On this page, you will learn about
- The basics of the All Seasons Portfolio Strategy
- How I translate the theory to practice, and
- My approach to the All Seasons Portfolio
When setting up any portfolio, it is important to have a thought-out plan with rules for yourself, and this is what I have done. First, I concluded that the All Seasons Portfolio Strategy was suitable for me, because, in theory, your capital would grown, but the portfolio would only on very rare occasions decrease in value over a year’s time.
Then, I spent some time, thinking hard and long, how I would turn this theory into practice. I came up with a game plant, that I will pursue, when assembling my All Seasons Portfolio.
What is the All Seasons Portfolio?
The All Seasons Portfolio Strategy, is a rather passive, but effective, investment strategy. You do not need to spend so much time following up on your investments, but you will still collect good returns. The portfolio composition will do most of the work for you, and you only need to rebalance the asset splits yearly, or semiannually.
With this investment strategy, you take advantage of a risk parity investment model. This means, that each asset in your portfolio are a natural hedge against each other. When stocks decrease in value, bonds will increase, and so forth. This is achieved through the theory that there are limited amount of factors that drive the price of assets.
The theory says, that the world economy, is basically only exposed to two factors: economic growth and inflation. These can be either higher than expected or lower than expected. This will form a matrix with four fields, which are your “seasons“.
Different assets react differently to the seasons. Stocks, for example, do well in an environment of high economic growth and falling inflation, while for example inflation-linked bonds/TIPS (Treasury Inflation Protected Securities) perform well when inflation is high but economic growth is slowing down and falling. The beautiful thing here in play is that all of the assets in the portfolio return above cash, but they do not do so at the same time. They do so in different seasons. So over time, with this portfolio allocation, you will cancel out the season changes in your portfolio (e.g. when growth turns from high to low), and then only be collecting the risk premiums from each asset.
The assets that perform well in each season is shown in the matrix below:
So what are the benefits of the All Seasons Portfolio? It is a diversified portfolio split between stocks, long term bonds, gold and commodities, and the splits are based on a risk parity model. All assets namely carry different amount of risk and are volatile to different extent. This means that each component constitute 25% of the volatility and risk of the portfolio (gold and commodities accumulated), instead of splitting the portfolio equally between the assets. This is because stocks are about 3 times as volatile as bonds, while gold and commodities are even more volatile.
So instead of each of the assets constituting 25% of the portfolio value, your splits would look like this:
The benefits of the All Seasons Portfolio are well documented, and I have gathered inspiration and further reading on the strategy from the below sources for you to read up on:
- Balanced Asset Allocation (book by Alex Shahidi)
- The All Weather Story (explanatory text by Bridgewater Associates and Ray Dalio)
- The Global Treasurer (blog from January 2019)
- Listen Money Matters (blog from February 2019)
- I will Teach You To Be Rich (blog post of unknown date)
- All Weather Strategy Portfolio (book by Ray Dalio)
- Money Master The Game (book by Tony Robbins)
My game plan and the All Seasons Portfolio theory put into practice
Quick strategy summary:
- 300€ monthly investment
- Invest in 1 ETF/month
- Rebalancing by buying – by selling only when portfolio reaches significant value (40,000 €)
- Choice of Distributing ETFs for cost efficient rebalancing
- Seeking US Exposure, no currency hedging
- Beginning with few ETFs and adding more as my wealth grows
Why do I invest – Dreaming about financial independence
When saving and investing, it is important to have a goal, so let’s begin from the beginning, before we consider the portfolio and monthly savings ratio. Without a clear goal, I find it difficult to motivate myself to be persistent and put a side a sum each month for a future cause. Maybe you are saving for your kids’ colleague or first home purchase, your retirement, or to be financially free and your early retirement.
I was pondering this question for a while. What am I saving for? Long have I been saving just for the sake of it, making it a cause in itself but that too is quite abstract.
Then I came across the book “Money Master the Game” by Tony Robbins, and found that it is possible to make oneself financially free by accumulating wealth. So this is my freedom fund – a portfolio which is going to make me financially independent, and giving me the freedom not to worry about the next pay check.
