Getting started with the All Seasons Portfolio

Getting started with the All Seasons Portfolio

(This post was updated 12 December 2019, 30 March 2020, and January 2021)

Learn more about:

  • How I fell in love with the All Seasons Portfolio Strategy
  • What is the All Seasons Portfolio?
  • What happens next? How can you get started?

Alright then. The first blog post of many to come on this blog I am so excited to get this project started. I have very much been looking forward for a while to write this first blog post about risk parity investing and the All Seasons Portfolio strategy.

It is going to be a great journey to tell you about how I am starting to invest with the All Seasons Portfolio Strategy and easily building it with widely available ETFs.

Many investors, especially new and younger investors, are taking more risk in their investing than they may be realizing. Most portfolios of these investors are heavily allocated into stocks, and that is not an odd phenomenon: the stock market has been the best place to store money through the 2010s. But even if a recency bias would tell you to keep your stock allocation intact at high levels, there are no guarantees that stocks will be the best investment in the next decade.

As I want to help as many as possible to begin investing responsibly and with a sensible risk exposure, I will share my journey to try to inspire, educate, and hopefully, get you started as well on switching your spending habits, your non-interest bearing bank accounts, and high-risk stock portfolios to accumulating enough wealth to feel secure.

During the Covid-19 coronavirus outbreak through the first half of 2020, a huge number of investors have realized that they have actually taken way more risk in their portfolios than they were prepared for.

Professional and non-professional investors alike, it came as a surprise how psychologically difficult it would be to see one’s stock portfolio lose so much in value in such a short period of time. It only took two weeks for the S&P 500 stock index to drop 30%. Until then, it had been easy to be a stock investor during the longest bull market in history, but it did not feel so great when the bear market and recession arrived. I hope that many have seen this as a wake-up call to make changes in the portfolio for a risk level that better suits your ability to sleep at night.

Many savers need to learn from the coronavirus crisis and adjust the risk of their portfolios

Therefore, many savers need to learn from the coronavirus crisis and see their investments from a new light and adjust the risk of their portfolios. For most, it will mean to decrease the exposure to risk assets, i.e. the stocks part in the portfolio, and to hedge the risk of economic downturn using safe assets, such as gold or government bonds.

By building a portfolio that is inclined to perform well in each kind of market environment, be it high or low growth, or high or low inflation, you can count on a steady growth in wealth, but with much lower volatility.

With this idea in mind, I started to figure out how I should reshape my portfolio to decrease the amount of risk I was exposed to, while still getting good long-term yield. Risk parity investing fits into this mindset perfectly.

Finding the All Seasons Portfolio

I first came across the All Seasons Portfolio when researching risk parity portfolios, and when I found the All Weather strategy advocated by Ray Dalio – one of the world’s most famous and successful investors – elaborates how his asset management firm, Bridgewater Associates, manages its clients’ funds.

The All Weather Portfolio is one of the company’s most famous products and is a leveraged (loan-induced) portfolio with a mix of assets types that counters market risks in all market environments – be it bull market or bear market – and with limited drawdowns (measure in decline from the previous top to the next bottom). The strategy is based on macro focused investing and algoritms to achieve extremely good results.

Ray Dalio also developed a simplified portfolio, which requires less maintenance and that gives a hedged value growth by risk parity. According to back-testing, the portfolio has made money 86% of each year since 1984 to 2013, and the average annual loss was only just under 2%. That is a phenomenal achievement. This portfolio is the one that Ray Dalio calls the “All Seasons Portfolio”.

As the All Seasons Portfolio is a simplified version of the All Weather Portfolio, it is possible for any retail investor, such as you and I, to replicate. Hence, even small investors can now achieve a similar portfolio as what Bridgewater offers its clients, with the caveat that Ray has many analysts at his hands and they constantly monitor and adjust according to market trends to maximize profits.

But the core portfolio split between assets can easily be replicated by you and I, which means non-professional investors and just any person you could meet on the street. This retail investor portfolio, Ray Dalio calls the “All Season Portfolio”, as it is not as exact as the All Weather Portfolio. The idea of the All Seasons Portfolio is also that it is easy to maintain and only requires minimal efforts by the investor. Rebalancing can be done only once per year, meaning that only annually, you would be selling what you have too much of and buying what you have too little of.

I then began researching the All Seasons Portfolio, together with other risk parity portfolio strategies. In its core, when you invest with a risk parity portfolio, you build it with several non-correlated asset classes and weigh them in the portfolio based on their volatility (risk). Typically, risk parity portfolios are highly data-driven and rule based, and are usually built with more than 15 different asset classes. This make them difficult for retail investors to replicate, because a) you need significant amount of funds to be able to effectively replicate so many asset classes, and b) a highly data-driven approach requires a high degree of active management – time that most do not have.

Because I have a background in law and banking, risk management and research are two elements I am well trained in, and it is something I have wished to incorporate in my investing life as well.

