: he bet everything was right.

Dalio defended his prediction in interviews, meetings, and conferences for months. His clients trusted him, the media listened, and his employees admired him. But reality had other plans. The market, instead of plummeting, soared. The economy, far from going into recession, began to grow strongly.

Dalio’s gamble not only failed but left him completely exposed. The losses were colossal. Ray Dalio lost everything. His company was ruined, his clients left, and he, humiliated and penniless, had to fire all his employees and borrow money from his father to survive. He went from being a rising star in finance to sitting alone in an empty office, rethinking everything he thought he knew.

At that moment of utter defeat, Dalio learned the most important lesson of his life. You cannot predict the future. No one can always be right in a world as chaotic and uncertain as the financial markets, no matter how brilliant.

Dalio could have given up. But instead, he decided to rebuild himself. He went back to studying, analyzing, and thinking. And from that bitter experience, a revolutionary idea emerged: if we cannot predict the future, the smart thing to do is to prepare for any scenario. Thus, the strategy that would take him to the top was born: the All-Weather Portfolio.

Today, Ray Dalio is one of the most respected investors on the planet, founder of the world’s largest hedge fund, Bridgewater Associates, and author of the bestseller Principles. However, what sets him apart is not his successes but how he turned his biggest failure into a tool to protect and multiply the wealth of millions of investors.

Dalio’s story teaches us an uncomfortable but liberating truth: we cannot control what the market will do, but we can build a strategy to withstand storms, winds, and calm seas. A portfolio that, like a good ship, will keep us afloat in any weather.

Why do we need to diversify?

Imagine you are sailing on the high seas. The sky is clear, the sun is shining, and the wind blows gently in your favor. It’s easy to get carried away by the calm and think it will be like this forever. But the sea is unpredictable. In hours, the sky can turn gray, the winds can become hurricane-force, and the waves can rise like walls of water, threatening to swallow you up.

So are financial markets. For years, they can seem calm and predictable. Stock markets rise, investments grow, and the economy prospers. Many investors, confident in this “good weather,” bet everything in one direction, as if the sun would shine forever. But when the storm comes – and always does – their ships sink. We have seen it repeatedly: in the bursting of the dot-com bubble, the 2008 financial crisis, and the 2020 pandemic.

The problem is simple, although few want to accept it: the future is uncertain. Uncertainty is the investor’s greatest enemy. No one can predict whether a trade war will break out tomorrow, a new banking crisis will shake the markets, or a pandemic will paralyze the world again. Not even the best investors on the planet have a crystal ball.

Let’s take an example: for years, real estate seemed like the safest investment in the world. People say that house prices never go down. Then came 2008. Suddenly, millions of people found themselves with unpayable mortgages and properties not worth half of what they had paid. Others who relied only on technology stocks in 2000 saw their fortunes evaporate when the bubble burst. Investors who fail to diversify face the same fate as a sailor without spare sails: they are at the mercy of the storm.

Herein lies the dilemma: if the future is uncertain, how do we protect our money and grow our wealth no matter what happens in the world? The answer lies in the All-Weather Portfolio—a strategy designed to withstand any economic condition: growth, recession, inflation, or deflation. Like a solid ship with sails for every wind and a rudder that stays the course, this portfolio does not promise miraculous gains. Still, it promises stability and resilience, which is gold in the investment world.

Ray Dalio understood it perfectly after losing everything: the secret is not to guess the future but to prepare for any scenario. Because if there is one thing that is certain in the market, nothing is certain.

So, dear reader, if you’re still confident that your boat can weather storms with a single oar, it’s time to rethink. The All-Weather Portfolio doesn’t promise you clear skies every day, but it guarantees you something much more valuable: no matter what happens, you’ll keep sailing.

The solution: Ray Dalio’s All-Weather Portfolio

If the financial world were an ocean, Ray Dalio would be the captain who figured out how to build a ship that could always sail after surviving the worst storms. It doesn’t matter if the sun is shining or the waves threaten to engulf everything; his boat, the All-Weather Portfolio, is designed to stay afloat, move steadily forward, and protect its crew: your money.

But how did Dalio achieve this perfect balance between safety and growth? The answer lies in a simple premise: extreme but intelligent diversification. Dalio understood that the global economy moves between four major economic seasons, each defined by the interplay between economic growth and decline and between inflation and deflation. And, as in the weather, these seasons give no warning when they will change:

• One day, markets will flourish with growth and expansion.

• The next, a recession withers all that has been sown.

• Inflation can raise prices like wildfire.

• Or deflation can freeze everything in a stagnation trap.

