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The end of the bull market
Legal Disclosure: Tony Robbins is a board member and Chief of Investor Psychology at Creative Planning, Inc., an SEC Registered Investment Advisor (RIA) with wealth managers serving all 50 states. Mr. Robbins receives compensation for serving in this capacity and based on increased business derived by Creative Planning from his services.
And the question everyone is asking is, “How long will it last?” We are not here to predict the future, but we want to ask you another question – “Will you be ready when it does come?” Because unlike the zombie apocalypse… this is a certainty you do need to prepare for.
We all remember the pain of 2008 – and yet not everyone lost half of his or her savings that year. Can you imagine a portfolio that declined just 3.93% in 2008, when the world was melting down and the market was down 50% from its peak? A portfolio where you can more than likely be safe and secure when the next gut-wrenching crash comes? A strategy that would greatly limit both the frequency and size of losses in nearly every conceivable economic environment, and simultaneously give stock market-like gains?
There is such a strategy – and it was designed by none other than Ray Dalio.
“Who?” you might ask. The average investor has never heard of Ray Dalio, but his name echoes in the halls of the world’s most wealthy and powerful people. He founded Bridgewater Associates, the world’s largest hedge fund, with nearly $160 billion under its watch. His observations – a daily report – are read by the most powerful figures in finance, from the heads of central banks to those in foreign governments, even the president of the United States. He created the All Weather portfolio in order to leave a legacy through his children and philanthropic efforts that can continue decades after he is gone. It has been back-tested to 1925 and has passed with flying colors.
Of course, anybody can show you a portfolio (in hindsight) where you could have taken gigantic risks and received big rewards. And if you didn’t fold like a paper bag when the portfolio was down 50% or 60%, you would have ended up with big returns. This advice is good marketing, but it’s not reality for most people. Dalio’s greatest genius lies in his obsession with not losing money – which leads to the ultimate balanced portfolio.
Conventionally balanced portfolios are divided up between 50% stocks and 50% bonds (or perhaps 60/40, or even 70/30 if you’re really aggressive). Conventional wisdom tells us that this balances out risk by limiting our exposure to the market. But then why did most “balanced portfolios” drop between 25% and 40% when the bottom fell out of the market? Dalio says its because stocks are three times more volatile (read: risky) than bonds. So if your stocks tank, the whole portfolio tanks.
Dalio sat down with Tony Robbins when he was doing comprehensive research for his personal finance book, MONEY: MASTER THE GAME. During their three-hour conversation, Dalio said, “When you look at most portfolios, they have a very strong bias to do well in good times and bad in bad times.”
Much like King Solomon (and The Byrds), Dalio believes there is a season for everything. He told Robbins, “Tony, when looking back through history, there is one thing we can see with absolute certainty: every investment has an ideal environment in which it flourishes. In other words, there’s a season for everything.”
According to Dalio, there are only four things that move the price of assets:
3. Rising economic growth
4. Declining economic growth
And, there are only four different possible environments, or economic seasons, that will ultimately affect whether investments (asset prices) go up or down. (Unlike nature, however, there is not a predetermined order in which the seasons will arrive.)
These seasons are:
1. Higher than expected inflation (rising prices)
2. Lower than expected inflation (or deflation)
3. Higher than expected economic growth
4. Lower than expected economic growth
Because there are only four potential economic environments or seasons, Dalio says you should have 25% of your risk in each of these four categories – not 25% of your wealth in each category. That’s why he calls this approach All Weather: because there are four possible seasons in the financial world, and nobody really knows which season will come next. With this approach, each season, each quadrant, is covered all the time, so you’re always protected.
This chart breaks down which type of investment will perform well in each of these environments.
Why would Dalio give away the secret to his “secret sauce”? The last time Dalio would take you on as an investor you had to have $5 billion in investable assets and your initial investment needed to be a minimum of $100 million – but here he is, generously willing to help out the average investor.
Behold the All Seasons strategy:
First, Dalio says, we need 30% in stocks — for instance, the S&P 500 or other indexes, for further diversification in this basket.
Then, you need long-term government bonds. Dalio recommends 15% in immediate term (seven- to ten-year Treasuries) and 40% in long-term bonds (20- to 25-year Treasuries). This counters the volatility of the stocks.
Finally, Dalio rounded out the portfolio with 7.5% in gold and 7.5% in commodities. As he notes, “You need to have a piece of that portfolio that will do well with accelerated inflation, so you would want a percentage in gold and commodities. These have high volatility. Because there are environments where rapid inflation can hurt both stocks and bonds.”
Lastly, don’t forget to rebalance. Meaning, when one segment does well, you must sell a portion and reallocate back to the original allocation. This should be done at least annually, and – if done properly – it can actually increase the tax efficiency. For more information on rebalancing see our article on investment strategy.
Now you’re ready for whatever comes your way, be it the longest bull run in U.S. history… or a sudden crash.
Header image © Sean Pavone/shutterstock
This document is for information and illustrative purposes only and does not purport to show actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those discussed, if any.