All Weather Kristals I How To Recession Proof Your Portfolio I Kristal.AI
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All Weather Kristals – Portfolios That Survive All Market Conditions

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As the poet and singer Bob Dylan once said, the times are definitely a-changin’. Looking back at the two decades that has been, we have survived a global depression, bear markets, bull markets, political upheaval, and a possible recession in the near future. The question that every investor ends up asking in such scenarios is – what should we do with our money? Do we up-end our asset allocation every single time the TV pundits give us new insights into the market, or do we just pray to the Almighty to take care of it all?

Neither. While many pundits have their own opinions of how to invest and there is no doubt a multi-billion dollar industry around that, they can be broadly split in to two philosophies. The first is where you “time” the market and hedge your bets against possible market movements, and the second is to find stable, long-term investing strategies where you can park your money and forget it. Essentially, we need to create a portfolio that can weather all market conditions and offer us consistent returns.

Enter, Ray Dalio’s All Weather Strategy

As the name suggests, this strategy is meant to help you create a portfolio that can see you through all market ups and downs. Bridgewater Associates hedge fund manager Ray Dalio, one of history’s legendary investors, created what is known as the All Weather Portfolio in the 1970s after growing political tension in the US from Richard Nixon’s presidency. Incidentally, Bridgewater is also the world’s largest hedge fund with around $160 billion in assets.

The portfolio is a blueprint that many have used since to allocate assets in a manner crafted to help you make money in any kind of economy. In the last 10 years, Dalio’s portfolio showed a 7.65% compound annual return (last update: October 2019).

From the period of 1984 to 2013, Dalio’s strategies earned him a positive return 26 out of 30 years, with an average annual return of 9.7%. According to author and business strategist Tony Robbins, Dalio’s All Weather portfolio has never lost more than 3.95% in any given year over the past 75 years. And in the two decades of the 2000s, Bridgwater had annualized returns of 14.7%. Let’s put that into some perspective: the S&P 500 index returned about 8.7% in the same two decades. What’s more, Bridgewater even managed to earn a modestly positive return during the recession in ‘08 when the general market was trending down.

It’s no wonder then that since the 1970s, Bridgewater’s has been one of the most frequently referenced all weather strategies which offer investors the potential to gain from all aspects of security price movements in the market.

How does this strategy help investors?

Now that we know just how well Dalio’s All Weather portfolio works against changing tides, let’s look at how we can make it work for our own financial planning.

According to Ray Dalio, “there is one thing we can see with absolute certainty: every investment has an ideal environment in which it flourishes. In other words, there’s a season for everything.” In his opinion, there are four factors that affect asset value:

  • Inflation
  • Deflation
  • Rising economic growth
  • Declining economic growth

And these factors in turn, lead to four different ‘economic seasons’:

  • Higher than expected inflation (rising prices)
  • Lower than expected inflation (or deflation)
  • Higher than expected economic growth
  • Lower than expected economic growth

Dalio suggests that these four economic environments form the ultimate litmus test for whether an asset’s price will increase or decrease. It is also possible for two or more of these market conditions to overlap. The crux is, nobody knows with surety how the markets will turn next.

The solution, therefore, is to invest in a balanced portfolio with 25% of our risk spread out evenly across all the four ‘economic seasons’.

Using the philosophy of ‘risk allocation’, Ray has developed the following asset allocation for Bridgewater:

Dalio-all-weather-allocation-Kristal-advisors.

 

A few interesting takeaways from this portfolio:

  • The portfolio has a relatively low amount of stocks. This is important for evening out risk, as stocks are highly volatile assets.
  • The majority of the portfolio is tied up in bonds. According to Dalio bonds form good counterpoints for stocks and lower volatility. Their long-term nature also helps with the ‘invest it, forget it’ philosophy behind this portfolio.
  • A 15% for gold and commodities might seem too much at first glance, but these assets do well historically in environments where there is inflation and add to your financial growth.

When back-tested during the Great Depression, the All Weather Portfolio was shown to have lost just 20.55% while the S&P lost 64.4%. That’s almost 60% better than the S&P.

