Deconstructing Dalio

Ray Dalio was interviewed by a couple of outlets while in Davos including by Yahoo Finance. The article was thin but there was a reference to his "holy grail" of 10-15 uncorrelated assets in portfolio construction. I haven't seen any articles/interviews where he shares idea on what should make up the uncorrelated bucket and how much to put into the uncorrelated bucket so if you've seen anything along those lines please leave a comment. 

We've looked at this a couple of times, it is interesting of course and actually having 10-15 uncorrelated assets in a portfolio would hit the mark for diversifying your diversifiers. Where equities are still the thing that goes up the most, most of the time, any exercise along these lines should have some sort of normal allocation to equities, for this post we'll look at 50% equities and 60%. 

Finding a bunch, even if not the full 15, of assets that have historically been uncorrelated wasn't that hard. Here's a dozen of them

I didn't include a straight inverse fund but client/personal holding BTAL does something very similar as does VIXM. With a couple of exceptions, most of them have no correlation to each other, not just that they are uncorrelated to stocks, which is what Dalio has in mind. Solana and Bitcoin have had a low correlation to each other but the extent to which they are correlated to stocks changes frequently. 

AMPD which I mentioned recently and am still not sure what it does is a very new fund which shortens up the backtest considerably. There are some interesting things though in the month to month data of the backtest, so I will start with that.

There are pockets of differentiation here and there. I highlighted three very big up months that were driven by the allocation to asymmetry, Bitcoin and Solana. The larger weighting to those two than we normally talk about but there were instances whether that worked against the portfolio too. The first month in the table, both portfolios lagged due a drop in Solana.

Where we talk often about the difficulty of holding managed futures, take a look at the rest of the table, the month by month of each holding.

There are a lot of red months for the alt funds. Stocks go up most of the time so if something has a negative correlation to the thing that goes up most of the time, then it, the alt, might go down most of the time. It can be difficult to sit with things that go down for an extended period.

I shortened the performance to last May to take out any huge gains from the crypto holdings.

The performance going back to June, 2023 has the two Dalio portfolios outperforming by a mile along with higher standard deviation. This shorter period though looks similar to VBAIX but avoids any sort of interest rate risk. Isolating the returns of the diversifiers in 2022, but taking out OSOL and AMPD because they weren't around the whole year, you can see that only Bitcoin had a rough time, several were flat (which is good for a year like 2022) and several were up a lot. 

I believe in most of these having a reasonable chance to up in a bear market for equities. Crypto, you never know and I already said I don't understand AMPD but the others I am confident can help more often than not realizing nothing will work every time. 

The Dalio idea is certainly valid but do you think you need that many uncorrelated assets to make it work? Not holdings necessarily but assets that are uncorrelated? There are some diversifiers that I would not want to put 10% in, like BTAL, but something like TFLO (I own a different one that does almost the same thing) would not be problematic. The history of catastrophe bonds suggests 10% is fine but I wouldn't go that high. In certain instances, client/personal holding MERIX would be fine at 10%. 

I'd bet seven or eight would get it done but I would think of asymmetry (Bitcoin/Solana in today's post) as being it's own sleeve. The big idea for me is taking Dalio's concept and seeing if it helps better manage the 40 that usually goes to bonds in the typical 60/40 portfolio. I think it does help, I've probably been doing a version of this for many many years but with fewer uncorrelated holdings. 

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