Ray Dalio's All-Weather Portfolio

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Dulocracy
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Re: Ray Dalio's All-Weather Portfolio

Post by Dulocracy » Wed Apr 13, 2016 10:13 am

azanon wrote:
Dulocracy wrote:You are correct. It is gold both recommend against, sorry. Commodities, Rick, Taylor, and a slew of other authors recommend against on this site. Larry is the outsider on the commodity issue, but he recommends this category only as insurance, as he has elaborated on this website.

The point remains, however, that the drag on the portfolio is significant enough during every time period that I have tried, that I do not think commodities or gold's benefit to the portfolio outweighs the drag created. Further, the benefit appears to be more for those who may not buy and hold for longer periods of time.


So for Gold then, the applicable expert (among many others) is in the thread title; Mr. Ray Dalio. #1 Hedge fund manager, 15.6 billion net worth and, in short, an elite investing resume. By all means, just downgrade me to nothing more than a messenger that understands Dalio's reasoning for using gold in a portfolio.

I didn't have the time to go back an re-read what was already said in this thread, but I'm still at a loss for what drag you're talking about. Go to portfoliocharts.com or portfolioanalyzer.com, add a nice chuck of gold, and watch 1. your portfolio return go up 2. your standard deviation go down 3. Sharpe and Sortino ratio go up. Those are all good things.


I have no idea what you are talking about when you seem to indicate that I am attacking you. I am not. As far as Mr. Dalio, good for him. He makes a lot of money selling a lot of people products. That does not mean he is correct. I think he is wrong. I backtested the portfolio and found over multiple periods of time that it reduced return. I apologize if my short answer offended you. I am a new father and a senior partner of a law firm, so time is a bit on the short side lately.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

azanon
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Re: Ray Dalio's All-Weather Portfolio

Post by azanon » Wed Apr 13, 2016 10:18 am

Dulocracy wrote:I have no idea what you are talking about when you seem to indicate that I am attacking you. I am not. As far as Mr. Dalio, good for him. He makes a lot of money selling a lot of people products. That does not mean he is correct. I think he is wrong. I backtested the portfolio and found over multiple periods of time that it reduced return. I apologize if my short answer offended you. I am a new father and a senior partner of a law firm, so time is a bit on the short side lately.


I didn't say you were attacking me. Please just use quotes of mine if you want to respond to something I said since you are claiming I said something that I didn't.

I only brought up Dalio and other experts because earlier you qualified that is a requirement for you; that an "expert" has to support this view. I just wanted to ease your concern that, that requirement is met. Dalio is, matter-of-fact, widely regarded as an investing expert, regardless of your personal opinion of him.

If you used similar calculators and found the opposite results, all I can say there is that I find that really interesting. I'd be curious to know what exact portfolio you simulated as I don't think I could add 5-10% of either commodities and gold and cause a worse result. The volatility is always lower, and the return is typically higher, and that's even if you're substituting commodities for equities. I tried a # of combinations and usually a 2 parts equities, 2 parts debt instruments, and 1 part commodities gives an unbeatable (risk-adjusted return) result.

So no, I'm not offended. Now if you find some way to take gold or commodities out of my portfolio I might get upset. :mrgreen:

Oh and FWIW, gold has been just about anything but, a portfolio drag this year. :mrgreen:

Dulocracy
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Re: Ray Dalio's All-Weather Portfolio

Post by Dulocracy » Wed Apr 13, 2016 10:33 am

azanon wrote:I only brought up Dalio and other experts because earlier you qualified that is a requirement for you; that an "expert" has to support this view. I just wanted to ease your concern that, that requirement is met. Dalio is, matter-of-fact, widely regarded as an investing expert, regardless of your personal opinion of him.

I did not set out that an expert's opinion was required. I have gotten a lot of good information from members of this board. If I was to listen to an expert, it would be one that ascribes to the boglehead philosopy. You would then do better using your Larry Swedroe argument (which I conceded on commodities).

