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How to build an all-weather portfolio

The investment decision is the most important financial decision for every person either Single person, Association of persons, Company, or any other recognized corporate sector / identity because it involves financial risks. For better decision making and analysis of the investment opportunities available to the investors, there are various theories and decision making tools having each difference pros and cons. The All-weather Portfolio is one of the portfolio management theory that is well known and globally accepted for investment management. The All Weather Portfolio was created and presented by Ray Dalio and his firm Bridgewater Associates, currently the largest hedge fund in the world. 

This is an investment portfolio that is best and perceived to be best in terms of analysis of the portfolio under different and various economic environments. This portfolio consists of and a mixtures of different types of securities, bonds and Physical assets. Now, the every investor varies in terms of investment capital, amount of expected return and the risk or exposure to the risk, the investor can bear and need to tailor the investment portfolio accordingly and as per the specific and prevailing circumstances and situation. Because there are some investor having high amount of capital but they are not much risk taker and cannot afford and allow themselves to be exposed to the risk and on the other hand there are some investors which are very risk taker and afford to take huge risk prevailing in the investment and in return they got either higher rate of return on the investment or big losses. So the investment portfolio theory have to customized and adjusted as per the investors’ portfolio and plan. In such situations the All-weather portfolio investment mechanism presents the best solution and portfolio management tool.

It is not a guarantee and surety that your investment and assets would not be subject to risk as it is about creating and making and maintaining a portfolio that receives the right level of return for the amount of risk being taken. Because it is a study and analysis tool that will allow investor to have assurance that investor’s portfolio is invested and capitalized appropriately for the investors’ current financial situation and condition, time horizon, and personal comfort level.

“The stock market is a device to transfer money from the impatient to the patient” -Warren Buffett

Before going into the detail analysis and study of the this tool, first we need to understand the some very basic concepts and terms that are very fundamental and useful to better comprehend the situation as the investment decision are taken by persons almost from every sphere of life and every sector / field of life or organization.

Stock :

It is an ownership in a company’s share capital and equity and it has a right embedded in it the right to receive a share of its profits / dividend from the company and it has a Perpetual life (no maturity) to wit the Company’s shares are traded based on perpetual life basis as it has no maturity.

The Company’s value and share growth are two different concept that has a value means stocks that appear to be undervalued by marketplace / Company and the Share’s growth means that the stocks of companies that offer strong earnings growth in return on the shares.

Bond:

Bond is form a of a Loan to a company in exchange for interest that the Company obtained by issuing the bond (convertible or non-convertible bonds) that receives interest payments from the Company to the Bond Holder and the bond has pre-determined life (matures on a specific date) that the Company payback the bond amount to the investor at the end of the Bond’s Life and tenure. Bond has different type of risks that are interest rate risk, Credit risk and reinvestment risk.

Mutual Fund:

Mutual fund is a pooled investment vehicle / entity that is managed and run professionally that earns by investing in portfolio of stocks, bonds, or other securities. Each investor and owning the Mutual Fund units are benefited and got loses in equal portion relative to the performance of the portfolio and the expenses are shared equally. There are two type of funds open ended and closed ended Fund.

All-weather portfolio:

Investing in different type of investment securities and instruments that is an attempt to reduce overall investment risk and to avoid damaging a portfolio’s performance by the poor performance of a single security, industry, or country. That is why the management of portfolio is used and applied to manage the complete set of investments.

The Stock exchange markets and other future derivatives markets do a good job of relating prevailing risk and return on such investments. Current prices and values of the securities represent a consensus of all investors, both optimists and pessimists, who are analyzing the same public information. Everyone, investor, having and managing the portfolio using their own portfolios.

Just like the weather, the economy and stock markets are too complex and risky as well as chaotic for short-term prediction in terms of return and stock market, however still there is no fixed and there are deep regularities.

Human beings and other corporate investor are fundamentally growth-seeking and robust, therefore the USA and the other countries economies’ are ultimately robust and prejudiced toward growth. The stock market is mirror to the real economy of the Country, so it can be concluded that is also biased toward growth over the long-term.

