Expanded Canvas Ray Dalio All Weather Portfolio: A Capital Efficient Maximum Diversification Masterpiece?

The Ray Dalio All Weather Portfolio is considered by many to be the cream of the crop when it comes to risk managed long-only asset allocation.

It’s designed specifically for all-weather conditions.

Unlike other portfolios that skew heavily towards equities, the all-weather approach is centred around diversification, balance, risk parity, correlations and overall economic regime readiness.

It’s not swinging for the fences with a home-run or strike-out as the most likely outcomes.

It’s more aligned towards having a disciplined eye willing to take a walk, lay down a bunt, slap a single past the third basemen or drive in a run with a sacrifice fly.

It’s a more versatile approach to asset allocation that has served investors well.

I’m of course referring to the simplified version of the Ray Dalio All Weather Portfolio that became popularized by a Tony Robbins book.

We’ve got the following allocations:

Expanded Canvas Ray Dalio All Weather Portfolio: A Capital Efficient Maximum Diversification Masterpiece? - Digital Art

Ray Dalio All Weather Portfolio

30% US Total Stock Market
40% Long-Term Treasury
15% Intermediate Treasury
7.5% Gold
7.5% Commodities

What are some obvious benefits of the Ray Dalio All Weather approach versus a traditional 60/40?

  1. Less Aggressive Equity Position (30% vs 60%)
  2. Increased Fixed Income Exposure (Historically less volatile assets)
  3. An Uncorrelated Alternative Sleeve (Gold and Commodities which are lacking in a 60/40 portfolio)

Hence, the Ray Dalio All Weather Portfolio is focused first and foremost on managing risk and preparing itself for every economic outcome under the sun.

That’s the “All Weather” approach in a nutshell.

It’s a simple and super duper easy to assemble portfolio for amateur investors to consider.

However, it’s not the “Holy Grail” that Ray Dalio describes in a popular Investopedia video.

Please stop reading and watch this short video before we proceed further:


source: Investopedia on YouTube

How To Improve The Ray Dalio All Weather Portfolio - Digital Art

How To Improve The Ray Dalio All Weather Portfolio With Capital Efficiency And Maximum Diversification For An Expanded Canvas Masterpiece!

Hey guys! Here is the part where I mention I’m a travel content creator as my day job! This investing opinion blog post is entirely for entertainment purposes only. Most investors should not use leverage in any way, shape or form. There could be considerable errors in the data I gathered. This is not financial advice. Do your own due diligence and research. Consult with a financial advisor. 

Expanded Canvas Ray Dalio All Weather Portfolio Seeking Maximum Diversification And Capital Efficiency Truck Going Through Mud
source: LOSTMIND on pixabay

Ray Dalio’s Holy Grail Approach To Asset Allocation

So what did you think of the video?

Some of the key phrases and concepts presented pertain specifically to “returns relative to risk”, “the power of diversification” and “correlation of assets”.

But according to Ray the true magic is this one simple thing:

Find 15 or 20 ‘good’ uncorrelated return streams.

The name of the game is to assemble a portfolio with as many unique return drivers and uncorrelated asset classes/strategies as possible.

This creates an all-weather juggernaut where enhanced risk management and returns collide.

In order to accomplish this task we’re faced with a unique problem.

What do we shave down, reduce or eliminate in order to make room for these additional strategies?

Do I slice and dice my equities, shave down my bonds or hack gold down to create this extra space?

What if there was another option that didn’t involve addition by subtraction?

Expanding The Canvas: Maximum Diversification Via Capital Efficiency - Digital Art

Expanding The Canvas: Maximum Diversification Via Capital Efficiency

Expanding the canvas is the solution to this problem.

Instead of deviating from the foundation of a sensible plan we’ll pack-mule a diversified stack of additional strategies on top of the backbone of the Ray Dalio All Weather Portfolio.

In other words, we’re committed to the foundational structure of the portfolio.

