The All-Weather Portfolio for UK Investors [Portfolio Ideas]

The All-Weather portfolio is a powerful way to grow your wealth without losing your sleep. This article discusses the All-Weather portfolio for a UK investor. It shows who should invest in it, how suitable it is for financial independence and how you can build it using low-cost ETFs in an ISA.

This is the first article in the new portfolio ideas series. I look at different portfolios and discuss their purpose, their performance, their assets mix and how painful it is to hold them.

I also show how to build each portfolio yourself. It should act as a good starting point for your investments or a good place to review your current holdings.

What’s the best portfolio? What investments should we hold when we start withdrawing so we don’t run out of money? Which portfolio maximises returns but minimises regrets? All valid questions.

Past performance is no guarantee, but we should definitely take the asset expectations when building a portfolio.

The selection of different assets and their weights is called asset allocation in investing jargon. Your asset allocation is what will ultimately drive your returns, not which provider of funds you choose. Every investor should start by choosing how offensively or defensively they want to invest based on their goals.

Everyone is different. What is right for me may not be right for you. I have a different risk profile, time horizon and needs. To give you an idea, I may choose a different portfolio to build my wealth and another one to preserve it. The idea of the all-weather portfolio is not to craft the perfect asset allocation. There is no such thing. Only in hindsight.

But it is built for those who want their portfolio to give moderate returns under ALL circumstances.

Some portfolios have different expectations than others. So we should create our portfolios with expectations as guidelines, not guarantees. Use more cash and you’ll have a smoother journey and probably lower returns. Add a little gold and you may be better off. Add more and expect wider outcomes! Bitcoin, property, small-caps and many more to choose from.

I would like to focus on 4 areas so that you can decide which portfolio is better for you:

  • Purpose of each portfolio
  • Past Performance
  • Pain Index
  • FIRE suitability

We are UK investors living in a globally connected world. The All-Weather (UK) portfolio uses global data and UK inflation.

Asset Allocation

all-weather portfolio asset allocation
  • 30% Global Stock Market
  • 40% Long Term Bonds
  • 15% Intermediate Bonds
  • 7.5% Commodities
  • 7.5% Gold

Purpose

Meet the All-Weather Portfolio, often called the All-Seasons Portfolio or the Ray Dalio Portfolio. As the name suggests, it’s one that works in both good and bad times. Ray Dalio is one of the most successful investors behind it. Tony Robbins in the book Money Master The Game made it popular.

The idea behind it is that risky assets have high volatility. To put it simply, their price moves up and down quite a lot. That’s stocks, gold and commodities like oil and rice. Bonds, on the other hand, have a more predictable return if you hold them until maturity. Commodities and gold are quite volatile and therefore have a small allocation.

The All-Weather portfolio has a large allocation to longer duration bonds (55%) and only a 30% allocation to stocks. Bonds do well in deflationary times and during crises. They hold up their value and often increase as people seek safety. They did that clearly both in 2008 and more recently in March 2020 during the Coronavirus mini-crash.

Stocks do well during economic prosperity. They offer some inflation protection as product and services go up in price too. But they get hammered from time to time because economies fail and people are greedy. Which is why the All-Weather has only a 30% stock weight. Gold does its own thing and is uncorrelated to stocks/bonds. It also offers inflation protection.

So you have assets that cover inflation, deflation, low and high growth. How much to allocate in each? Their weights are intentional because they are close to risk parity. Risk parity means each asset contributes an equal amount of risk to the overall mix. Which is why bonds make more than half of the portfolio. It’s made for people who want to sleep well at night. It’s giving up some upside to offer protection in bad times.

Let’s see the performance of the All-Weather portfolio for a UK investor investing globally.

Performance

All-Weather portfolio returns (inflation-adjusted)
All-Weather vs 60/40 vs 100% Stocks. Returns are inflation-adjusted in log scale. Replaced 7.5% commodities with gold because returns were not available for the first 20 years. Using global market data.

Surprisingly, the All-weather portfolio has returned 5.9% real, after-inflation returns. That’s close to 8% (nominal) returns if you factor in today’s 2% inflation. This means your £10,000 would have grown to £17,795 over 10 years on average.

min max average returns

I’m using the word surprisingly because, given the heavy bond part of the portfolio, it has held up pretty nicely compared to a 60/40 or a 100% stocks portfolio (7.3%). The more interesting bit is that the All-Weather portfolio has done so while losing “only” a maximum of -27% since 1970.

-27% drawdown may seem quite a lot but compare it to a -51% loss of a stocks-only portfolio and you realise you’re in much better shape. Holding this portfolio makes you sleep better at night while enjoying strong returns until now.

