Should You Try To Mimic Bridgewater All Weather?

With all the conversations we've had lately about using alternatives to smooth out the ride of the equity market and now we have to consider smoothing out the ride of the bond market too, should we consider whether it makes sense for investors to try to mimic the Bridgewater All Weather Portfolio (capitalizing All Weather) versus instead, what we've been talking about, trying to capture some sort of all weather (lower case all weather) effect?

According to the interwebs, this is the All Weather asset allocation and the funds that capture the portfolio;

• Equities 30% VTI
• Long Term Treasuries 40% VGLT
• Intermediate Treasuries 15% VGIT
• Commodities 7.5% PDBC
• Gold 7.5% IAU  

This chart shows how it did in the first half of 2022 with Vanguard Balanced Index Fund (VBAIX) thrown in for context. I added TQQQ because its huge decline makes the rest of the chart easier to see.

Crunching the numbers, I get that mix having a decline of 13.4% versus 18% for VBAIX. That's pretty good, 460 basis points. Looking at calendar 2021, which was a great year of course for equities looks like this;

 

I swapped in client/personal holding GLD for IAU because there was a distracting distortion that made the chart tougher to read and I added SDS because of how much it dropped, it made the rest of it easier to see. Crunching the numbers for 2021 I get a gain of 3.5% versus a gain of 9.65% for VBAIX, so a lag of 615 basis points. So that's less good than how it's done in 2022. 

This isn't the real All Weather Portfolio which is probably obvious. The above link describes it as the available to the masses version. Bridgewater uses risk parity in which we've looked at quite a few times and I doubt their client version is statically allocated. The available to the masses version is a valid portfolio of course. Our very short time study here shows it doing both pretty well and noticeably lagging. I bet that if the current rumblings I am seeing about a dis-inflationary outcome happens and interest rates go back down (bond prices up), equities would go up in that scenario and anyone sitting on this available for the masses version will get an equity like return for the whole thing. 

Building any sort of portfolio that drifts that far from a "normal" equity allocation is not ideal for anyone relying on normal, long term equity market like returns in order for their financial plan to work. All weather for the masses strikes me as more on the game over spectrum compared to what I think of as normal for equities, something like 50-70%.

Hopefully it is clear that the context of all these posts lately is about finding ways to add exposure that behave the way investors think bonds will behave while reducing the portfolio's interest rate risk versus a normal allocation to fixed income, possibly reducing the equity allocation slightly (like 60% down to 55%, not down to 30%) in search of a better risk adjusted result in order to maybe be a little more all-weather-ish to help avoid what happened 60/40 in the first half of 2022.

I've been writing for years about the potential downside volatility that goes with interest rate risk and now that we've got a few months of that (it's only been a few months!), I can see where folks might want to take that risk off their table. Maybe, instead of 60/40 being the default, the target should be 55% in equities, 25% in fixed income (avoiding longer term debt) and 20% in alternatives? Is 20% too much? It is a lot, it is more than I have for clients or personally and in the wrong alternatives, yeah...it's too much. I am not suggesting 55/25/20, it's an example which might be terrible for your specific circumstance. And even then, I will tweak the allocation percentages, reducing net long equity exposure at times.

This work requires time. I don't think the barriers to entry to understand this are that high but do accept, you will not understand every single liquid alternative you might find, that's ok, I don't understand all of them either. If you don't understand it, don't buy it. 

This really is a great example of what I talk about in the more life-style posts I write. Portfolio construction is an evolving art and if you are going to do it yourself, you need to stay engaged enough, I believe, to give yourself the best chance of having the outcome you want. Spending time learning, tweaking and improving is doing your future self a huge favor. You get more out of it, the more you put into it.

If you've been reading my blog posts for a while, you know this is not an exercise in hindsight bias. I've been talking about these ideas and quite a few of the funds for years, you've seen when they've worked and when they haven't. You already have a leg up. If you think you don't have a leg up and any of this interests you (you've read this far, you must have some interest), then start now.