Dalio's all weather Portfolio - Value Investing version
I recently thought about this idea after reading Dalio's new book. Many of you are informed with Dalio's All Weather portfolio. It has returned on average 9.6% over the past 30 years. For those who don't know its a mix of 40% long term bonds, 15% short term bonds, 30% equities, 7.5% gold, 7.5% commodities. Most of these holdings are in the form of ETFs. Would looking at the fundamentals for the equities and bonds to find price inefficiencies work as opposed to ETFs yield similar results? I may have fallen into the trap of over simplifying Dalio's allocation as Bridgewater uses algorithms to make trades for the most part. Same macro principle as Ray with the 4 economic conditions, however use a different method to invest in. Interested to hear the consensus on this idea.
Cheers
the last 30 years had the best tailwind for long bonds in modern history. this portfolio would suck major ass in a rising rate environment
And what - P/Es haven't expanded over the last 30 years, giving a major tailwind to any equity-dominated asset allocation strategy (i.e. nearly all of risk parity's alternatives)? AW does better in a rising rate environment than you think. Nominal rates are the product of real rates and breakeven inflation. Bonds go down when rates are going up - i.e. when real rates and breakeven inflation are rising; but AW also invests in assets that do well when real rates (growth) are rising and (breakeven) inflation is rising. By not concentrating the portfolio's risk in a given asset class or economic environment, AW is far less likely to suck ass in any given environment - including rising rates - than most other asset allocation strategies. Do you even backtest bro?
I just question the use of long term bonds, you have to have some opportunity cost, why not a flexible duration that extends maturities as rates get higher but keep it short-int in the meantime
But what do I know I’m just a dumb PWMer from a state school in the south
if I may put words in mr greenspan's mouth, I think he's speaking to the fact that after a decade of easy money, companies and governments have borrowed beyond rationality, and in the quest for yield, people have bought those bonds without regard for the underlying fundamentals. I expect mayhem in the HY market within 3y, though it won't be across the board. I also think people will need to lower return expectations because most pension funds were built with the idea that you can count on 4-6% from treasuries, and I don't see us getting back there anytime soon, so pensioners and retirees will have to cut spending or increase savings to make up the difference if they want the same risk profile.
now does that make it a bubble? across the entire bond market? bullshit, a bubble is when asset prices are completely detached from reality. high quality issuers like apple and microsoft ought to be able to borrow at close to US10 rates, so I don't think they're a bubble. tesla borrowing at low rates? that's another story entirely, and you're seeing some of that in the HY market in the US plus abroad (tajikistan had an offering that was oversubscribed at 7% and iraq had one 6x oversubscribed at 6.75%) - ft.com/content/1dd9f200-93d5-11e7-bdfa-eda243196c2">see here. but does that mean the entire bond market is a bubble? nope, not in my opinion.
the other issue which can be conflated with the "bubble talk" is whether sovereign debtors rates are commensurate with the risk of their underlying balance sheets. specifically, I'm talking US, JGB, and EU. does the US, Japanese, or European sovereign debt picture mean that their bonds are inherently more risky from a credit standpoint than the coupon would indicate? probably yes, but you forget that you also have the full faith & credit of those governments, so you can't underwrite a US bond like you would an IG issue, because you have the GDP of the most powerful nation in the world with taxing authority backing it.
now, as with most things, the answer is somewhere in the middle. the bond market isn't bubble free, but it's also not without bubbles. I believe there are bubbles in some parts of the EM, floating rate, and HY markets, and I believe that the return you get from govvies and IG credit would lend itself to a short duration portfolio with lower expectations, but there's still value to be had in some parts of the muni market, there's always opportunity in the corporate market (be it HY or IG), so to throw an entire asset class out the window is just foolish, and while I think greenspan would generally agree with me, he has to make comments that fit into the crawl on bloomberg or CNBC, and what I just wrote doesn't lend itself nicely to that medium
Risk Parity funds employ leverage to meet target levels of volatility. The point is that each asset is scaled to an equal risk contribution and in all weather's case they are additionally balancing to economic factors. All Weather is mostly a portfolio construction exercise and designed to be a beta portfolio. All Weather should not be confused with Pure Alpha.
The tangential MPT (MVO) portfolio is simply the portfolio with the highest historical Sharpe ratio; investors can leverage/deleverage it to attain a certain return/volatility target. Risk parity portfolios are actually quite similar: they assume all asset classes generate roughly similar Sharpe ratios over the long run, so should get equal risk allocations (what AQR and most others do). Likewise, Bridgewater assumes that all asset classes generate roughly similar Sharpe ratios. But there are common 'environmental' factors, namely growth and inflation, that drive asset class returns. Instead of allocating equal amounts of risk to asset classes, All Weather simply allocates equal amounts of risk to these environmental factors in four portfolios (Rising Growth, Falling Growth, Rising Inflation, Falling Inflation). I agree that commodities offer sub-optimal Sharpe ratios. And MVO is garbage (the outputs are highly sensitive to the inputs; moreover, an important input to MVO, asset class correlations, are empirically and logically unstable across time/environments).