We’re going to ensure we’ve got exactly this:

30% US Total Stock Market
55% Fixed Income
7.5% Gold
7.5% Commodities

But we’re not going to make the classic mistake that trips up most amateur investors.

The temptation to dial things up 2 to 3X.

Instead, we’ll take the more sensible approach suggested by Ray Dalio.

We’ll seek a motley crew ensemble of alternative investment strategies that have low correlations amongst each other; and more importantly, ensure that they’re uncorrelated with the traditional asset classes we’ve already got in our all weather portfolio.

I’m not quite sure we’ll make it to 15!

Sorry, Ray!

But I’ll darn well try my amateur best to thumb my way across the finish line with at least 10.

Our Mission Statement: 10-15 Unique Return Sources - Digital Art

Our Mission Statement: 10-15 Unique Return Sources

Let’s review our mission statement:

“We’ll attempt to build the Ray Dalio All-Weather Portfolio in its entirety utilizing capital efficient building blocks that expand the canvas to create additional space for diversifying uncorrelated strategies where we’re seeking at least 10 unique sources of returns for an overall enhanced version of the portfolio.”

Alrighty then!

We’ve got our work cut out for us but we’ll take a stab at it anyways.

Let’s get crackin’!


source: Investopedia on YouTube

Phase 1: Seeking The Most Capital Efficient Building Blocks - Digital Art

Phase 1: Seeking The Most Capital Efficient Building Blocks

In order to create space in our portfolio to find unique sources of uncorrelated return streams we first need to expand the canvas.

So we’re specifically hunting for the most capital efficient products out there to give us the exposures we need to fulfill the requirements of the original Ray Dalio All Weather Portfolio.

We’ll first turn our attention towards PSLDX Mutual Fund.

It’s better known as PIMCO StocksPLUS Long Duration Fund.

For $1 spent here we’ll receive $1 worth of US Equities PLUS $1 exposure to long duration fixed income!

With a generous 30% allocation we’re filling up 30% each of the equites and fixed income buckets.

Our next capital efficient building block is RSBT ETF.

It’s more typically referred to as Return Stacked Bonds & Managed Futures ETF.

This is another 200% expanded canvas product that’ll give us a 2-1 special of aggregate bonds and managed futures.

With a 25% slice of the pie it’ll eat up our 55% fixed income requirement.

We’re now done with our two most important sleeves: 30% US Equities + 55% Bonds.

We’ve only used 55% of our portfolio real-estate to accomplish this goal and we’ve added a big ‘ole scoop of uncorrelated managed futures to the mix.

We’ll use one more capital efficient fund to round things out.

GDMN ETF at 8.5% provides us with 90% exposure to Gold Miners PLUS 90% Gold Futures meaning we get 7.65% towards each strategy.

It’s a nifty fund known as WisdomTree Efficient Gold Plus Gold Miners Strategy Fund.

Finally we’ve selected COM ETF to finish the task of completing all of the Ray Dalio All Weather sleeves.

It’s the only non-capital efficient fund we’re adding to the mix.

If you read the article entitled, “How To Create A More Defensive Ray Dalio All Weather Portfolio” you’ll find out why I chose Direxion Auspice Broad Commodity Strategy ETF with its long-flat strategy versus a long-only fund.

Let’s review what we’ve accomplished over here.

With 71% of the portfolio resources we’ve fulfilled the Ray Dalio All-Weather mandate and added a managed futures and gold miners to the mix.

We’ve still got 29% of our portfolio resources at our disposal to diversify to our heart’s content.

Phase 2: Diversifying Like There Is No Tomorrow! - Digital Art

Phase 2: Diversifying Like There Is No Tomorrow!

So we’ve got a nice slice of empty canvas to paint our diversification masterpiece.

We’ve already added two unique return streams to the mix with managed futures and gold miners.

Shall we slice things up into 4%, 2% and 1% slots to add 8-10 more funds?

Let’s kick things off with a long-short equity strategy VMOT ETF that provides global factor focused exposure to value and momentum on the long-end with beta hedges on the short side during downward trends.

