All-Weather Portfolio Finally Broken, as Ray Dalio Says “Don’t Own Bonds”? #94

[@mccannger]

Very timely video…timeless in fact. Thanks 🙏

[@andyyan]

Thanks! Agree to think about all these questions because human is emotional on money matters.

[@EnFuego79]

23:00 Great presentation, thank you! The only thing I found fault with was at 23:00, and I'm not sure if you just miss-spoke, but you said "assets across the board are going up in value". The issue is that value is not determined by the dollar amount in an environment of massive monetary inflation; you would have to price the asset in something more stable economic fundamentals like gold or oil to know if it's going up in value. I think what you meant to say was all assets are going up in nominal, but not real terms. Anyway, thanks again!

[@TheMoneyParadox]

Yep, that is spot on. I meant in nominal terms. And I agree that real terms are just as (if not more important) a measure to look at

[@theoracle10]

Good video. The problem with bonds is they are NOT providing that inverse correlation to stocks. Normally, when the stock market drops bonds go up and visa versa. But that assumes you aren't in a time period where you have had the fed artificially suppressing the yield of bonds as stimulus, and now unwinding that . So in 2022, The S&P is down 10% but at the same time TLT is down 10%. There is no inverse correlation. Bond yields are rising in anticipation of the end of QE and rate hikes regardless of what the market does. And since bonds still haven't found a stable price, you see days where stocks are up and long term bonds are up, and days where stocks are down and long term bonds are down. Right now the reverse correlation between stocks and bonds is not working.

[@TheMoneyParadox]

Thanks Chuck. All great points. I agree that bonds and stocks are not inverseley correlated at the moment. Though, in practice, these two asset classes are weakly inversely correlated during "normal" times

[@theoracle10]

@@TheMoneyParadox Today a good example TLT down 2% while stocks flat to open. I think what is better to say is that certain assets perform better in specific market conditions or "seasons" I prefer all seasons to all weather btw. Bonds will naturally do worse when interest rates are rising regardless of what other asset classes do and do better when interest rates are dropping. The exception is a "flight to safety" to bonds were we to experience a fast stock market crash but a slow drip of higher rates will probably lead to bonds losing value. Dalio probably saw higher interest rates coming which is why he doesn't iike bonds right now. There are few chances for bonds to gain value if interest rates are rising. Two other interesting portfolio's I love to see you analyze = great job on this one btw are the Permanent Portfolio and the Golden Butterfly. The Permanent is another attempt to put together assets that respond to the different economic seasons. The one economic season that nobody seems to have found an asset for is recession. All assets generally lose then, but the Permanent has 25% cash or very short term treasuries which blunts the losses and gives you capital to buy the down ones when you rebalance.

[@TheMoneyParadox]

@@theoracle10 All good points. A couple of things to bear in mind. Bonds tend to do worse when interest rates rise more than expected. So it's actual vs expectation that is key to that. The main reason Dalio doesn't like bonds at the moment is due to Central Banks devaluing their currencies through huge printing of money. This ultimately devalues cash and debt denominated in their currency (eg their government bonds). Noted on the other two portfolios. The reason why most assets devalue in recessions is because of credit drying up and thus the amount of money in the economy. For example, gold may become more popular in recession, but that just means a higher share of a much smaller pot of money available. That is why gold often goes down in a recession too initially. But as time goes on it tends to go up once credit improves and there is more money available to invest. When it comes to picking assets that do well in recessions, it depends on what type of recession you expect will occur and where in the world. For example, is it an inflationary or deflationary recession? Is it a local or global recession? It's also to bear in mind what other things are going on. For example, in 2000, bonds and REITs did well. In 2008, bonds and gold did well. My personal view is that in times of uncertainty and increased risk of significant reductions in specific asset classes, the best thing to do is to diversify into many different asset classes. And to rebalance when there are large changes in the value of these assets.

[@theoracle10]

@@TheMoneyParadox All great points. Thanks. The problem for people like me approaching retirement is there has been nowhere to hide. You can't go all cash with high inflation. With interest rates rising, bonds have been terrible, I think long term treasuries TLT are down 14% over the past 3 months. Corporate bonds are down. A disaster for conservative investors who think they are hedging by having a 60/40 portfolio. Gold and commodities, especially oil but others have done very well. Emerging markets are down. Europe is down. Stocks imo are overvalued. Not that they can't get more overvalued but by any historical measurement they are high. Real Estate is probably in a bubble although we have a shortage of housing in the USA, but higher interest and mortgage rates won't help. So where does someone without a long time frame go now? Certainly the 2/10 spread is warning of a potential recession within the next couple years. Any ideas?

[@evanmastermind]

@@theoracle10 I'm in the same boat as you only I'm just starting to invest. It seems that nothing is safe right now. I guess that just proves the importance of having a diversified portfolio. Right now I'm thinking to use the AWP but with less bonds and more stocks / gold. Me being young means I can hold more stocks, but for a retiree maybe just move your bond duration towards a shorter term or look into TIPS.

[@davidf.torressola2920]

The table shown here: 14:00. Is that something that was put together manually? or are there tools where you can put a set of assets and will generate that table for you?

[@TheMoneyParadox]

Yep, it's in the show notes. Link below too for ease of reference. The website shows historical performance for a host of portfolios and ETFs www.lazyportfolioetf.com/allocation/ray-dalio-all-weather/

[@davidf.torressola2920]

@@TheMoneyParadox thank you. I was actually wondering how I can create a similar table with other assets, tweaking the percentages, etc.