Investors in risky assets should have a time horizon of at least 5 years. Here are the rolling 10-year returns of the All-Weather portfolio.

rolling 10-year returns all-weather portfolio for a UK investor

The All-Weather portfolio from a UK point of view has a great starting-date sensitivity (or lack thereof). In other words, regardless of when you decide to start investing, you will make something close to the “expected” return. If you’re willing to ignore the first 5 years of the 70s that is.

Very high inflation destroyed bonds during the 70s but gold and stocks were less affected by it. As a result, the overall journey til 2020 was incredibly smooth.

heat-map all-weather portfolio for UK investors
Here’s the heat map of the entire all-weather portfolio returns for a UK investor

I would like to thank Portfolio Charts and Portfolio Visualizer for the useful data and charts. They’re incredible data sources and you can play with the numbers and run your own simulations.

Pain index

As you might expect, the All-Weather portfolio is for those who don’t like big portfolio losses.

  • The 30% stocks capture economic growth and prosperity which has been the case most of the time. They also offer some inflation protection.
  • The 55% bond part does wonders in deflationary times. Getting paid a fixed amount (interest) is good when this amount has more purchasing power in the future – therefore enhancing your real returns
  • The gold acts as an insurance to the rest of the portfolio and along with commodities they perform well under high-inflation

The combination of all assets is such that there is good synergy during all times. You wouldn’t perform as good as a stock-only investor would if the world keeps prospering. But you expect to perform much better in times of stress while not giving up much of the upside either.

Here is the maximum drawdown of the All-Weather for the UK investor:

all-weather portfolio drawdown and years to recover for a UK investor
As you can see, the all-weather portfolio took a -27% hit a few times. It took a maximum of 12 years to go back to the previous value (inflation-adjusted!)

For a US-only investor, the same asset mix has a maximum drawdown of only -16%! That’s astonishing and it’s definitely one of the smoothest if you consider the 50 years timeframe.

FIRE Suitability

Those who want to FIRE their boss have to have a plan before doing so. Does the all-weather portfolio suit an early-retiree’s needs?

I have previously laid out my financial independence plans which are indeed getting real now. It’s both scary and exciting at the same time. But I’m not there yet. How has All-Weather performed for a FIRE’d person 10, 20 or 30 years ago?

Using the (often-criticised) 4% rule to retire early (fixed withdrawal)

Rule: Withdraw 4% of your initial portfolio balance every year adjusting it for inflation

all-weather 4% withdrawal early retirement

As you can see the portfolio performs really well for a 40-year retirement. The 4% is free of taxes, fund and platform costs, which is why I like to deduct around -0.5% to account for these. Unless you have a £1m ISA of course.

Can we ramp it up to 5% (fixed withdrawal)?

Rule: Withdraw 5% of your initial portfolio value every year adjusting it for inflation

5% safe-withdrawal-rate all-weather portfolio

Unfortunately, in 5 cases you run out of money, depending on when you actually started investing. Not all starting dates are created equal. Most of the time, a 5% SWR has at least maintained its initial £1m value (nominal terms). In a few extreme scenarios, your £1m has grown to £6,000,000 even after accounting for withdrawals! In some cases, though, it has failed.

You might be thinking: if the portfolio goes south, then you wouldn’t expect me to sit there and watch because I trusted some 5% safe-withdrawal rule 20 years ago. And you’d be right. You would normally lower your spending, look for other income, or both.

What if we’re flexible with our 5% withdrawal rate?

Withdraw 5% of your initial balance. Increase your portfolio withdrawals by 5% of previous withdrawal in years where your portfolio is up or decrease it by -5% of your previous withdrawal when it’s down. But you can’t go crazy. Use a 50% ceiling and a -20% of your initial portfolio value. In other words, a £1m portfolio on a 5% flexible rule, can withdraw a maximum of £75k and a minimum of £40k at all times.

5% flexible safe-withdrawal-rate

I didn’t expect the flexible 5% to hold up so well but it does. This means a retiree did not run out of money in any 40-year timeframe when using the flexible 5% rule on the all-weather portfolio.

You may be wondering: Sure, but how much did they end up withdrawing in actual amounts every year?

withdrawal amounts on a 5% flexible withdrawal rule
Withdrawal amounts on a 5% flexible withdrawal rule – all-weather portfolio

Not bad at all. As you can see, there are more lines above the £50k mark than below. Not only the 5% flexible withdrawal rate has not run out of money, but it has also allowed for a better quality of life (or a larger inheritance!) while doing so.