If you used similar calculators and found the opposite results, all I can say there is that I find that really interesting. I'd be curious to know what exact portfolio you simulated as I don't think I could add 5-10% of either commodities and gold and cause a worse result. The volatility is always lower, and the return is typically always either, and that's even if you're substituting commodities for equities. I tried a # of combinations and usually a 2 parts equities, 2 parts debt instruments, and 1 part commodities gives an unbeatable (risk-adjusted return) result.

We already had this conversation, and I think you did not like the method I used (portfoliovisualizer). I think that the reason that my result was so different may be that I used a starting amount of 100,000 and a continued annual contribution of 15,000. The gold and commodities added a drag.

So no, I'm not offended. Now if you find some way to take gold or commodities out of my portfolio I might get upset.

Especially if I just took them and did not replace them with anything. I did make a comment a while back about gold only being good for piracy when talking to a friend. :twisted:

:mrgreen:
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

azanon
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Re: Ray Dalio's All-Weather Portfolio

Post by azanon » Wed Apr 13, 2016 10:42 am

Dulocracy wrote:We already had this conversation, and I think you did not like the method I used (portfoliovisualizer). I think that the reason that my result was so different may be that I used a starting amount of 100,000 and a continued annual contribution of 15,000. The gold and commodities added a drag


That's right, we did (have that conversation). I recall fleshing out that by drag, you just meant return. By contrast, I'm more concerned with risk-adjusted return. If you set the period long enough, risk-adjust return (sharpe, sortino) is better no matter what you load in that calculator, including adding new investments each year, provided you're using the 1972 to present.

For those that don't care about volatility, and only seem to be concerned by "drag" (short for, lowered returns), I already stated gold and commodities are not appropriate for a returns-only focused investor. So, yes, I understand why you don't use them.

Dulocracy
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Re: Ray Dalio's All-Weather Portfolio

Post by Dulocracy » Tue Apr 19, 2016 11:57 am

No comments about the piracy? Bummer. To sit here with a chest of gold coins, clinking them together... But that is a different topic.

I would be interested to see gold and commodities in isolation. My understanding was that gold did not improve the Sharpe ratio, but I have not run the numbers and do not have time to do so. Have you run them separately?

In any event, because of the way these two assets act, whatever the ratio, I do not want them as a part of my portfolio. To me, despite the Sharpe ratio, these are asset classes of speculation rather than investment, as neither produce interest or products to be sold. They just sit there and go up and down in value based on market conditions.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

lack_ey
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Re: Ray Dalio's All-Weather Portfolio

Post by lack_ey » Tue Apr 19, 2016 12:21 pm

Dulocracy wrote:No comments about the piracy? Bummer. To sit here with a chest of gold coins, clinking them together... But that is a different topic.

I would be interested to see gold and commodities in isolation. My understanding was that gold did not improve the Sharpe ratio, but I have not run the numbers and do not have time to do so. Have you run them separately?

Usual caveats about gold backtests through much of the 70s where it wasn't so legal and there were one-off events like decoupling from the dollar, but here, wouldn't have made a huge difference:
https://www.portfoliovisualizer.com/bac ... rmBond3=40


Dulocracy wrote:In any event, because of the way these two assets act, whatever the ratio, I do not want them as a part of my portfolio. To me, despite the Sharpe ratio, these are asset classes of speculation rather than investment, as neither produce interest or products to be sold. They just sit there and go up and down in value based on market conditions.

They're not all that much different from cash for investing purposes in my opinion, as some kind of imperfect store of value. Non-USD cash, that is, not incredibly different from holding foreign currency that might move differently from USD cash. You don't get interest but you may get appreciation over time, perhaps approximately with inflation. Interest on actual cash mostly just serves to counteract inflation anyway so you're not gaining all that much there. A lot of stocks don't pay dividends and never will, just going up and down with market conditions too. They do have cash flows internally but as an investor you may never see them.

I'm not really a huge fan either, though. I just don't like the characterization as speculation rather than investment, rejecting an option by labeling as an "other" that you won't touch.

