Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for October 2020 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for October 2020 (Final)
1st ETF 2nd ETF 3rd ETF

Testing the All Weather Portfolio

| | Posted in: Strategic Allocation

A subscriber requested a test of Ray Dalio‘s All Weather (AW) portfolio with different rebalancing frequencies, allocated to exchange-traded funds (ETF) as asset class proxies as follows:

30% – Vanguard Total Stock Market (VTI)
40% – iShares 20+ Year Treasury (TLT)
15% – iShares 7-10 Year Treasury (IEF)
7.5% – SPDR Gold Shares (GLD)
7.5% – Invesco DB Commodity Tracking (DBC)

To investigate, we test:

We consider the following gross performance metrics, all based on monthly measurements: average monthly return, standard deviation of monthly returns, compound annual growth rate (CAGR), maximum drawdown (MaxDD) and Sharpe ratio (with the 3-month Treasury bill yield as the risk-free rate). We also compare number of rebalance actions for each portfolio. Using monthly dividend-adjusted returns for the specified assets during February 2006 (limited by DBC) through January 2020), we find that:

The following table summarizes gross performance statistics for the above portfolios since the end of February 2006 (except SACEMS EW Top 3 statistics start at the end of Jun 2006 to allow identification of an initial set of 4-month past return winners). Notable points are:

  • Differences in gross performance among AW variations are very small and likely noise. A prudent investor would choose AW-12 to minimize trading for best net performance.
  • The 60/40-12 benchmark beats AW gross CAGR and AW gross Sharpe ratio, but has deeper MaxDD.
  • SACEMS/SACEVS alternatives generate considerably higher CAGRs than AW, with similar or higher Sharpe ratios but somewhat deeper MaxDDs.
  • Rebalance counts are as modeled, but a prudent investor may rebalance based on deviation from target allocations rather than the calendar.

For perspective, we compare cumulative performances.

The following chart compares gross cumulative performances of the same portfolios over the available sample period, generally confirming relative performances and risks.

In summary, available evidence suggests that Ray Dalio’s All Weather portfolio with a low rebalancing frequency may appeal to very risk-averse investors willing to sacrifice performance for low volatility and crash protection.

Cautions regarding findings include:

  • The sample period is not long in terms of number of asset class bull and bear markets.
  • Net performances of strategies depend on investor account size and broker fee structure. As noted, an investor may choose to rebalance based on deviation from target allocations rather than the calendar.
  • AW portfolios may be particularly sensitive to whether interest rates are rising or falling (bond prices are falling or rising). Interest rates fall during most of the available sample period.
  • Testing multiple strategies on the same, or a similar, sample introduces data snooping bias. There may be data snooping bias in construction of individual strategies (such as in selection of assets for all strategies and length of lookback intervals for SACEMS and SACEVS).
Login
Daily Email Updates
Filter Research
  • Research Categories (select one or more)