Published By Anthony Brunello in Finance on March 22, 2016, 2 minute read

DIY All Weather Portfolio with Vanguard Funds

Some of you may have heard of the “All Weather” portfolio concept Ray Dalio’s Bridgewater Associates hedge fund uses for its largest clients. Basically, the idea is that there are two categories, the economy and inflation. At any given time, either of these categories could be rising or falling. The All Weather approach aims to distribute your assets across various asset classes to minimize losses while still leaving the opportunity for growth in a bull market. When this strategy was run against historical data all the way back before the Great Depression, the greatest one year loss was just over -3%, while the average annual return was 9% (!!) There’s a lengthy write up from Bridgewater here that gets in to the nitty-gritty for those interested.

I’m not a Bridgewater client (they require $5bn net worth to invest in their fund, and I’ve got like $5bucks) but I liked the idea of a ‘set it and forget it’ diversification strategy that would basically run on autopilot and require rebalancing just once a year.

Vanguard funds seem ideal for this, as they consistently have very low expense ratios. Plus, if you open an account at Vanguard directly, you can trade Vanguard funds for free (i.e. no commision). When I say fund, I really mean ETF, which is an index of multiple assets in a given class, so this strategy is pretty much diversification of diversification. For what it’s worth, you could use mutual funds as well, but Vanguard has some minimum investment requirements on mutual funds that might prevent proper allocation. Vanguard ETF and mutual fund performance is nearly identical so I choose to just use ETFs.

All that said, I built out the following All Weather portfolio using Vanguard funds and figured I’d share:

Symbol What %
VOO S&P 500 20.00%
VEA Non-US Stocks 15.00%
VWO Emerging Markets Stocks 5.00%
VCIT Corporate Bonds 22.00%
BNDX International Bonds 16.00%
EDV 30 Year US Treasury 15.00%
VTIP Inflation Protected Securities 2.00%
VNQ Real Estate 5.00%

Basically, just spread your investment across these funds at these percentages. Then, once a year, re-balance your portfolio; take your total account balance and run the calculations again. Each fund will perform differently on a given year so your distributions could become skewed. Re-balancing each year corrects for this and ensures you never have too large an allocation in any one fund. Again, I recommend opening an account directly with Vanguard to take advantage of the commission free trades for this annual re-balancing.

Happy investing!