[@AK-ez9nv]

Thanks for the video. Although you briefly mentioned it I feel the video did not really answer the question how the AWP and Dalio's statement "you must be pretty crazy to want to own bonds" fit together. Could you elaborate on that?

[@TheMoneyParadox]

Hi AK. The main reason is that Ray Dalio hasn't specifically commented on how the AWP and his recent position of being anti-bonds fits together. So I can't put words in his mouth. However, my personal view is that if pressed, Ray Dalio would say that the All-Weather Portfolio approach still fulfills the objective it sets out to achieve. There will be times that it performs better or worse than its long-term trend but its main objective is to achieve good long-term returns, with low volatility, without the need to change the approach given the "season" we are in. The current concerns people are having are valid, though they are essentially driving a change to one's investment approach based on the season we are in. That is understandable but goes against the premise of the All-Weather approach. That being said, I suspect he wouldn't have pushed the All-Weather approach as much if asked now, if at all

[@AK-ez9nv]

fair enough, thanks James

[@theskull3838]

Great video James. It's a shame that All Weather is not straight forward to arrange inside an ISA wrapper. Also, hard to see that Ray Dallio can reconcile his thinking here, that nobody should own bonds, while his recommended portfolio has 55%.

[@TheMoneyParadox]

At first sight, it can seem difficult to set up the All-Weather Portfolio in an ISA wrapper. It took me a long time to finally work it out. However, once you get a hang of it is actually quite simple. I produced three videos explaining step by step how to do it (videos 66-68). Start with this video: kzbin.info/www/bejne/qqGuZKuOaLeSf5I

[@theskull3838]

@@TheMoneyParadox That's great James. I'll have a look. Please keep up the great work.

[@TheMoneyParadox]

@@theskull3838 Thanks Chris! Very kind of you to say. Let me know if there are any specific questions or topics you'd like me to cover in future videos

[@bluetroll2082]

How's it doing now? Bonds are getting killed...

[@TheMoneyParadox]

In the transition to higher bond yields the AWP got killed. But..... now that bond yields are higher, people investing in it now, are doing much better. This is the main benefit of the AWP. It's not going to be the best-performing approach, and certainly not during certain periods. But it will produce decent returns in the long term when factoring in all seasons that the market goes through

[@mccannger]

As time passes in 2024 it may be a decent entry point for setting up parts of the all weather portfolio. To me this is very interesting: how do we set up the all weather portfolio without overly trying to time the market?… To me, the stock markets are priced for perfection and rate cuts seem inevitable . So building out the bonds side seems sensible. Gold, too, is having a decent run and there are structural reasons for this. Key principle: diversify BEFORE you need to… It’s always worth thinking about rotating, but as emphasised in the video, manage, don’t meddle 😊 - have reasons for taking action. But nobody ever lost money by taking profits in the stock market 😎

[@theskull3838]

James. Do you think that if Tony Robbins so l spoke to Dallio's again in 2021 he would give him the same answer (55% bonds etc)? The statements that the All Weather Portfolio is great and you shouldn't own bonds are totally incongruent. Thanks.

[@TheMoneyParadox]

My personal view is that if pressed, Tony would say that the All-Weather Portfolio approach still fulfills the objective it sets out to achieve. There will be times that it performs better or worse than its long-term trend but its main objective is to achieve good long-term returns, with low volatility without the need to change the approach given the "season" we are in. The current concerns people are having are valid, though they are essentially driving a change to one's investment approach based on the season we are in. That is understandable but goes against the premise of the All-Weather approach. That being said, I suspect he wouldn't have pushed the All-Weather approach as much is asked now, if at all

[@julienschittenhelm7023]

Did anyone tell you before, that you look a bit like Adam Sandler? 😄

[@TheMoneyParadox]

That and Andy Samberg 😂

[@julienschittenhelm7023]

Haha, you're like a perfect blend between the two. Hilarious. Nice video BTW. Very well put information. 👍 Thankyou, Adam Samberg! @@TheMoneyParadox

[@TheMoneyParadox]

Thanks Julien! I'm glad you enjoyed it. Yours Sincerely, Andy Sandler@@julienschittenhelm7023

[@tacocruiser4238]

If interest rates start skyrocketing, then the value of every asset class will collapse except for cash. The All-Weather Portfolio is no exception. But aside from rising interest rates, this portfolio will do a decent job at protecting your wealth and even increasing it a bit here and there. But if rising rates are your biggest fear, then make sure you keep a significant reserve of cash in your portfolio.

[@TheMoneyParadox]

All very good points Taco - Thanks for providing your thoughts

[@cherianjerinoommen595]

So if interest rates increase significantly, won't that affect the returns from bonds also positively (as the returns from bonds is basically interest)?

[@TheMoneyParadox]

@@cherianjerinoommen595 If interest rates rise then yes, bond yields will also rise. But only on new bonds being issued. Consequently, if you already own bonds with relatively lower yields to those now on offer, the market value of those bonds will be worth less. In a sentence: Interest rates increase -> Value of bonds already owned go down; Yield on new bonds you buy go up

[@cherianjerinoommen595]

@@TheMoneyParadox Thanks man! That was so quick.

[@shaddyshokralla3002]

My understanding is that the bond market will price in projected increases in interest rates, so a bond fund will not necessarily decrease in value if interest rates rise.