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Pragmatic Capitalism

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Assessing the Ray Dalio/Tony Robbins Portfolio

I was intrigued by this article on Yahoo Finance by Tony Robbins who cites his interview with Ray Dalio in his upcoming book.  I ordered the book despite the fact that the blurbs in the back struck me as outlandish.  For instance, the back cover says:

“Learn how you can apply a never-before-revealed investment strategy from the world’s largest hedge fund manager that has made money even when the markets crashed”.

And:

“Invest like the wealthy where you participate in market gains but are guaranteed to never lose when the market drops”.

Yes, my eyes are rolling.  But let’s explore this in more detail before we just shrug it off.

First, the “never-before-revealed” strategy is Ray Dalio’s All Weather strategy.  It’s most certainly been revealed and widely distributed to those who actually track this stuff so “never” revealed is obviously just catchy terminology. In fact, there are now several funds that claim to do some version of this approach.  But look at what Robbins actually recommends in the article based on Dalio’s thinking – it’s a 55% bonds, 30% stocks, 15% commodities portfolio.  So let’s assess this a bit.

Importantly, this is not the actual All Weather portfolio.  Dalio has been known to use dozens and more non-correlating assets.  In fact, Dalio is on record saying that the key to the approach is finding 15 or more sources of non-correlated returns:

“If you have 15 or more good, uncorrelated return streams — the math of that is such that if you go from 1 to 2 uncorrelated return streams. That you will reduce your risk by about 80% at about 15. And there’s a certain math to it; there’s a certain structure to it.”

The Yahoo Finance portfolio has 3, maybe 4 drivers.  This portfolio is just cookie cutter stocks, bonds and commodities.  There’s really nothing fancy going on here at all.

Second, the All Weather portfolio utilizes leverage to achieve risk parity.  Therefore, it’s obvious that the Yahoo Finance portfolio is not using the same degree of strategic diversification that Dalio implements in the All Weather portfolio.

Third, this portfolio is just a bond heavy portfolio.  Robbins mentions how “astonished” he was by the “back-tested” results of the portfolio.  Well, of course a bond heavy portfolio will perform well during the greatest bond bull market of the last 100 years.  And as I often mention, this is one of the dangers of back-testing.  The idea that that future will necessarily look like the past is ludicrously misleading.  And yes, bonds will not come close to generating the types of returns in the coming 30 years that they have in the past 30 years.  You just need an ounce of common sense to know that.

I hate to rain on the parade here (not like it matters since the book is selling so well), but this is not a newly revealed approach and it most certainly will not “guarantee” that you make money in the future.  In fact, if I had a gun to my head I’d bet the ranch that this bond heavy portfolio with a commodity tilt generates sub-optimal returns going forward.  We know that because the math on the low bond yields and the negative real returns of commodities makes it a high probability bet.

So please be careful reading this – I know the allure of a market guru can be strong.  But this portfolio is not a true representation of Ray Dalio’s All Weather portfolio so don’t go running into this idea thinking that you’ve found some “guarantee” of high returns.  That said, I look forward to reading Tony’s book.  I am sure there are tons of valuable insights in the book.

Related:

Some Thoughts on Risk Parity

The Investor’s Conundrum

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC.Orcam is a financial services firm offering low fee asset management, private advisory, institutional consulting and educational services.Cullen is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Cullen Roche

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