Self-Directed IRA

Ray Dalio’s All-Weather Portfolio and the Self-Directed IRA

There is no investing without risk. But is it possible for an investor—particularly a Self-Directed IRA investor—to construct a portfolio that minimizes risk no matter what the economic conditions? That was the idea behind a concept known as the “All-Weather Portfolio.”

What is Ray Dalio’s All-Weather Portfolio?

Ray Dalio’s “All-Weather Portfolio” was first introduced en masse by Tony Robbins, who included it in one of his books about personal finance. Citing Dalio’s experience as a successful hedge fund manager, the idea is that Dalio took a look at the economic terrain and surmised that there are generally four economic threats to anyone’s portfolio at any given time. Those threats include:

  • Inflation
  • Deflation
  • Rising growth
  • Declining growth

The concept behind the portfolio is simple: an investor should stand to have one aspect of their portfolio expand in any one of the situations listed above. For example, in a period of inflation, it would be useful for an investor to hold precious metals, as precious metals tend to hold on to their value in the case of currency debasement. In periods of deflation, holding cash would potentially help an investor hold on to a lot of value. Stocks and bonds round out the rest of the portfolio.

The portfolio is then broken up into individual asset classes that would perform well, depending on which type of “weather” appears on the economic horizon. That means that the portfolio has a high exposure to bonds (40% long-term bonds), stocks (30%), and then rounds it off with intermediate bonds (15%), and then gold (7.5%) and commodities (7.5%).

This portfolio may look strange to investors who are used to seeing stocks and bonds in the reverse relationship, more stocks than bonds. But for someone who’s risk averse, bonds would help stabilize a portfolio in times of economic hardship, which in turn leaves the investor holding on to much of their value while traditional stock-based investors are left hoping that the market turns north again.

What Does This Have to Do with a Self-Directed IRA?

What does the all-weather idea have to do with holding a Self-Directed IRA? Simple: a Self-Directed IRA is an investment vehicle that allows you to hold assets like precious metals within a retirement account. That kind of freedom doesn’t only provide you with the flexibility to add an asset class to your portfolio, but it allows you to design the portfolio the way you see fit.

We’re not saying that you have to design a portfolio in this style. And it’s possible that Ray Dalio himself doesn’t adhere strictly to the idea of the all-weather portfolio. It’s more of a thought experiment about what a portfolio might look like if it were going to prepare an investor for everything that was coming. In that portfolio, an investor would hold assets that would be slated to perform well in any of the conditions listed above.

As a Self-Directed IRA administration firm, American IRA doesn’t give away specific investment advice. And this is not advice. It’s simply a way of thinking about markets in a way that helps investors understand the importance of diversifying out of one asset class and into a multitude of investments that can provide more overall security and safety.

A Self-Directed IRA investor can take this knowledge and use it to build a more stable long-term portfolio for their own purposes. That, in turn, provides the peace and security required to feel good about their long-term retirement nest egg.

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