Risk Parity (All Weather): How Ray Dalio Built an Unsinkable Portfolio
Risk Parity (All Weather): How Ray Dalio Built an Unsinkable Portfolio
EXECUTIVE SUMMARY
- The Problem: A traditional “60/40 Portfolio” is actually a “90/10 Risk Portfolio.” Because stocks are 3x more volatile than bonds, 90% of your risk comes from stocks. If stocks crash, the bonds aren’t strong enough to save you.
- The Solution: Risk Parity allocates based on risk, not capital. It leverages low-volatility assets (Bonds) to equal the volatility of high-risk assets (Stocks), creating a perfectly balanced “All Weather” structure.
- The Components: Ray Dalio’s simplified version holds 30% Stocks, 40% Long-Term Bonds, 15% Intermediate Bonds, 7.5% Gold, and 7.5% Commodities. It is designed to survive four economic seasons: Growth, Decline, Inflation, and Deflation.
You cannot predict the future, but you can prepare for it. Ray Dalio, founder of Bridgewater Associates (the world’s largest hedge fund), realized that assets perform differently based on two variables: Growth and Inflation. The “All Weather Portfolio” is an engineering marvel. It ignores market timing and instead balances assets so that when one zigs, another zags, smoothing out the ride without sacrificing long-term returns. Source: Bridgewater Associates / Tony Robbins (Money: Master the Game)
Every asset has a favorite season. You must own them all.
- 1. Rising Growth (Bull Market): Stocks, Corporate Bonds, Commodities.
- 2. Falling Growth (Recession): Nominal Bonds (Treasuries), Inflation-Linked Bonds (TIPS).
- 3. Rising Inflation (Overheating): Commodities, Gold, TIPS.
- 4. Falling Inflation (Deflation): Nominal Bonds, Stocks (sometimes).
- Result: While a 100% stock investor panics during a recession, the All Weather investor watches their Bonds explode in value, offsetting the stock losses.
Volatility Comparison: S&P 500 vs. All Weather
| Portfolio | Max Drawdown (2008 Crisis) |
|---|---|
| S&P 500 (100% Stocks) | -51 |
| All Weather (Risk Parity) | -4 |
*In 2008, All Weather investors lost ~4% while the world collapsed. They slept well.
CRITICAL SCENARIO: The 2022 Inflation Shock
The Achilles Heel of Risk Parity.
| Strategy | Return (2022) |
|---|---|
| S&P 500 | -18 |
| All Weather (Bond Heavy) | -16 |
Execution Protocol
You can build this with 5 ETFs:
30% VTI (Total Stock Market)
40% TLT (Long-Term Treasuries)
15% IEI (Intermediate Treasuries)
7.5% GLD (Gold)
7.5% GSG (Commodities)
True Risk Parity uses leverage. Funds like RPAR (Risk Parity ETF) use borrowed money to boost the return of the safe assets (bonds) to match stocks. This aims for stock-like returns with bond-like risk (Sharpe Ratio maximization).
The magic comes from selling what’s high to buy what’s low. In 2020, you sold exploding bonds to buy crashing stocks. In 2022, you sold commodities to buy cheap bonds. You must rebalance annually or quarterly.
WEALTH STRATEGY DIRECTIVE
- Do This: Adopt Risk Parity if you have a low risk tolerance or are approaching retirement. It is the ultimate “Preservation” portfolio.
- Avoid This: Expecting to beat the S&P 500 during a raging bull market (like 2010-2021). All Weather will lag by 5-10% per year when stocks are skyrocketing. It wins by not losing.
Frequently Asked Questions
Is this the same as the Cockroach Portfolio?
Close, but no. The All Weather Portfolio relies heavily on Long Bonds (Deflation hedge). The Cockroach Portfolio (#402) adds “Long Volatility” (Options) and “Trend” to handle the inflation shocks that hurt All Weather in 2022.
Why so many bonds?
Bonds are less volatile than stocks. To make them “matter” in the portfolio, you need to own more of them (or leverage them). This balances the risk contribution.
What about rising interest rates?
Rising rates hurt bonds. This is why the Commodity and Gold buckets existโthey typically rise when rates rise due to inflation. Diversification is the only free lunch.