The typical investor mistake is to rely on a single economic season. Betting everything on stocks during times of growth is tempting, but what happens when a recession hits? Investing solely in bonds seems prudent, but how do you protect your money if inflation spikes? The key is to be prepared for anything.

What makes the All-Weather Portfolio unique?

Ray Dalio designed the All-Weather Portfolio with one goal: to weather any economic storm and grow with long-term stability. He achieved this by balancing assets so that, no matter what happens, a portion of the portfolio is always working in your favor.

The basic structure of the All-Weather Portfolio is divided as follows:

• 30% in equities: They represent the growth engine in times of prosperity. When the economy grows, stocks shine, and your capital grows.

• 40% in Long-Term Bonds: They act as a haven during recession and deflation. If markets fall, bonds tend to rise, cushioning losses.

• 15% in Medium-Term Bonds: An additional balance to protect capital when volatility strikes.

• 7.5% in Gold: Gold is the “insurance” against inflation and crises. When all else fails, gold usually maintains or its value increases.

• 7.5% in Commodities: Protect your purchasing power during inflationary periods, when commodity prices rise.

This breakdown is no accident. Ray Dalio and his team at Bridgewater Associates ran countless historical simulations to adjust each percentage and see how the portfolio held up under different scenarios. The results were astounding:

• Over the past decades, the All-Weather Portfolio has delivered an average annual return of 7-8%, adjusted for inflation.

• At critical times like the 2008 crisis, it lost only 3.9%, while other portfolios plummeted more than 30%.

Why does the All-Weather Portfolio work?

The genius of this portfolio lies in its balanced, non-intuitive diversification. While other investors pursue individual assets or short-term strategies, the All-Weather Portfolio focuses on long-term resilience. Each asset class serves a specific purpose, and together, they form a perfect symphony where:

• Stocks capture economic growth.

• Bonds protect against deflation and market declines.

• Gold and commodities hedge against inflation.

It is a system that anticipates the unexpected. Like a ship with sails for every wind, this portfolio automatically adjusts to economic changes without needing you, the investor, to constantly juggle.

While others try to predict what the market will do tomorrow, the All-Weather Portfolio plays a different game: it accepts the uncertainty of the future and prepares for any scenario. It is the solution for those who want to sleep soundly at night, knowing that whatever happens – inflation, recession, expansion, or deflation – their assets will be protected and will continue to grow.

Ray Dalio summed it up best when he said:

“You can’t control the world, but you can build a plan that allows you to thrive in it, no matter what.”

And that plan is the All-Weather Portfolio. A simple, effective, and, above all, humane solution. Because in a world of economic storms and unpredictable winds, the best strategy is to have a ship that never sinks.

Criticism of the All-Weather Portfolio

With its promise of stability and resilience to any economic scenario, the All-Weather Portfolio sounds almost too good to be true. And while it is a robust and widely endorsed approach, no investment system is without its critics, nor is it a universal solution. Like any strategy, it has weaknesses, detractors and competitors who put forward other visions of financial equilibrium.

1. Limited profitability in times of growth

Although the All Weather portfolio excels in turbulent times, its performance in times of economic expansion may lag behind other more aggressive portfolios, such as a 100% equity portfolio.

• When stock markets rise by double digits, the 30% allocated to equities in the All-Weather portfolio may seem unambitious and slow capital growth.

• Younger or more risk-tolerant investors may be frustrated to see other strategies capture higher returns.

2. Implementation and maintenance costs

Implementing the All-Weather Portfolio requires diversifying among various assets, some of which, such as long-term bonds and commodities, may involve:

• Additional commissions for purchase and maintenance.

• Need to access funds or ETFs that replicate these assets, which is not always easy or economical in less developed markets.

3. The Role of Inflation in Long-Term Bonds

The All-Weather Portfolio allocates 40% to long-term bonds, which perform well in deflationary or recessionary scenarios. However, when inflation spikes, as it did in 2022, these bonds suffer significant drops in price, affecting the overall performance of the portfolio:

• Critics argue that this overexposure to fixed income could weigh on net returns in prolonged inflationary periods.

4. Lack of adaptation to specific situations

The All-Weather Portfolio is static in its distribution, meaning it does not actively take advantage of economic cycles.

• While other strategies seek to rotate between assets according to the economic context, the All-Weather Portfolio maintains its structure regardless of market signals.

• More experienced investors may prefer dynamic strategies that adjust asset proportions based on opportunity and risk.

Alternatives to the All-Weather Portfolio

While the All Weather Portfolio is a solid and well-designed proposal, other strategies seek to optimize the relationship between risk and return. Here, we present three alternatives that propose different approaches:

1. 60/40 Portfolio (Stocks/Bonds)

• Concept: A classic strategy that allocates 60% to stocks and 40% to bonds. This approach provides more exposure to economic growth while maintaining a buffer with bonds.

