The Fundamental Philosophy of the All-Weather Portfolio: Mastering the 4 Economic Seasons
The All-Weather Portfolio, designed by Ray Dalio and his team at Bridgewater Associates in the 1990s, is based on rigorous macroeconomic analysis. Its central philosophy is to anticipate and protect against the four economic "seasons," defined by the conjunction of two dimensions: economic growth (growth vs recession) and inflation (inflation vs deflation).
These four scenarios are:
- Growth + Inflation: typically an economic expansion with rising prices, often linked to strong demand and increasing costs.
- Growth + Deflation: economic growth with falling prices, a rare scenario but possible in case of increased efficiency or cost reduction.
- Recession + Inflation: stagflation, a difficult period where growth is negative but prices continue to rise.
- Recession + Deflation: economic contraction accompanied by falling prices, a classic scenario of financial crisis or depression.
Dalio posits that the classic stocks/bonds diversification is not enough to cover these four environments. For example, stocks perform well in growth/deflation but fall in recession/deflation, while long bonds protect in recession/deflation but suffer in inflation.
The key concept is therefore to allocate assets so that no "season" endangers the portfolio. Thus, by combining stocks, long and medium bonds, gold, and commodities, the portfolio aims for maximum resilience regardless of the economic cycle.
Original Composition of the All-Weather: A Rigorous and Counter-Intuitive Allocation
The allocation initially proposed by Bridgewater is as follows: