An Alternative All Weather Portfolio

After writing the article a few days ago, I have continued to look at how Ray Dalio's portfolio would hold up during different markets. Something I did notice is that in 2022, it did not hold up. The combination of inflation and rising rates created an environment whereby stocks and bonds both declined. Also, I have noticed that gold tended to not beat inflation by a steady rise in price, but by having these big bull runs i.e. in 1979 and 2011. In addition to this, I have been looking at different bond periods and that the shorter timeframes seem to be less volatile, which is what I want. So, I have made an alteration to his All-Weather Portfolio and created my one of my own.

Starting off with the equity portion of the portfolio. Dalio uses the VTI or US Total Market ETF. In my alternative All Weather portfolio, I'm going to use VOO or the S&P 500 ETF. So instead of buying the whole market, I'm just going to be buying the biggest 500 companies. Over time, VOO has shown to have slightly better performance than VTI, although they are highly correlated. VTI is slightly more volatile, which is important to note when its long-term returns are worse. VOO captures the growth of the largest companies, with economies of scale. I will raise the weighting to 40% because even though they are at all-time highs, equities have done better over time than any other asset class.

For the bond portion of the portfolio, Dalio uses 40% TLT (20+ year bond ETF), and 15% IEF (7–10-year bond ETF). In my alternative portfolio I'm going to use SHY (1-3 year bond ETF). SHY has the combination of a decent (and un-taxed) yield and much lower volatility. The TLT ETF has a volatility over 2 times that of the equity market. I am buying SHY because its volatility is 0.24 that of the market. Remember that the purpose of the bond holding/s is to reduce the volatility of the equity and commodity ETFs. The TLT is highly volatile, so it won't offset any volatility. The weighting of the SHY will be the same as VOO at 40%.

For the gold and commodity portions of the portfolio, I will raise the weightings in the GLD and DBC ETFs to 10% each. There is a bit of a risk with GLD as gold recently hit $4,000 an ounce. But having that gold holding will help protect me from inflation, and it also has a monthly volatility half that of the equity market. As for the DBC (Commodity ETF) it also has lower volatility than that of the market, along with an almost 5% yield. This yield will help to cushion the portfolio in the event of a market drawdown.

So essentially, I have a 50% weighting of this portfolio at all-time highs (stocks and gold). The other 50% of this portfolio is yield producing and not currently in a bull market. Who knows if the bull market will continue for stocks and gold, and if it does my alternative All Weather is set up for a continuation of that run. But if it doesn't, the portfolio is also constructed to survive in the event of a significant market correction. The portfolio has a 2.4% net yield. with lower volatility than an all-equity portfolio, combined with 50% drawdown protection.