It’s full name is Alpha Architect Value Momentum Trend ETF.

We’ll add a market neutral anti-beta strategy with BTAL ETF which is long low volatility stocks and short high beta ones.

It’s better known as AGF US Market Neutral Anti Beta Fund.

IVOL ETF is a unique fund providing investors exposure to a generous slice of TIPs and also a OTC options strategy.

It’s called Quadratic Interest Rate Volatility and Inflation Hedge ETF.

Next we’ve got a multi-strategy FLSP ETF zeroing in on Quality, Value, Momentum and Carry mandate.

It’s full name is Franklin Systematic Style Premia ETF.

SVOL ETF gives you exposure to a hedged 0.2-0.3 Inverse VIX.

It’s better known as Simplify Volatility Premium ETF.

It’s probably no surprise that ARB ETF covers all of your merger-arbitrage needs.

It’s called AltShares Merger Arbitrage ETF.

And in term of covering your $TAIL you’ve got out of the money put options as portfolio insurance.

It’s full name is Cambria Tail Risk ETF.

With an OTC derivative strategy in PFIX ETF you’ve got a unique interest rate hedge for your portfolio.

It’s better known as Simplify Interest Rate Hedge ETF.

And why not dip our toes into the crypto market with just a 1% sliver with BITO ETF.

It’s called ProShares Bitcoin Strategy ETF.

Assembling The Maximum Diversification Ray Dalio All Weather Portfolio - Digital Art

Assembling The Maximum Diversification Ray Dalio All Weather Portfolio

Let’s take a peak at our expanded canvas Ray Dalio All Weather Portfolio.

Maximum Diversification Expanded Canvas Ray Dalio All Weather Portfolio

30% $PSLDX – PIMCO StocksPLUS® Long Duration Fund
25% $RSBT – Return Stacked Bonds & Managed Futures ETF
8.5% $GDMN – WisdomTree Efficient Gold Plus Gold Miners Strategy Fund
7.5% $COM – Direxion Auspice Broad Commodity Strategy ETF
4% $VMOT – Alpha Architect Value Momentum Trend ETF
4% $BTAL – AGF US Market Neutral Anti Beta Fund
4% $IVOL – Quadratic Interest Rate Volatility and Inflation Hedge ETF
4% $FLSP – Franklin Systematic Style Premia ETF
4% $SVOL – Simplify Volatility Premium ETF
4% $ARB – AltShares Merger Arbitrage ETF
2% $TAIL – Cambria Tail Risk ETF
2% $PFIX – Simplify Interest Rate Hedge ETF
1% $BITO – ProShares Bitcoin Strategy ETF

It’s not the most pleasing from a design point of view.

This is anything but the Harry Browne Permanent Portfolio with 25% equal slices as we’re a bit all over the place.

But ultimately I’m thrilled with how many strategies we’ve been able to add.

15 Distinct Investing Strategies Under The Hood

  1. US Stocks
  2. Fixed Income (Long-Term Treasury + Aggregate)
  3. Managed Futures (Trend-Following)
  4. Gold
  5. Gold Miners
  6. Commodities Long-Flat or Long-Short
  7. Long-Short Equities (Concentrated Value-Momentum Factor Focused)
  8. Anti-Beta Market Neutral
  9. TIPs
  10. Style Premia (Quality, Value, Momentum and Carry)
  11. Inverse VIX
  12. Arbitrage
  13. Tail Risk (Put Options)
  14. Interest Rate Hedge (OTC Derivatives)
  15. Bitcoin

Here is a full list of all the distinct strategies we’ve been able to assemble under one hood.

15 Distinct Investing Strategies Exposures Rank Ordered

  1. 55% Fixed Income (Long-Term Treasury + Aggregate)
  2. 30% US Equities
  3. 25% Managed Futures
  4. 7.65% Commodities (Long-Flat)
  5. 7.65% Gold Miners
  6. 7.5% Gold
  7. 4% Long-Short Equities (Focused Factors minus Beta)
  8. 4% Market-Neutral Anti-Beta
  9. 4% TIPs + Options (OTC)
  10. 4% Style Premia (Quality, Value, Momentum, Carry)
  11. 4% Inverse VIX (0.2-0.3 with hedge)
  12. 4% Merger Arbitrage
  13. 2% Tail Risk (Put Options)
  14. 2% Interest Rate Hedge (OTC Derivatives)
  15. 1% Bitcoin

Expanded Canvas Portfolio: 161.8% 

And that’s our nifty little 161.8% expanded canvas portfolio!

Simulated Backtest and Correlations Between Strategies - Digital Art

Simulated Backtest and Correlations Between Strategies

The last thing for us to consider is a simulated backtest and to check out the correlations between all of the various funds and strategies we’ve assembled under the hood.

In order to rewind the clock back to 2014 for a long-range back-test I’ll have to trim some strategies and replace others with mutual funds.

So we won’t be able to backtest our Inverse VIX, Tail Risk, Interest Rate Hedge or Bitcoin funds.

That extra 9% space will be added to the five 4% funds at roughly 2% each.

Maximum Diversification Ray Dalio All Weather Simulation Assets
source: portfoliovisualizer.com

30% PSLDX – PIMCO StocksPLUS Long Duration
25% AGG – iShares Core US Aggregate Bonds ETF
25% PQTIX – PIMCO TRENDS Managed Futures Strategy
7.65% GLD – SPDR Gold Shares
7.65% RING – iShares MSCI Global Gold Miners ETF
7.5% LCSIX – LoCorr Long/Short Commodity Strategy
6% QLEIX – AQR Long-Short Equity
6% BTAL – AGF U.S. Market Neutral Anti-Beta
6% TIP – iShares TIPS Bonds ETF
6% QSPIX – AQR Style Premia Alternative
6% ADAIX – AQR Diversified Arbitrage
-32.80% CASHX – Cash

Maximum Diversification Ray Dalio All Weather Portfolio Simulation versus 100% 60/40 Portfolio VBIAX
source: portfoliovisualizer.com
Ray Dalio All Weather Portfolio Performance from 2014 until 2022
source: portfoliovisualizer.com

CAGR: 8.98% vs 6.89% vs 4.59% 
RISK: 9.37% vs 10.05% vs 7.73%
BEST YEAR: 23.27% vs 21.79% vs 18.30%
WORST YEAR: -11.40% vs -16.90% vs -17.53%
MAX DRAWDOWN: -13.97% vs -20.78% vs -19.84%
SHARPE RATIO: 0.87 vs 0.62 vs 0.50
SORTINO RATIO: 1.54 vs 0.93 vs 0.75
MARKET CORRELATION: 0.57 vs 0.97 vs 0.68

We’re able to clearly see from an albeit imperfect back-test that the maximum diversification Ray Dalio All Weather Portfolio reigns supreme in comparison to the 60/40 Portfolio (VBIAX) and the traditional Ray Dalio All Weather Portfolio.

It clearly outpaces both portfolios in terms of performance, best year, worst year and maximum drawdown.

Moreover, it offers superior risk adjusted rates of returns as indicated by its Sharpe Ratio and Sortino Ratio.

Finally, it’s less correlated to markets than both portfolios.

And now let’s check out the correlations between strategies which ranges from 2014 until 2023.

Ray Dalio All Weather Portfolio Maximum Diversification Approach monthly correlations between ETFs
source: portfoliovisualizer.com

When comparing each fund with all of the others you get most low correlation results.

This is exactly what we’re seeking with our maximum diversification mandate.

Finally, we’ll add back BITO, PFIX, TAIL and SVOL for a short sample size correlation examination.

Monthly Correlations between BITO, PFIX, SVOL and TAIL ETF
source: porfoliovisualizer.com
Nomadic Samuel visiting Salzburg, Austria
Nomadic Samuel visiting Salzburg, Austria

Nomadic Samuel Final Thoughts

The Ray Dalio All Weather Portfolio is hands down one of the best long-only asset allocation model portfolios in terms of risk management, diversification and simplicity.

