When you save for retirement, you want the confidence that your portfolio does not have to constantly be micromanaged and manipulate to compensate for market conditions. Yet even with the independence afforded you by a Self-Directed Roth IRA, you can build an “all-weather portfolio” that gives you peace of mind and a high degree of security.
How? First, let’s look at famous investor Ray Dalio’s concept of the “all-weather” portfolio and what it means for the Self-Directed IRA holder:
Ray Dalio’s Concept of the “All-Weather” Portfolio
Ray Dalio conceived of an “all-weather” portfolio that could theoretically stand up to any market conditions over the long term. Dalio’s portfolio would utilize funds that are diversified among the following asset classes:
- 40%: Long-term bonds
- 30%: Stocks
- 15%: Intermediate bonds
- 5%: Commodities
- 5%: Gold
Most investors will note just how conservative this portfolio is. Only 30% stocks? 8% in gold? 40% in long-term bonds? But the concept behind Dalio’s portfolio is less about returns than it is about managing risk. Stocks (a volatile but high-returning investment) are reduced, and gold (a stable but low-yielding investment) is increased.
Theoretically, this portfolio would continue stable increases in any market conditions: recessions, bull markets, bear markets, depression. Dalio’s idea is that inflation/deflation and economic growth/declining growth are the four essential variables that a portfolio would have to withstand. In a period of inflation, for example, the higher amount of assets in commodities and gold would help weather the storm. Each element of the portfolio has its role in reducing overall risk.
An All-Weather Portfolio with a Self-Directed Roth IRA
Theoretically, if you wanted to build an all-weather portfolio like this, a Self-Directed IRA would be an ideal vehicle for it. Not only does a Self-Directed Roth IRA broaden your capacity to invest retirement money in these asset classes, but it makes it easier to broaden your portfolio across a multitude of asset classes.
Some Self-Directed IRA investors might bristle at the notion of investing 55% of one’s portfolio in bond funds. But this “all-weather” portfolio doesn’t have to be followed to the T. For some investors, it’s simply a good reminder that a portfolio should have a wide degree of asset classes in it if it’s truly going to be diversified against risk.
Managing a Portfolio in Different Weather Conditions
Perhaps the main appeal of an “all-weather” portfolio is that it should remain mostly hands-off. If the market tanks, your all-weather portfolio should do fine. If inflation strikes, your commodities and gold holdings will help pick up the slack.
But what if you do not want to hold this exact portfolio? There are still lessons you can take from the all-weather portfolio that are easy to implement in a Self-Directed Roth IRA:
- Have a plan for various economic conditions. There are essentially four to consider: inflation, deflation, rapid economic growth and lagging growth. What will your portfolio do in each condition? If you do not know, it might be time to revisit your strategy.
- Don’t put too much money in any one asset. Rounding out a portfolio with different assets, as in the all-weather portfolio, can help ensure the kind of stable long-term growth you want.
- Remember that you can’t predict the future. It’s tempting to want to “bet” a lot of your money on one particular asset class. If it succeeds, you can count yourself a brilliant investor and beat the market! But consider a different way of thinking. Ray Dalio is one of the most successful investors alive, and even he is thinking about the best ways to manage risk. Wouldn’t it be prudent for you to do the same?