Market volatility is the true test of an <a s risk tolerance. While it is simple to claim during a questionnaire that you can handle a bear market or a correction, it is a different experience entirely to watch your portfolio value drop by 10%, 20%, or more—often with surprising speed.
If the recent market downturn has revealed that your risk appetite is lower than you initially thought, the “all-weather portfolio” concept might be worth exploring. A prominent investor has developed a widely used strategy for constructing such a portfolio, and in this third and final installment of our series, you will learn directly from Bridgewater founder and <a t require investors to time the market successfully.
Financial planners have historically favored balanced portfolios consisting of stocks and bonds to reach an optimal risk-reward profile. A common approach is the 60/40 strategy, which allocates 60% of a portfolio to stocks and 40% to bonds. Stocks generally outperform bonds over time, and maintaining a significant stock allocation typically leads to better results than holding cash, even if bonds temper the portfolio’s total returns. Conversely, when equities struggle, bonds often provide stability, which helps mitigate losses and keeps the overall portfolio risk in check.
Beating the 60/40 strategy
However, Dalio discovered that achieving a true all-weather strategy is more nuanced than that. Two primary concepts are essential for an ideal all-weather portfolio.
First, expanding beyond standard stocks and bonds can assist investors in managing risk with greater precision. Specifically, gold and other commodities tend to perform best during inflationary periods, and including them can improve portfolio efficiency and diversification. Furthermore, while many proponents of the 60/40 model rely exclusively on traditional fixed-income assets, the availability of inflation-indexed bonds provides potential outcomes that conventional bonds simply cannot replicate.