It’s easy to assemble and allows many investors to stay the course during more difficult economic regimes.

However, if we’re seeking what Ray Dalio refers to as “true magic” and the “one simple thing” we need something closer to 15-20 diversified return streams to direct our compasses towards “The Holy Grail”.

One of my biggest pet peeves in the industry is the general assumption that amateur investors aren’t capable of managing a portfolio of 10+ funds.

Imagine a spice rack consisting of only a few different ingredients.

All you’ve got is salt, pepper, garlic powder and oregano.

How boring!

Where’s the flavour enhancers and spices?

I’d be craving paprika in no time flat!

So if we can manage a cupboard full of diverse spices to create masterpiece meals why is it assumed we’ll crumble if managing a portfolio of more than 10 funds with an annual rebalance?

It quite honestly baffles my mind.

But let’s leave things on a more positive note.

What do you think of this maximally diversified capital efficient reinterpretation of the Ray Dalio All Weather Portfolio?

The expanded canvas version.

It is overly complex or just the right amount?

Can it be improved?

I’d be more than curious to hear your opinion.

Please let me know in the comments below.

That’s all I’ve got for today.

Ciao for now.

More from Nomadic Samuel
Tax-Efficient Investing: Maximizing Returns in Your Portfolio
Step right in, dear reader, to a world where maximizing returns is...
Read More
Join the Conversation

3 Comments

  1. says: Geoffrey

    Hi Samuel,

    I like it a lot, though I would like it even better if there were more global equities involved. I realize that VMOT is a global etf, but what I’m thinking is a larger, capital efficient allocation along the lines of the PIMCO fund, or better yet an etf. Do you know if the Resolve guys are going to come out with a return stacked global equities/bond etf in addition to RSBT? That I believe would be even more interesting and expand Dalio’s idea further. Also, what about CYA (which already includes SVOL and PFIX and other strategies for tail risk); RRH for rising interest rates; BLOK for proxy crypto exposure with more of an emphasis on block chain tech and more global equities. I’m suggesting these in place of TAIL and BITCO. I’m also wondering about the virtue of gold miners. Perhaps just go long GLDM and call it a day? I wouldn’t add too much else; IMHO, once you get under say a 3 or 4% allocation I question it’s overall impact on the portfolio. Your thoughts?

  2. says: Charles Carrington

    Hello Samuel,

    You’ve got a great site here. I’ve only recently discovered it, and I’ve enjoyed reading some of your back articles. I like what you’ve done here in applying return stacking to Dalio’s All Weather, and even more your additional uncorrelated assets. Thanks for including all the correlation data. One of the first things I do when comparing portfolio constructions, or investments is look at CAGR+MaxDD. It’s just a rule of thumb. Ideally, that sum should be positive. It’s usually negative. Here, what’s important is how your return stacked approach produces (8.98-13.97= -4.99). This is much better than the classic Ray Dalio All Weather (4.59 – 19.84 = -15.25).

    After the disabusing nature of last year, I’m not excited about the All Weather, the Golden Butterfly or even plain old TIPS. All of these were supposed to be able to provide steady wealth protection, via low drawdowns, in unfavorable economic conditions. In return, you gave up some upside potential. In practice, it seems you gave up the upside and didn’t get anywhere near the downside protection one was led to expect. Maybe Cash and QQQ (55/45) which from 2014 to now would have given you a CAGR of 8.38 and MaxDD of -14.16. (so 8.38-14.16= -5.78), with maybe more upside and Sharpe and Sortino ratios close to what you have with 15 components, using only 2.

    Bottom line though, getting 20% more performance with less risk is worth the effort of dealing with 15 funds.

    Thanks

  3. says: Ned Weiner

    Where can I find your most up to date personal portfolio? I see recent changes but I am looking for an updated list that reflects your highest conviction portfolio.

Leave a comment
Leave a comment

Your email address will not be published. Required fields are marked *