Author:@RayDalio

Translated by: He Student

Founder of Bridgewater Associates. I am currently at a stage in my life where my main goal is to share the principles that I have learned over the past 60 years, which have been helpful to me and I believe can also help others, with more people. I think one of the most important investment principles I can convey is about what an "All Weather Portfolio" is and how to build such a portfolio. I believe these principles are particularly valuable in a time filled with risks like the present.

For me, the most important thing for most investors is to have a portfolio like this: a) well-diversified/designed to achieve the highest possible returns while taking on minimal risk; b) does not require market timing. The reason is: a) while most people think that the safest investment is cash (such as short-term government bonds, or high-quality money market funds with near-zero default risk), since it does not default, these cash investments inevitably yield the lowest after-tax returns over the long term, and perform particularly poorly in high inflation periods—resulting in a significant loss of purchasing power. Similarly, b) almost all investors (including most seasoned professional investors) are unable to effectively time the market, even if they believe they can. Therefore, I believe that for most self-managed portfolio investors, investing should involve minimal or even no market timing.

An All Weather Portfolio is a passively held portfolio, expected to yield returns significantly higher than cash and other low-risk assets, while taking on risks much lower than high-risk assets like stocks and bonds, under any circumstance. This is different from most portfolios—such as the classic 60/40 stock-bond portfolio, or those that perform well in good years and poorly in bad years. So it's important to clarify that an All Weather Portfolio is atype of portfolio designed to accomplish the above goals, rather than an investment product. It resembles a financial engineering challenge aimed at achieving this balance, from which investment products can be derived. My All Weather Portfolio is built in my own way, which I will briefly describe here and elaborate on later. Naturally, my approach has evolved and improved over time, and I have some ideas for making it better. But anyone can achieve it in their own way—perhaps I should hold a competition to see who can build the best method.

I will start by explaining how I developed my method and how it works.

About 30 years ago, I attempted to create an investment strategy for my family so that they could invest without my guidance after my passing. I believed I needed a portfolio that could:

a) provide significantly higher returns than cash (i.e., equal to or exceeding the classic 60/40 stock-bond portfolio);

b) have lower risk than the 60/40 portfolio;

c) not perform poorly in any specific type of economic environment;

d) require no market timing.

In my view, the only way to achieve this All Weather Portfolio is to hold a variety of diversified investments that provide higher returns but also have higher risks, combining them in such a way that, due to the diversification effects among these asset classes, the overall portfolio achieves the same high returns as individual assets while maintaining lower risks. For better diversification, I introduced the concept of "Risk Parity"—adjusting investments according to different levels of risk (i.e., different volatilities), increasing the risk/volatility of low-risk/low-volatility investments and decreasing the risk/volatility of high-risk/high-volatility investments to make their risk levels more consistent, thereby balancing them better. Then, I balanced my exposure to each asset class based on the fundamental factors driving the returns of each asset class. In other words, by understanding how each asset class responds to changing economic conditions (such as inflation and growth—for example, when inflation and growth are rising, bonds perform poorly while inflation-protected assets like gold, inflation-linked bonds, and commodities perform well), and allocating equal amounts of risk in environments of rising and falling inflation and growth, I was able to create a passive strategic asset allocation portfolio that maintains good balance across all economic scenarios. Even 30 years later, I still firmly believe that having this core strategic portfolio is crucial. My All Weather Portfolio is my ideal, continuously held strategic asset allocation—i.e., a "beta" (asset class) portfolio. While I also make numerous tactical bets based on my market outlook to generate "alpha," these are realized through creating a well-diversified alpha portfolio that I call"Pure Alpha" strategy. (I will not explain this method in detail now, as that would be too off-topic.)

I developed this All Weather approach together with my excellent Bridgewater team, especially Bob Prince and Greg Jensen, who have been with Bridgewater for 40 and 30 years respectively, and are still co-Chief Investment Officers there. Once it was constructed, I found this method straightforward and simple enough that almost anyone could implement it, and I couldn't imagine we doing this for others to manage funds could earn us payment. So I demonstrated how to do this to almost everyone I met (and I still want to do this today), but to my surprise, many clients asked us to manage their funds using this strategy. We launched it as a product, and naturally, it has been evolving and improving since. Bridgewater is now operating and continuously optimizing it in their own way, while I am doing the same in my own way. The difference between us is that they are managing All Weather accounts for others, while I only do this for my family and family foundation, while showing others how to do it.

Regardless of whether investors construct their own All Weather portfolios or have others do it, my greatest hope is tohelp people understand how it works and have the opportunity to apply it, thereby building their confidence to achieve good returns without incurring unacceptable losses in what most view as dire market/economic conditions. I have written extensively about how to construct my All Weather Portfolio and distributed it widely. (For example, if you want to systematically learn my investment principles, you can access an online course built in collaboration with the Singapore Wealth Management Institute:). In any case, I will soon write out my "formula" to more clearly explain how you can construct your own All Weather Portfolio and I will share it once it's ready.

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