Bridgewater's Ray Dalio recently had an interview with CNBC's Maria Bartiromo in which he discussed how average investors should set up their portfolios. What he advocated for average investors is in essence a portfolio that is very similar to Bridgewater's All Weather portfolio. See the key points here.
The All Weather portfolio has been used by many pension funds and other institutional funds. In a pdf document prepared by Pennsylvania Public School Employees' Retirement System, the portfolio has the following allocations:
Based on the above, we use equal weight for each section and derive the following table:
|Growth +||Growth -||Inflation +||Inflation -||Total||Fund|
|EM Debt Spreads||6.25%||8.33%||14.58%||PEBIX|
Using the above, we constructed a model Bridgewater All Weather Portfolio that uses mostly index funds. Investors can use the following ETFs to substitute for the mutual funds:
Stocks VTSMX (or SPY, VTI) 18.75%
EmergingMktDebt PEBIX (or PCY, EMB) 14.58%
Commodities GLD (or IAU) 14.58%
CorporateSpread VWEHX (or HYG, JNK) 6.25%
NominalBonds VBMFX (or BOND, TLT, LQD, BND, AGG) 25%
InflationProtectedBonds VIPSX (or TIP, LTPZ, STPZ) 20.84%
The back testing started from 7/18/2000.
This portfolio is similar to Harry Browne Permanent Portfolio. In the following, we compare the two portfolios' performance:
Portfolio Performance Comparison (as of 9/18/2012)
|Portfolio/Fund Name||1 Week
|1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe||10Yr AR||10Yr Sharpe|
|Bridgewater All Weather Portfolio||0.8%||9.7%||9.4%||175.7%||11.5%||218.3%||8.5%||124.5%||9.5%||146.7%|
|Harry Browne Permanent Portfolio||0.5%||8.0%||7.2%||101.4%||11.6%||173.5%||8.6%||103.6%||9.1%||111.8%|
* Not annualized
** Year to Date
In the detailed year by year comparison, we can further see that the Bridgewater All Weather Portfolio lost 8.9% in 2008, compared with Harry Browne's 2.1% loss in the same year. The All Weather portfolio has a maximum peak to trough drawdown of 20%, compared with 15.3% for the Permanent Portfolio.
In terms of portfolio construction, one can see that the All Weather portfolio is lighter in stocks and instead uses high yield corporate bonds and emerging market debt in the rising growth quadrant. Similarly, it uses inflation protected bonds, unlike the Permanent Portfolio. This results in lower overall standard deviation (5.6 vs. Harry Browne's 6.2). As a result, the portfolio has a higher Sharpe ratio than Harry Browne's.
In the Pennsylvania Public School Employees' Retirement System's document, it was proposed to use 25% in the All Weather portfolio and 75% in traditional cash/short term investments in place of the pension fund's cash investment to counter the extremely low cash/short term interest rate. Though this is a debatable way of using the All Weather Portfolio, this portfolio does posses the important risk parity properties to properly hedge each of the four scenarios outlined in the above figure.
In conclusion, average investors can use ETFs or index funds to construct a portfolio that has similar characteristics to the Bridgewater All Weather portfolio. Such a portfolio adds another variation to the Harry Browne Permanent Portfolio family.
Disclosure: I am long GLD, SPY, TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.