16/04/2558 This investing style could protect you from bubbles

This investing style could protect you from bubbles

What about long-term allocation?

If you are a long-term investor who doesn’t want to worry about short-term market trends, you might consider the approach developed by Ray Dalio and Bridgewater Associates,
which they call the All-Weather Portfolio. The two main opportunities and risks considered for the All-Weather Portfolio are growth and inflation.

This diagram shows a broad outline of the suggested investment allocation:


he idea is to have a diversified portfolio that protects you from inflation, while taking advantage of growth opportunities. You might consider putting a portion of your investment capital in this type of conservative portfolio, while leaving a portion for your own sector- or region-based allocation.

The All-Weather Portfolio outlines asset allocation, and for investors with large actively managed portfolios, the credit holdings would likely be individual bonds, which one can hold to maturity, rather than mutual funds or ETFs, which feature fluctuating share prices and additional interest-rate risk.

“In essence, All Weather can be sketched out on a napkin. It is as simple as holding four different portfolios each with the same risk, each of which does well in a particular environment: when (1) inflation rises, (2) inflation falls, (3) growth rises, and (4) growth falls relative to expectations,” according to Bridgewater.

There is some overlap, with equities being included in both the Rising Growth and Falling Inflation categories, for example.
Here are samples (not recommendations) of exchange traded funds that might fit into the broad asset categories within the four risk categories in the chart above that make up Bridgewater’s All-Weather Portfolio:

Equities

• SPDR S&P 500 ETF SPY, +0.45% 
• ProShares S&P 500 Dividend Aristocrats ETF NOBL, +0.26% 
• iShares Russell 2000 Index Fund IWM, +0.70% 
• iShares MSCI ACWI ex-US ETF ACWX, +0.54% 
• Vanguard Health Care ETF VHT, +0.23% 

We included a health-care ETF because this sector has outperformed all others in the S&P 500 for most time periods over the past 10 years.

Commodities

• iShares S&P GSCI Commodity-Indexed ETF GSG, +2.85%
• GreenHaven Continuous Commodity Index Fund GCC, +0.62%
• PowerShares DB Base Metals Fund DBB, +0.97%
• SPDR Gold Trust GLD, +0.87% 
• PowerShares DB Oil Fund DBO, +3.25% 

Corporate Credit

• iShares iBoxx $ Investment-Grade Corporate Bond ETF LQD, +0.07%
• Vanguard Intermediate-Term Corporate Bond ETF VCIT, +0.35% 
• SPDR Barclays Short-Term Corporate Bond ETF SCPB, +0.07% 

Emerging Market Credit

• Market Vectors Emerging Markets Aggregate Bond ETF EMAG, +1.24% 
• WisdomTree Emerging Markets Corporate Bond Fund EMCB, +0.00% 
• SPDR BofA Merrill Lynch Emerging Markets Corporate Bond ETF EMCD, +2.27% 

Nominal Bonds

U.S. Treasury yields are at historically low levels, but they are paying more than many other developed countries’ bonds, and offer safety from default.
Here are three examples of ETFs with various average maturities:

• SPDR Barclays Long-Term Treasury ETF TLO, -0.09% 
• Vanguard Intermediate-Term Treasury Fund Investor Shares VFITX, +0.09%  
• iShares Short Treasury Bond ETF SHV, +0.00% 

Inflation-Linked Bonds

There was plenty of reader feedback to my discussion on what will happen to bond funds when interest rates rise. Some readers don’t think U.S. interest rates will rise very much,
which means bond funds won’t fall very much. Government-reported inflation numbers have been quite low in the United States, although those don’t include food prices, so real inflation may be higher.
Inflation-linked bonds provide protection, because some of the interest paid is based on the inflation rate. U.S. Treasury Inflation Protected Securities (TIPS) come in a variety of maturities.
Here are some examples of ETFs holding TIPS:

• PIMCO 15+ Year U.S. TIPS Index Exchange Traded Fund LTPZ, +0.48% 
• Vanguard Inflation-Protected Securities Fund Investor Shares VTIP, +0.16% 
• FlexShares iBoxx 3-Year Target Duration TIPS Index Fund TDTT, +0.20% 

The All-Weather Portfolio provides the four broad categories and asset classes to protect against different market risks, while also encompassing various market opportunities.
But within each asset class, you need to make your own choices, depending on your risk tolerance, thoughts about the direction of interest rates and inflation, and even your own sector preferences.
It’s a good idea to discuss asset allocation with your investment adviser, at length, and do enough research on your own to build a comfort level for long-term success.

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