That is why I fell in love with the All Seasons Portfolio strategy. It is, in fact, a risk parity portfolio, and has the same benefits as any other complicated risk parity portfolio, but it is much more simple to replicate and manage. As it is only built with 5 different asset classes – stocks, long-term government bonds, inflation-linked bonds, gold, and commodities – it is easy for any investor to build this portfolio using ETFs marketed to retail investors.

Moreover, by simplifying and approximating the volatility of each asset class, you will cut out the active component, as the only actions you will need to do is to occasionally rebalance the portfolio so that the asset classes get back to their original weights.

Even though the All Seasons Portfolio is a simplified risk parity portfolio, you can still count on similar return as more complicated portfolios. This is because while the holdings of complicated portfolios are adjusted based on historical volatility, future volatility remains unknown. Hence, with a simplified approach, based on a sound core structure, you still are very well prepared for what ever market environment may face you in the future – regardless how asset classes have behaved in the recent past.

And as the All Seasons Portfolio is rule-based (with fixed allocations to each asset class, and is rebalanced on a regular basis) it is hard to make mistakes as long as you follow the recipe.

This is the portfolio and strategy that I fell in love with because it works great for regular people and is easy to replicate. There is a lot of uncertainty on the financial markets and the financial system, so you better be prepared for whatever event or crisis is thrown at you.

So what I am going to do here? Well, I will take the asset split from Ray Dalio’s magic formula, and translate that into low-cost ETFs (Exchange Traded Funds) available to everyone, but not only that – I will do so in the European environment. Most blogs on investing and tips concerning ETFs are unfortunately based in America. As a European, I found that lightly annoying. Therefore, I found that a European perspective is needed, and will thus be writing primarily from a European’s perspective. If you are American however, do not worry. You can easily follow the same ideas and concepts, but using ETFs available in the United States.

In addition to describing the strategy, I will be blogging about my experiences and how the All Seasons Portfolio strategy works in practice, and give you a summary of recent market developments. I will write monthly portfolio updates and mix it up with some other relevant content about investing as well in Insights post, so make sure to subscribe to the newsletter in the page footer or on the right hand side of this post.

What is the All Seasons Portfolio?

Let us dig a bit more into the All Seasons Portfolio and how it is fundamentally constructed. It is a split between the asset types bonds, stocks, gold and commodities. These weights of these assets in the portfolio is however not equal, nor does “the most common” assets get heavier weight such as in an unbalanced 60/40 portfolio

Instead, the portfolio splits are based on the assets’ relative volatility (risk). This is done because you want to balance the risk in the portfolio to ensure lower overall portfolio volatility. Thus, your All Seasons Portfolio will have the following allocations to each asset class:

  • Bonds – 55%
  • Stocks – 30%
  • Gold – 7.5%
  • Commodities – 7.5%
    Total – 100%

The basis behind this allocation and risk parity investing could be explained much more extensively, and I will do so piece by piece in my monthly updates. But to simplify it, stocks carry more risk than bonds and should therefore have a smaller proportion in the portfolio to make the portfolio more stable. That is also the basis for why gold and commodities have such a small share in the total portfolio – these asset types are even more volatile than both bonds and stocks.

Another beautiful aspect of the All Seasons Portfolio is that the value of each of these asset types move differently in different investment climates. The basis is that there are fundamentally only two variables that move assets prices: economic growth and inflation. More correctly, what impacts the prices are rather changes in expectations of future economic growth and inflation.

In higher than expected economic growth, risk assets such as stocks and commodities would flourish, while safe assets being government bonds, inflation-linked bonds ( or “TIPS” in the U.S. (Treasury Inflation Protected Securities)), and gold would fall in price. The opposite would be true when expectations economic growth falls.

See for example what happened in March 2020. Because of the Covid-19 outbreak and the imposed lockdowns in most countries, the markets expectations of economic growth suddenly turned from positive to extremely negative. This had a great impact on asset prices when stocks and commodities fell sharply, while gold and U.S. Treasury Bonds increased in value.

On the inflation side, if it would increased at a higher rate than expected, commodities, gold and TIPS would increase in value, while stocks and government bonds would decrease in such a climate. The tables would then be turned if the inflation would be lower than expected.

The biases of each asset class can thus be described by assigning them to the squares of the below simple matrix:

With these biases in mind, you will end up with a portfolio as shown in the pie chart further up in this post when weighing each asset class in accordance with their volatility versus their seasonal biases.

The key will then be to rebalance the portfolio through the economic cycles to maintain the correct splits when different assets are performing stronger and others weaker. For most, rebalancing is sufficient to perform only an annual or quarterly basis (as you see fit), or when you notice that an asset class highly deviates from its assigned weight in the portfolio (for example 10%).

By rebalancing, you will automatically buy an asset at its lower price points and sell at a high price. This is the holy grail of investing – buy cheap and sell high – which is something that could otherwise be a challenge when focusing on only one asset class, for example when investing in individual stocks. With this rule-based approach with the All Seasons Portfolio, it is difficult to make stupid mistakes based on external or psychological factors.