Investment horizon are the shorter the time horizon, the lower the risk in this the investor mainly focus on minimizing volatility and lower the risk on the investment and on the other hand longer the time horizon, the higher the risk as the return on the securities directs over the long-term. The degree of variability of return and profits on the investment that an investor is willing to bear and accept is directly proportional to the risk associated with the risk attached to the investment.

To get the maximum return and profits out of the investment having an accepted level of risk is best with the best mix of the different type of the assets that an investor can afford to invest in. Each of the security and type of investment has a different risk tolerance level. As shown in the above picture attached herewith there are certain securities that gives higher level of profits and return on the long term basis but it may have high volatility in the short term basis.

Diversification of investment in terms of the Investment in the different type of securities and assets needs to be a perfect combination of assets that create diversification and reduce / off-set the risk.

So the basically the main goal of the presented all weather portfolio is to decide and make decision how much risk as investor can bear will provide the maximum return to the investor.

An all-weather portfolio Elements that help investors to stick with their plans include:

  • Using and preparing a personalized plan:
    • Making List of all important financial goals
    • Preparing a saving and investing plan to achieve the goals set
    • Setting the investing time horizon and risk level
    • Creating personalized investment policy statement and plan
  • Using time-proven wisdom to capture investment returns
    • Choosing broad diversification at the lowest costs
    • Making it simple

The all-weather portfolio tool depicts how much stocks, bonds, or cash for each investment and securities invested in and to effectively manage the portfolio there needs to be an asset allocation or investment capital allocation between the available investing opportunities. It helps minimize second-guessing and making unnecessary transactions. Growing and building investment portfolio to meet investors’ needs means continuously adding new savings and capital to the portfolio and not second-guessing investment strategy.

References:

  1. Benjamin Graham and Jason Zweig, The Intelligent Investor: A Book of Practical Counsel, Rev. ed (New York: HarperBusiness Essentials, 2003).
  2. “The Four Pillars of Investing with Bill Bernstein, MD – Podcast #107,” The White Coat Investor – Investing & Personal Finance for Doctors, May 23, 2019, https://www.whitecoatinvestor.com/four-pillars-of-investing-bill-bernstein-md-podcast-107/.
  3. FinancingLife.org. 2021. How to build an all weather portfolio.. [online] Available at: <https://financinglife.org/build-an-all-weather-portfolio/> [Accessed 18 February 2021].
  4. Optimizedportfolio.com. 2021. [online] Available at: <https://www.optimizedportfolio.com/all-weather-portfolio/> [Accessed 18 February 2021].
  5. Maggiulli, N., 2021. The Definitive Guide to the All Weather Portfolio – Of Dollars And Data. [online] Of Dollars And Data. Available at: <https://ofdollarsanddata.com/ray-dalio-all-weather-portfolio/> [Accessed 18 February 2021].
  6. Monterey.org. 2021. [online] Available at: <https://www.monterey.org/Portals/1/PDFs/Events/Financial%20Planning%20Workshops/Oct17_2018/PowerPoint%20Slides%20-%20How%20to%20Build%20an%20All%20Weather%20Investment%20Portfolio%20with%20Allison%20Barrientos%2010172018.pdf> [Accessed 18 February 2021].
  7. Investopedia. 2021. The Difference Between Shares and Stocks. [online] Available at: <https://www.investopedia.com/ask/answers/difference-between-shares-and-stocks/> [Accessed 18 February 2021].
  8. GQ India. 2021. How to build an all-weather portfolio. [online] Available at: <https://www.gqindia.com/get-smart/content/how-to-build-an-all-weather-portfolio-motilal-oswal> [Accessed 18 February 2021].
  9. Ahern, D., 2021. How to Create an All Weather Portfolio Like Billionaire Ray Dalio. [online] Investing for Beginners 101. Available at: <https://einvestingforbeginners.com/all-weather-portfolio-daah/> [Accessed 18 February 2021].

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