The portfolio was ideal for those who FIRE’d in the past 40 years despite having lower returns than a stocks-heavy portfolio. This is because the lower returns came in a much smoother way. To understand this statement think of the following question for your upcoming retirement:

Would you choose a 10% per year portfolio that will lose -50% once in a while or a 5% fixed return per year?

While accumulating money, a -50% drop may actually help you build your wealth faster if it happens early in your accumulation phase. As I’ve shown before, a stock market crash is actually good for you if you can keep your job.

But if the -50% crash happens early in your retirement it will be catastrophic. That’s because your withdrawals will cause extra harm to a portfolio that’s struggling to recover.

As a result, a 5% guaranteed annual return has a safe-withdrawal rate of 5%! This smooth journey of the past is not guaranteed in the future, especially given the high allocation to low-interest-rate bonds. But it helps explain why the all-weather portfolio used to enjoy such a high safe withdrawal rate.

Overall, a safe withdrawal rate should act as guidance more than a rule. Often your SWR will be affected by 3 things:

  • Retirement length (years in retirement)
  • Portfolio mix
  • Probability of success you are comfortable with (i.e. 85%, 95%, 100%)

How to build the All-Weather portfolio using ETFs in an ISA

For a UK investor, you can implement the all-weather portfolio using the following ETFs:

  • 40% SPDR Barclays 15+ year Gilts UCITS ETF (GLTL, OCF 0.15%)
  • 15% Lyxor Core FTSE Actuaries UK Gilts (DR) UCITS ETF (GILS, OCF 0.07%)
  • 30% Vanguard FTSE All-World UCITS ETF (VWRL, OCF 0.22%)
  • 7.5% iShares Physical Gold ETC (SGLN, OCF 0.25%)
  • 7.5% L&G All Commodities UCITS ETF (BCOM, OCF 0.15%)

These ETFs should be available in most Stocks and Shares ISAs.

The All-weather portfolio has a weighted average cost of 0.16%. Quite low.

Every now and then you would need to rebalance back to the target weights. The rebalancing frequency doesn’t matter much. You can do it quarterly or annually. But you have to do it.

Please note: I have used global funds for stocks, gold and commodities but UK bonds.

My view on the All-Weather portfolio for UK investors

I can bombard you with more graphs and data but I think you get the gist of it. The All-weather portfolio is made for those who want moderate growth and lower risk.

Personally, I think the returns will not be as good going forward. The portfolio has benefited from the falling interest rates of the 80s and 90s and has performed very well because of that. But for a person starting today, where 80% of government bonds yield less than 1%, I struggle to see how it can achieve a 5.9% real return going forward.

I wouldn’t recommend it for someone who’s looking for high growth though. If you’re starting out you may want to consider a higher allocation to equities and property. Early retirees may also struggle if they have a long retirement horizon ahead of them (30+ years).

A 15% allocation to gold/commodities may not be easy to hold either. Gold is doing really well in 2020 but I want to remind you it just reached its previous 2011 levels. It also took 28 years, between 1980 to 2008 to recover!

This doesn’t mean that it is not a good choice though. The All-weather portfolio may end up performing a lot better compared to other portfolios. Your invested money has to go somewhere one way or the other. If we have a low-growth deflationary environment (or deep negative rates) the all-weather portfolio should outperform.

But overall, the All-Weather portfolio is a decent choice for UK investors who want stability and moderate growth.

Stay tuned for more portfolio ideas coming up in the series.

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3 thoughts on “The All-Weather Portfolio for UK Investors [Portfolio Ideas]”

  1. Very interesting to see a portfolio where bonds > equities.

    Taking a tip from Tim Hale (and Monevator), I set up my own ‘portfolio for all seasons’, which I’ve tweaked slightly in the last 6 years. It got a bit battered in March but has recovered well these past few months. At 70% equities, it’s quite aggressive compared to your All Weather one, although I can see myself moving towards 60% over the next few years. However, I don’t hold any commodities or gold and not sure that I want to or need to. While I’ve done ok so far without either, perhaps I just need to read more about them.

    Reply
    • Thanks for posting your allocation, Weenie. I also follow Tim Hale’s recommendations while in the accumulation phase. My target weight is 60% equities but it has drifted to around 70% and needs rebalancing. I know rebalancing will feel like I’m selling my winners but it’s the right thing to do.

      I don’t own any gold either. I’m flirting with the idea though, mainly thanks to the role it plays in a portfolio rather than for the “growth” it can offer.

      Reply

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Hi! I’m Michael and I love writing about different ways to earn, save and invest our money. Coffee addict :)

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