 

Bringing Dalio to Kristal

Given that Dalio’s All Weather has been written about so much and has shown such consistent returns, there was no way that we wouldn’t replicate the same for our investors. The All Weather Kristal follows Dalio’s investment philosophy to bring together a portfolio with investments in three main asset classes: Fixed Income, Equity, and Commodity. Using our algorithm and our Internal Committee’s views, we have arrived at a broad guidance that has been tested
over time.

On the Kristal.AI platform, you will find two types of all weather portfolios. The first is theAll Weather – Unleveraged portfolio which has an asset allocation of:

  • 55% Fixed income (10% inflation-linked treasuries, 30% long duration bonds, 15% 3-7yr duration bonds)
  • 30% Equity (Broad US market ETF, e.g. S&P 500, total stock market ETF, etc)
  • 15% Commodities (Gold, and/or broad commodity tracking ETF)

The portfolio will perform based on the assumed correlation between different asset classes. Strong economic growth will support equities and commodities but at the expense of fixed income. In a recession, rates trend lower and since lower rates mean higher prices for bonds, the gains of this section of the portfolio will mitigate losses from a slump in equities. In an inflationary scenario, which is hurtful for both equity and fixed income, the commodity allocation will act as a buffer to negative impacts from both markets. The portfolio is also regularly balanced to maintain target allocation.

We analyzed our All Weather-Unleveraged Kristal against the SPDR SSgA Multi-Asset Real Return ETF – used as a proxy for a balanced portfolio – for performance. The graph below clearly shows how well the Kristal has performed. Since launch in December 2017, the portfolio has provided annualized returns of 17.3%.

All-Weather-US-Unleveraged-performance-Kristal-Advisors

 

We even back-tested it against the same ETF just to make sure:

All-Weather-Kristal-US-Unleveraged-Backtest.

 

The other all weather portfolio you will find on our platform is the All Weather-Aggresive’ Kristal, which is meant for accredited investors.

All Weather US – Aggressive provides leveraged exposure to equity asset class, allowing the investor to obtain targeted 30% equity exposure by actually investing roughly 10% of the investment in the equity class. An investment worth USD 10,000 in the Kristal will provide a risk-return exposure of an investment equivalent of USD 12,000.

We have further refined our strategy by including inflation linked bonds as part of the allocation in the fixed income space.

Since its launch in August 2017, this Kristal has provided annualized returns of 13.19%.

All-Weather-US-Aggresive-Performance-Kristal-Advisors

 

The All Weather-Aggressive Kristal invests via leveraged and unleveraged ETFs and is regularly rebalanced to maintain targeted risk-return exposure of various asset classes:

  • 55% Fixed income (10% inflation-linked treasuries, 30% long duration bonds, 15% 3-7yr duration bonds)
  • 30% Equity (Broad US market ETF, e.g. S&P 500, total stock market ETF, etc)
  • 15% Commodities (Gold, and/or broad commodity tracking ETF)

Investing In All Weather Kristals

You can get started with All Weather Kristals in a simple and easy manner via our app (Google Store, or on iOS) or our web portal. Investments can be done in a lumpsum amount, or you can set up a systematic monthly plan for regular investments.

* For the ‘All Weather-US Unleveraged Kristal’, investments start at USD 1250 (including 2% buffer to accommodate for market fluctuations). The recommended investment horizon is 2-5 years.

*For the ‘All Weather-US Aggresive Kristal‘, the minimum amount required for investments in USD 1500 (including 2% buffer to accommodate for market fluctuations). The recommended investment horizon is 2-5 years.

2019 has been a rollercoaster ride and most market analysts, including yours truly, expect 2020 to be more of the same. All said and done, Ray Dalio has given us a time-tested model of asset allocation that is akin to Valium for all your investment worries. While you can’t do much to stop the next market crash from happening, you can cushion your finances to soften the blow with a resilient strategy like the All Weather portfolio.

So, what are you waiting for? You can choose to subscribe to our All Weather Kristals now, or write to advisors@kristal.ai for more details.

As always, happy investing!

 

 

Disclaimer

The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.