Ray Dalio’s All-Weather Portfolio Might Do Even Better With A Bit Of Bitcoin

Ray Dalio’s All-Weather Portfolio Might Do Even Better With A Bit Of Bitcoin
Jonathan Hobbs, CFA

over 1 year ago4 mins

  • Ray Dalio’s all-weather portfolio was built to hold up in most economic conditions. It’s a defensive portfolio made up of bonds, stocks, gold, and other commodities (weighted in that order).

  • Bitcoin can work well as a small part of the all-weather portfolio, based on past results.

  • If the economy collapses more than expected and drags inflation down with it, central banks may be forced to shift gears again. And bitcoin could do really well in that scenario.

Ray Dalio’s all-weather portfolio was built to hold up in most economic conditions. It’s a defensive portfolio made up of bonds, stocks, gold, and other commodities (weighted in that order).

Bitcoin can work well as a small part of the all-weather portfolio, based on past results.

If the economy collapses more than expected and drags inflation down with it, central banks may be forced to shift gears again. And bitcoin could do really well in that scenario.

Billionaire fund manager Ray Dalio has long been a skeptic of bitcoin, but he wrote in a LinkedIn post last year that the cryptocurrency had crossed over from being a “highly speculative idea” to an asset that would probably have “some value in the future.” So at a tumultuous time when his defensive approach is more popular than ever, I thought we could try a thought experiment: seeing how his famed all-weather portfolio would perform with some bitcoin in the mix.

What’s in Dalio’s all-weather portfolio?

Most classic portfolios have more of an allocation to stocks and less to other asset classes – the logic being that stocks grow more over time than the rest. But the all-weather is different: it has more in bonds than stocks, with the rest in gold and other commodities. It’s a lower-risk portfolio, and was built for long-term wealth protection in any economic environment.

Dalio’s all-weather portfolio breakdown.
Dalio’s all-weather portfolio breakdown.

The all-weather portfolio is designed to protect you against big market drops and “black swan” events. But its returns generally aren’t going to shoot the lights out in the long run. It’s stable and steady, sure, but maybe a bit too defensive for those looking to grow their wealth over the next 10, 20, or 30 years.

And then there’s bitcoin, which seems to do well as a hedge against monetary debasement. It has a finite coin supply, after all, and tends to rally most when central banks expand the money supply by buying government bonds. Mind you, that’s not what’s happening right now in the US, the UK, and across Europe, where central banks have been tightening their monetary policy grip – raising interest rates in an effort to curb inflation.

But that’s not to say it won’t happen again: if the economy collapses more than expected and drags inflation down with it, those central banks may be forced to shift gears again. And bitcoin would be a valuable asset to own in that scenario.

What impact would bitcoin have had on the all-weather?

Given bitcoin’s brief lifespan, there isn’t much history to go on to properly back-test the results. But to make them as fair as possible, I need to lay out a few assumptions.

First, I chose two time periods, beginning each one near the top of a bear market. I also chose a longer-term time frame and a shorter, more recent one to get a better overall measure of how the portfolios would have done over time.

  • July 1, 2014, to June 30, 2022
  • Jan. 1, 2018, to June 30, 2022

Second, I tested two all-weather portfolios with bitcoin, including it in different proportions each time. In both cases, I substituted some bitcoin for stocks, leaving everything else the same. After all, bitcoin belongs mostly in the high-growth bucket.

  • All-weather with 2% in bitcoin (28% in world stocks)
  • All-weather with 5% in bitcoin (25% in world stocks)

Third, I assumed the portfolios were rebalanced each quarter back to their original percentage splits – by selling some of the best-performing investments and using those proceeds to top up the investments that lagged behind. With an asset that moves around as much as bitcoin, this helps lower the risk.

So here’s what investing $10,000 in each portfolio would have done for you during the 2014-22 time period.

Portfolio balance after investing $10,000 (July 1, 2014, to June 30, 2022). Source: Portfolio Visualizer
Portfolio balance after investing $10,000 (July 1, 2014, to June 30, 2022). Source: Portfolio Visualizer
Portfolio stats after investing $10,000 (July 1, 2014, to June 30, 2022). Source: Portfolio Visualizer
Portfolio stats after investing $10,000 (July 1, 2014, to June 30, 2022). Source: Portfolio Visualizer

As expected, adding bitcoin to the all-weather would have boosted your returns. But here’s what's more interesting: because you’d have been rebalancing each quarter, your portfolio risk wouldn’t have gone up that much.

Even with as much as 5% in the volatile crypto, the maximum drawdown – the largest drop from peak to trough during the period – would’ve been only 2.8 percentage points deeper than having no bitcoin at all. In other words, it's still a defensive portfolio. That might come as a surprise, considering bitcoin’s had three drawdowns of more than 70% over that time frame.

And here’s the kicker: the risk-adjusted growth would have actually been higher with more of the portfolio in bitcoin.

We see similar results play out between January 2018 and June 2022:

Portfolio balance after investing $10,000 (Jan. 1, 2018, to June 30, 2022). Source: Portfolio Visualizer
Portfolio balance after investing $10,000 (Jan. 1, 2018, to June 30, 2022). Source: Portfolio Visualizer
Portfolio stats after investing $10,000 (Jan. 1, 2018, to June 30, 2022). Source: Portfolio Visualizer
Portfolio stats after investing $10,000 (Jan. 1, 2018, to June 30, 2022). Source: Portfolio Visualizer

The numbers here speak for themselves: adding a small amount of bitcoin to Dalio’s all-weather portfolio would have improved its risk-adjusted returns. Does that mean the same would happen in the future? Only time will tell…

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