In 2020, our stock investment plan returned 40.77% while the real estate while the fixed income plan returned 16% and 10.1% respectively. Anyone seeing this would have wished that they invested all their money in the stock plan to get the maximum return possible. But is that the most efficient way to grow your wealth? What happens when stock performs poorly or real estate performs poorly?
Stocks don’t always go up. The best performing asset at any point in time can also be the worst at another time. Thinking about your investment principles, you shouldn’t just consider how to make the maximum return in the market. It should also be about how to cushion storms when they come.
Ray Dalio of Bridgewater, the largest hedge fund in the world that manages over $150b developed a portfolio idea in 1996 called the All-Weather Portfolio.
The idea is that you should be able to build a portfolio that will stand in all weathers. Ray Dalio’s team concluded that there are 4 kinds of weather; rising growth, falling growth, rising prices (inflation) and falling prices (deflation). The weather that we seem to have right now is that of rising growth where the stock market is skyrocketing. But if there is one thing history has taught us, it’s that all weathers only last for a while before another comes. Hence, the need to be prepared for all weathers.
A portfolio that will stand in all weathers as popularized by Ray Dalio is divided as below:
Since 2006, a simulated all-weather portfolio compounded at an annual rate of 8%. Compared to the S&P 500 at 8.5%. However, the maximum drawdown on S&P during this period was 32% compared to 18% on the all-weather portfolio.
The logic behind the principle is first a portfolio with sufficient diversification, then what the asset should be diversified in. Also, it should be such that reduces drawdowns while maximizing upsides. The challenge of course is that you will not get the maximum return in the market but you will have great sleep at night in all kinds of weather.
Building an all-weather portfolio with Risevest
When we conceived the idea of Risevest, prosperity for our people was the prime goal. It is our driving force and it is what we optimize for. The implication of this is that even if we see an opportunity that can give the maximum return in the market but could as well potentially cause catastrophic wealth erosion, we would rather not invest in such an opportunity. GameStop comes to mind here.
That’s why on the Rise app, you’ll realize that we have more than one investment product. We have fixed income, real estate and stock. The idea is to give you enough product to build an all-weather portfolio.
To build an all-weather portfolio on the Rise app, there are two options.
- Building All Weather Portfolio With “Build Wealth” Feature
On the Rise app, you would have noticed a “build wealth” feature and maybe you have even used it. When you tap to create a “build wealth” plan, we will ask you a couple of questions after which we will show you a portfolio mix that will fit your risk profile.
The recommendation we make for you is such that it fits your risk profile and that can stand all kinds of weather. Also ensures you have great sleep at night as you build wealth.
And yes, you can edit the recommendation to accommodate your thought and judgement. The idea is not rigidity but expert advice plus flexibility. With such a plan if you keep adding to it as you planned, you are set to build wealth in all kinds of weather.
A pie similar to what “build wealth” will give here as well.
- Build The All-Weather Portfolio
The other option to create the all-weather Portfolio is for you to build it yourself without the use of our “Build Wealth Plan”. It involves deciding which percentage of your investment should go to fixed income and which should go to real estate and stock as you may deem fit.
Constructing such a portfolio would require more effort from you but it is not impossible. We have seen a lot of others like you doing it. What’s important is that you think in terms of an all-weather scenario and invest in terms of that.
Markets are up at the moment but markets don’t always go up. Investments behave differently depending on how the market is. With a portfolio consisting of different asset classes, you are set up to have the cushion to forestall any drawdown that may threaten to wipe your wealth away.