• Advantages: Simplicity, reasonable cost-effectiveness, and low complexity to implement.

• Disadvantages: Less protection in environments of extreme inflation or prolonged deflation.

2. Boglehead Portfolio (Total Indexing)

• Concept: Inspired by the philosophy of John Bogle, founder of Vanguard, this portfolio invests primarily in low-cost global index funds, combining stocks and bonds.

• Advantages: Minimal costs, global diversification, and long-term focus.

• Disadvantages: Higher volatility than the All Weather portfolio, especially in bear markets.

3. Harry Browne Permanent Wallet

• ConceptDesigned to withstand any economic scenario, this portfolio allocates:
  • 25% in shares (prosperity),
  • 25% in gold (inflation),
  • 25% in cash or short-term bonds (recession),
  • 25% in long-term bonds (deflation).

• Advantages: Resilience to different economic scenarios, similar to the All Weather Portfolio.

• Disadvantages: Moderate returns and somewhat static exposure to specific assets.

Conclusion: the importance of being prepared

Throughout history, even the most brilliant minds have stumbled into finance. Sir Isaac Newton, the genius who gave us the laws of motion and universal gravitation, could not predict the most unpredictable movement of all: that of the financial markets.

Newton’s story leaves us with a universal lesson: no matter how smart or how well you think you understand the market, failure to diversify can be your undoing. No matter how brilliant a strategy or promising an investment may seem, concentrating all your capital in a single bet leaves you vulnerable to the unexpected.

This is where Ray Dalio’s All-Weather Portfolio comes into its own. Unlike Newton, who bet everything on a single card, the All-Weather Portfolio accurately spreads risk. It is a simple but wise approach because it accepts an inescapable reality: no one can predict the future, but we can all prepare for it.

As investors, we don’t need to prove we are more intelligent than the market or win on every move. We must build a strategy protecting us from our emotions and economic swings. The All-Weather Portfolio does not promise exorbitant returns or quick wins. Still, it offers us something infinitely more valuable: knowing that we are prepared no matter what happens.

In closing, let us recall the words of Ray Dalio, which capture the essence of this philosophy:

“There are no certainties in the markets, only uncertainty. The key is how we prepare for the unexpected.”

Life, like the markets, is unpredictable. But with a solid, diversified strategy, we can navigate any storm. We will not be Newton trying to calculate the incalculable; we will be prudent captains with a compass that keeps us steady on our course while our ship – the fruit of our efforts – stays afloat.

References for further information

Books

• “Principles: Life and Work“ by Ray Dalio. In this book, Dalio shares the principles that have guided his life and career, including his investment approaches.

• “Money: Master the Game“ by Tony Robbins. An interview with Ray Dalio discussing the “All Seasons Portfolio,” an adaptation of the All-Weather Portfolio for individual investors.

• “The All-Weather Portfolio Strategy Portfolio“ by Ray Dalio and Bridgewater. This book details the All Weather portfolio strategy and how to implement it.

These books can be found on Amazon in their paper version, in their version for Kindle version, or as an audiobook for a subscription to Audible.

The links above are affiliate links, meaning if you decide to purchase them, the blog will receive a small commission at no additional cost. This partnership helps keep the content free, informative, and quality.

Online articles

• ¿What is the All Weather Portfolio | All about this famous strategy? This Rankia article offers a detailed overview of the All Weather strategy, its fundamentals, weightings, advantages, and disadvantages.

• All-Seasons: Ray Dalio’s Permanent PortfolioIn this analysis, the differences between the All-Seasons portfolio and the Permanent Portfolio are explored, as well as recommendations for its implementation in Europe.

• All Weather Portfolio. How this Strategy WorksThis article explains in detail how the All Weather strategy works and how assets are weighted according to their risk to balance the portfolio.

• ¿What is the All Weather Portfolio, and how do you replicate it? Here, we describe the composition of the All Weather Portfolio and offer suggestions on how to reproduce it and adapt it to the needs of investors.

• The Portfolio with the Least Losses: The PortfolioThe All Weather Portfolio: This article discusses how the All Weather Portfolio is designed to withstand any economic climate, using assets that perform well in different scenarios.

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The content of this article is purely informative and purely informative and educational. It does not constitute financial, tax, or legal advice. Before you make any investment decision, we recommend you consult a qualified professional who can look at your personal and economic situation. Investments involve risks; the investor is responsible for analyzing and assuming those risks.