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investorguy1
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Re: Ray Dalio's All-Weather Portfolio

Post by investorguy1 » Mon May 02, 2016 1:39 pm

Robert T wrote:.
Here are some additional portfolio comparisons. Few observations:

- Dalio's 'all weather' portfolio has better simulated returns than the Permanent Portfolio
- If you use small value for the stock allocation in Dalio's portfolio it produces fairly impressive 'simulated' returns (P3 in table below).
- If you use gold for the full commodities allocation (following earlier concerns about GSCI simulated returns related to investor impacts on contango/backwardation), results are still good
- Returns seem fairly consistent for some of the sub-periods (periods of high inflation when long-term bonds did badly, and an extended period where gold tanked). Just to note the 12.0% returns for the each of the sub-periods for P3 is not a typo (they were 12.05%, 11.99%, and 12.03% respectively).
- Extending bond duration with a higher commodity allocation (P4 vs. P5), improved mean-variance efficiency over this time period (a similar duration-commodities point made by Larry in one of his books as I recall).
- I tried adding gold stocks instead on gold bullion, but did not find any allocation when it was more efficient.

I know any inclusion/discussion of gold/commodities often becomes emotional. Just presenting, what I found to be interesting results.

P1 = Permanent Portfolio
P2 = Dalio (as per Tony Robins book)
P3 = Dalio with small value for equity allocation
P4 = Dalio with small value for equities, and gold replacing GSCI allocation
P5 = Larry style portfolio
P6 = US Total Stock Market (CRSP1-10)

"High inflation" = 9.2% annualized from 1973-1981 (9 years)
"Gold legal" = in the US, investors could not legally own gold bullion before 1975 (as per Bernstein's book)
"Gold decline" = gold had a -3.1% annualized return for 22 years

Image
Small Value = Dimensional US Small Value 1972-1975, RAFI Fundamental Small Value 1976-2013

FWIW - here are some different views on the inclusion of gold.

From First Eagle


From Buffet - who does not like gold. See letter http://www.berkshirehathaway.com/letters/2011ltr.pdf

From the Permanent Portfolio book

    It is important to remember that when people say gold is doing well, what they often mean is that gold is simply maintaining its value while the value of their currency or other assets are falling. … Gold should not necessarily be thought of as a long-term investment, but as a long-term insurance policy protecting against bad economic events.
.


Robert thanks for your posts. I have a few thoughts about this strategy and wanted to see if you or anyone else here have some insights for me.

1. A few people pointed out that long term bonds have done well in the past due to falling rates and probably won't do as well now that rates are low. They also point out that this model is basically cherry picking an asset class that did really well over the last 35 years. I get that rates are lower now but so are expected stock returns. I think the main idea of the portfolio is "risk parity" so to me this concept still holds now. You may get lower returns but still get a smoother ride than 60/40 portfolio which also has lower expected returns.

2. The all weather portfolio tries to reach "risk Parity" by reducing equity risk and taking on other risks mainly duration and inflation through gold and commodity. How do these risk factors relate to other factors such as value and size. Shouldn't those be included in taking into account "risk parity"?

3. I'm not sure how the back test on portfolio visualizer and other sites determine the return on gold and commodities. But if you look at the returns on DBC they are pretty poor. So in the real world maybe returns would be significantly less. Also the same would apply for gold. Assuming you use an ETF like IAU there is an expense ratio there that will reduce returns.

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pondering
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Re: Ray Dalio's All-Weather Portfolio

Post by pondering » Wed Sep 13, 2017 8:32 pm

Tim Ferriss did a podcast with Ray:

https://tim.blog/2017/09/13/ray-dalio/

Listen to it on iTunes.
Stream by clicking here.
Download as an MP3 by right-clicking here and choosing “save as.”

http://traffic.libsyn.com/timferriss/Th ... _Dalio.mp3
--Robert Sterbal | 412-977-3526 call/text

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