AMA First Investment
Asked by Anonymous
Asked on 29 Jan 2019
Hi Anonymous, this is Chuin Ting Weber, CEO & CIO of MoneyOwl. I infer from your question that you are thinking of implementing the strategy of Bridgewater/Ray Dalio's "All Weather Portfolio", namely, the strategy of Risk Parity.
To re-cap quickly on Risk Parity: in traditional asset allocation, you allocate according to asset classes, e.g. 50% equities and 50% bonds. In risk parity, conceptually, you allocate according to risk. For example, if you thought that equities were twice as risky than bonds, then one way of doing risk parity would be to allocate much less to equities and much more to bonds. A usual proxy for risk is volatility. But this is probably too simplistic for most funds. For Bridgewater, All Weather was meant to be a systematic, "automatic" way of investing. All Weather allocates to assets that respond differently in four environments (hence "weather"), namely, combinations of rising growth, falling growth, rising inflation, falling inflation. 25% of risk is allocated to asset classes that perform well in each (this is all on Bridgewater's website):
The idea is that the returns are not cancelled totally and net returns are more than cash over time.
Some roboadvisors, e.g. WealthFront, have introduced risk parity ETFs. There is even one roboadvisor that also uses the term "All Weather".
I have the following difficulties with recommending All Weather/ Risk Parity as a main strategy for investors.
Perhaps we can take a leaf out of the book of institutional investors. I have said that "risk parity" is a strategy and not an asset class. What is an asset class is "hedge funds" in general (or you can say it is a sub-asset class under the asset class called "alternatives"). Bridgewater is such a hedge fund. Institutional investors do allocate to hedge funds, but usually limit exposure, e.g. university endowment funds that have a long investment horizon will go for say, 20% in alternatives, and generally not more than 5% in each fund or strategy. The thing is, hedge fund performance is really dependent on manager skill and included in the portfolio generally because it gives uncorrelated return to traditional asset classes, but there is often a question if the return is not just leveraged beta - and All Weather is indeed beta. For me, it is really a question mark over whether fund managers can perform consistently over the long term to beat the market. Over the past years, for all the trouble that fund managers go to and all the costs, it has been very hard to beat the market especially on a net basis.
So if you wish to try it out, maybe you can consider a small percentage of your portfolio in this strategy, but bear in mind the implementation problems mentioned above especially if you do not have a lot to start with.
But for your main portfolio, from a financial planning point of view, the portfolio that you invest in to help you accumulate wealth should be based on your (1) need to take risk (what is your required return, e.g. to fund your retirement) (2) ability to take risk and (3) willingness to take risk. For most of us, a globally diversified portfolio comprising of equities and bonds should suffice. Less is more when it comes to investing. Find the correct asset allocation for you such that you can bear short-term volatility without panicking and selling off, search for portfolios that put this asset allocation together using low-cost funds that do not time the market, and capture market-based return by staying invested over the long term. That would probably be the best bet for your investing experience and for your financial goals.
All the best!
Chuin Ting Weber
02 Feb 2019
Ray Dalio gave a sample portfolio, a simplifed version for beginners, so YES it is suitable.
There are variants of the sample portfolio. As I first learnt about All Weather Portfolio from Tony Robbins book, I summarized as follows:
Asset allocation is the most important investment decision.
Ray’s has large allocation to bonds to counter the volatility of stocks.