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Tony Robbins: Ray Dalio's "All Weather" Portfolio

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Tony Robbins has helped more than 50 million people from more than 100 countries transform their lives and their businesses through his books, audio programs, health products, live events and personal coaching. His first book in over 20 years, MONEY Master the Game: 7 Simple Steps to Financial Freedom, is out November 18th.

In the past 4 years, I’ve interviewed more than 50 self-made billionaires, Nobel Prize winners, investment titans, bestselling authors, professors, and financial legends. My goal was to find a way for normal individual investors to take control of their money in a system that seems rigged against them. I vowed to discover the best possible information from the most knowledgeable and influential experts in the world.

One of the experts I was fortunate enough to interview was Ray Dalio, founder of the largest hedge fund on the planet, Bridgewater Associates, with $160 billion in assets under management.

Ray comes from an unlikely background—born in Queens, New York to a jazz musician father and a homemaker mother. He started as a caddy who picked up his first stock tips at the local golf course. Now he’s the 31st richest man in the United States, worth about $14 billion.

His Pure Alpha Fund, according to Barron’s, has lost money only 3 times in 20 years, and in 2010 he produced 40% returns for his key clients. Over the life of the fund (since launching in 1991), he’s produced a 21% compounded annual return (before fees). If there’s anyone I wanted to ask, “Can the average investor still make money in this crazy, volatile market?” it was Ray. So when he told me, “There’s no question you can still win,” I was all ears!

“But Tony,” he prefaced his remarks about the approach that he calls his “All Weather Strategy,” “it’s not really that simple.”

See, Ray has taken very few investors in the last 10 years, and the last time he did, the bar was set very high: you had to be an institutional investor, you had to have at least $5 billion in investable assets, and your initial investment needed to be a minimum of $100 million just to get Ray’s advice. Not only does Ray’s All Weather strategy use very sophisticated investment instruments that use leverage to maximize returns, but it is also closed to new investors.. Fortunately, as a self-made man from the Outer Boroughs, he has never forgotten his roots nor stopped caring about the little guy.

So I asked:

“Can you give me the percentages that the average person can do, without any leverage, to get the best returns with the least amount of risk. Could you offer a version of the All Weather portfolio that readers could do on their own or with the help of a fiduciary advisor?”

After much convincing Ray started with the most important part of his strategy (and how it got its name): “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.”

Ray noted that there are only four things that move the prices of assets:

1. Inflation

2. Deflation

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 (assets prices) go up or down (except unlike nature, there is not a predetermined order in which the seasons will arrive):

1. Higher than expected inflation (rising prices),

2. Lower than expected inflation (or deflation),

3. Higher than expected economic growth, and

4. Lower than expected economic growth.

Ray elaborated: “I know that there are good and bad environments for all asset classes. And I know that in one’s lifetime, there will be a ruinous environment for one of those asset classes. That’s been true throughout history.” Therefore, he explained, you should have 25% of your risk in each of these four potential economic environments. This is why he calls this approach ‘All Weather’—there are four seasons in the financial world and nobody knows which one is coming next.

“I imagine four portfolios,” Ray continued, “each with an equal amount of risk in them. That means I would not have an exposure to any particular environment.” In layman’s terms, you’re protected. By using this investment strategy, we can know that we are protected from the unpredictable volatility of the financial world’s four seasons, and that our investments as a whole will do well in any season that comes our way.

So now to your most important question: “Where do I put my money, Tony?!”

The All Weather Portfolio

First, Ray said, we need 30% in Stocks (for instance, the S&P 500 or other indexes for further diversification in this basket). Initially that sounded low to me but remember, stocks are three times more risky than bonds. And who am I to second guess the Yoda of asset allocation!?

“Then you need long-term government bonds. 15% in intermediate term (7- to 10-year Treasuries) and 40% in long-term bonds [20- to 25-year Treasuries].”

“Why such a large percentage?” I asked.

“Because this counters the volatility of the stocks.” I quickly remembered it’s about balancing risk, not the dollar amounts. And by going out to longer-term (duration) bonds this allocation will bring a potential for higher returns.

He rounded out the portfolio with 7.5% in gold and 7.5% in commodities. “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, the portfolio must be regularly rebalanced. 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, can actually increase the tax efficiency. This is part of the reason why I recommend having a fiduciary implement and manage this crucial ongoing process.

When my own investment team showed me the “back-tested” performance numbers of this All Seasons portfolio I was astonished. I will never forget it. I was sitting with my wife at dinner and received a text message from my personal advisor, Ajay Gupta, that read, “Did you see the email with the back tested numbers on the portfolio that Ray Dalio shared with you? Unbelievable!” Ajay normally doesn’t text me at night, so I knew he couldn’t wait to share. As soon as our dinner date was over I grabbed my phone and opened the email.

During what I call the “modern period,” 30 years from 1984 through 2013, the portfolio was rock solid:

1. Just under 10% (precisely 9.72%, net of fees) average annualized return. (It’s important to note that this is the actual return, not an inflated average return.)

2. You would have made money just over 86% of the time. That’s only four down/negative years. The average loss was just 1.9% and one of the four losses were just 0.03% (essentially a break-even year)—so effectively you would have lost money only three out of thirty years.

3. The worst down year was -3.93% in 2008 (when the S&P 500 was down 37%!)

4. Investor Nerd Alert: Standard deviation was just 7.63% (This means extremely low risk and low volatility.)

So there you have it! The All Seasons recipe from the Master Chef, Ray Dalio. And rather than wait until you have a $5 billion net worth, you get access now. He has simplified it by taking out the leverage and also making it a more passive approach (not trying to beat the market by being the best picker or predictor of what’s coming next).

The ball is now in your court. If you have a better strategy that has proven effective to minimize downside and maximize upside, maybe you should be running your own hedge fund. You now are armed with info to do this on your own or if you choose to you can have a fiduciary implement and monitor this for you (as part of a comprehensive plan).

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