At the same time, I want to have the security that if I would lose my day job, I would not need to worry. However, if my investments would be a back up for if I would become unemployed, it would be very unwise to be all-in invested in stocks. That is because if the stock market would crash, it is likely that unemployment would rise, which in turn means that my safety net has shrunk considerably the day I need it. Instead, I needed to build a portfolio that is dependent of the stock market performing well, as I need to make sure that my safety net works regardless when the rainy day comes.
The coronavirus crisis of 2020 is a great example of why it is vital to have an own safety net in case you would get laid off. In only a few weeks, millions lost their jobs, and even more were furloughed. I bet you would have felt a lot more calm if you would have had a sizable portfolio that you could fall back on.
The crisis also showed why you cannot only be invested in stocks. In March 2020, the S&P 500 lost more than 30% of its value. Clearly, you need a much more diversified portfolio than that to be able to use it as a safety net. Thus, the All Seasons Portfolio strategy is a superior strategy, with better risk-adjusted return and lower drawdowns.
But when are you financially independent? For me, the long-term aimed amount is 440,000 €, which would give me 2,000 € in monthly cash flow at 5.5% growth per year (average stock market growth of 7.5% minus expected inflation rate of 2%). To reach that amount, it will take me 30 years with compound interest of 7.5% 400 € monthly investments.
The beauty with the All Seasons Portfolio, is also that when I reach the goal amount, the drawdowns (the times that the portfolio takes a loss) are very rare. This means, that I would be able to keep my fortune, without having to worry as much about losing it all.
How do I implement the All Seasons Portfolio Strategy to practice?
Having decided to apply the All Seasons Portfolio, I now needed a more detailed game plan – putting theory into practice. I identified an ETF universe of 26 different low cost ETFs, with that track diversified indices. I have included the list of ETFs on the ETF Portfolio Inspiration page.
I have also determined my target amount to invest each month, which is taken from my salary income. The amount will be around 300€ each month to be able to achieve my goal.
The said monthly amount will be added to the portfolio by buying units of 1 ETF per month. This way, I will achieve constant balancing of the portfolio based on the asset class splits (stocks, bonds, inflation-linked bonds, gold and commodities).
In the end, I will therefore be buying what is cheap at that time. Once my portfolio reaches certain size (about 40,000€), I can start rebalancing by selling assets that are taking up a larger share than the aimed allocation and buying what I have too little of. I will not do it before that, as the transaction costs would eliminate the benefits.
To achieve this in a more costs efficient way, I have chosen to mainly invest in distributing ETFs (i.e. ETFs paying out dividends on at least a quarterly basis). In doing so, I do not need to pay for selling ETFs when rebalancing, but only when buying.
Note that I am choosing distributing ETFs because that is tax efficient in Sweden where I live. Depending on your home country and the tax regulation, accumulative ETFs may be the better choice, to avoid triggering taxes when you receive dividends.
As for my broker, I use one of Europe’s leading online brokers – 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.
About my chosen ETFs
From my list of about 30 identified ETFs, I will cherry pick those that help me achieve my result. I will not be buying all of them. Far from it. You could easily achieve the sought results with only 5-7 ETFs, which I am beginning with.
For me risk parity is important, and during a severe global financial crisis, investors seek safe havens such as in US Treasury Bonds and investments denominated in the US dollar. Therefore, many of my government bonds will be such issued by the US. As for stocks, an all-world approach is acceptable, which is what I have gone for, and will provide a broad exposure to the stock markets.
My list of about 30 selected ETFs are found at the ETF Portfolio Inspiration page and I have also included some example portfolios with different combinations of these ETFs depending on what markets you want to be exposed to and, whether you want EUR Hedged ETFs. There, I have also included an example portfolio for any American reader, with ETFs available in the US.
Start small and then grow. That is the important thing when you get started. Compound interest will do wonders for your portfolio, so the important thing for any new investor is to just begin, and then
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Thanks for your attention, and feel free to leave me your comments in the field for any of the blog posts.