For a comprehensive description of how each asset class is biased to certain economic environments, I highly recommend the book Balanced Asset Allocation by Alex Shahidi. Here, Shahidi explains the reasons for why the matrix here above looks like it does, for example why stocks do well in an environment of higher than expected economic growth and low inflation, and why inflation-linked bonds perform well in the completely opposite environment.

What to do next – how to get started

To get started, you will need to do mainly two things: keep reading up on risk parity investing (I will, for example, keep adding valuable content to this blog every month), and start picking ETFs based on your preferences. Remember to track broad indexes to achieve good diversification, and to keep the ETF management fees low. You can check out a few example portfolios that I have constructed, by accessing the ETF Portfolio Inspiration page in the header (for inspiration only; no recommendations).

Hand in hand with low costs for ETFs goes to find a good low-cost broker. You would not want your wealth to be eroded through trading commissions. You should also look for a broker which gives you access to a wide offer of ETFs. It is a lot easier for you to build your optimal portfolio if your broker offers more ETFs to pick from.

As for my broker, I use one of Europe’s leading online ones – DEGIRO – which is a low-cost broker were you can easily build your own All Seasons Portfolio. You can do so from a great variety of ETFs listed on for example Xetra, LSE, Euronext, and Borsa Italiana. This even includes a selection of 200 commission-free ETFs (conditions apply)! As always, remember that all investments involve a risk of loss. 

I acknowledge there will be some challenges to get the full effect from the All Seasons Portfolio when you start with little money. If you will have 5-6 different ETFs in your portfolio, it will be almost impossible to get the asset splits right because of the prices of each ETF unit.

My advice is therefore to save up to about EUR 4,000, because then you will be able to actually get the splits in % that was described earlier. I learned this the wrong way trying buy only one ETF at the time. I learned that it is best to save until you have EUR 4,000 in you investment account and only then shape your All Seasons Portfolio.

When you have got started, and have a smaller amount invested (less than EUR 20,000), you can rebalance your portfolio by buying those ETFs that you have too little of with your monthly savings. For example, if your gold portion has dropped from 7.5% to 5%, you buy gold back to its original share when you make your monthly deposit to your account. No need to sell any other ETF in that case, and thus you save on trading fees.

When you have a more sizeable portfolio, lets say with a value of more than EUR 20,000, you can start rebalancing your portfolio in suitable intervals by selling what you have too much of and then buying assets that you have too little of. You can do so either once per year or quarterly – completely up to you as you prefer. Just make sure not to rebalance too often, or your transaction costs will offset your returns.

When you have a greater amount invested, it will be quite cost efficient to rebalance the portfolio by selling and buying, rather than just by adding funds. If you start with this kind of rebalancing too soon, the transaction cost may eat up an unreasonably high proportion of the value added from the rebalancing act itself.

If you need helpful tools and resources for managing your portfolio, I have shared a couple of Google Spreadsheets documents in the Shop (some resources for free). For example, the Simplified Portfolio Tracker helps you keep track of the asset allocation in your portfolio, and provides you with a easily readable economic dashboard with key economic data in an accessible Google Spreadsheets format. Good tools for portfolio management helps a tonne in practice and make it a lot easier to keep track of your investments.

This blog is your and mine joint journey, and we will learn by doing together. Therefore, I will be extremely transparent with my mistakes, personal finances and learned lessons here on the blog. You will see all my returns and Performance of my portfolio through good times and hard times, of which the Covid-19 outbreak was an interesting example. I hope you too take the opportunity to discuss your journey and experience in the comment section, or by mail to nicholas@allseasonsportfolio.eu if you do not want to make your information publicly available.

So join me on this ride, and always feel free to leave a comment with any input, question or feedback that you would have. This is a shared experience where we learn and grow our wealth together.

Read more about my approach and Game Plan here.

Remember to sign up to the newsletter (subscription form in the footer) so that you will receive notifications of new blog posts with ideas and market updates.


Want to learn more about the All Seasons Portfolio Strategy before you get started yourself? Check out this great book where Bridgewater Associates shows the data and statistics for the All Weather Portfolio Strategy works, how small the drawdowns are in comparison to stock indexes and the reasoning behind the splits to achieve risk parity.

This book is a showcase of the data behind the strategy, so it is a good read if you are not yet 100% convinced that this is a wise strategy for non-professional investors like you and me.

Also go have a look at my list of the 3 Best Books on the All Seasons Portfolio and Risk Parity Investing for more inspiration.

This Post Has 2 Comments

  1. Nostromo

    Finally a blog from a European perspective! Felt as a relief to read that. Because most blogs or other websites about the subject are USA based (so are the ETFs) and you have to find a European ETF alternative every time.

    1. Nicholas

      Thanks for noticing! This was an important item when I started this blog about two years ago to write about investing from a European perspective. I definitely agree with you that most content available is created with the American investor in mind. That is an issue since 2018 when American products are no longer available in the EU.
      I hope you find the blog worthwhile and useful!
      Cheers,
      Nicholas

Leave a Reply