Dalio’s All Weather Portfolio: Risk Parity and Sample Weights
Summary
The document explains why a commonly quoted All Weather allocation may not show equal risk contributions when measured with portfolio software. According to the accepted answer, the weights came from an interview describing an unleveraged sample portfolio for individual investors. They were presented as an accessible approximation, not as the exact allocation used by Bridgewater or a precisely optimized portfolio.
The underlying framework targets diversification across four economic environments: growth rising or falling, and inflation rising or falling. Its risk balance concerns exposures to those environments, rather than equal contributions from each asset class. The discussion notes that the live strategy uses sophisticated instruments and leverage, while the public methodology is not fully specified. It also cautions that equal risk contribution is only one interpretation of risk parity, depends on measurement choices such as horizon, and can produce concentrated exposures. The exact implementation and weights therefore cannot be inferred from the sample allocation alone.
Key ideas
- The commonly quoted weights are described as an unleveraged sample allocation for individual investors.
- All Weather seeks balance across growth and inflation environments rather than equal risk from each asset class.
- The strategy’s actual implementation is described as more complex and leveraged than the sample portfolio.
- Equal risk contribution is one risk parity method, and its results depend on the assets and measurement horizon.
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# How were Dalio's All Weather weights determined? # How were Dalio's All Weather weights determined? Somewhere along the lines, Ray Dalio's all weather became known to be a portfolio with the following weights: - 30% Equities - 40% Long Term Treasuries - 15% Intermediate Term Treasuries - 7.5% Gold - 7.5% Commodities When I run this with portfolio visualizer, and drill down to the metrics, I get a risk contribution that's not at all equal across different asset classes. The questions are: - 1) Why is that? - 2) How were the above weights derived? - 3) How are these weights static when risk parity talks about using leverage to increase exposure in low volatility assets compared to the higher volatility ones? ## Answer by Helin (score 2, accepted) https://quant.stackexchange.com/a/48983 - As mentioned in the short comment above, this particular allocation comes from an interview documented in the book Money: Master the Game. Dalio explained that "in his All Weather strategy, they use very sophisticated investment instruments, and they also use leverage to maximize returns." The interviewer then followed up by requesting the weights that an "average person" can do, "without any leverage, to get the best returns with the least amount of risk." Dalio then provided these weights, emphasizing that it was a "sample portfolio" that "wouldn't be exact or perfect." - The actual All Weather portfolio is almost certainly dramatically different. At a high level, the portfolio is constructed such that it has (roughly) equal risk exposures to four environments – rising growth, falling growth, rising inflation, and falling inflation. Absolutely no claim is made that the contribution to total risk is equal across underlying asset classes/instruments. - The exact methodology to implement All Weather is not known, which is understandable. But the conceptual framework is published on this website and is very educational. ## Answer by demully (score 1) https://quant.stackexchange.com/a/48973 What horizon are you using to calculate your "equal risk contribution" weights? I am guessing it's 1 year, maybe 5 year... versus Dalio looking over decades. Plus, where are TIPS? When the Taper Tantrum hit in 2013, Bridgewater was on the record being 180% long of these! Gold obviously shares characteristics/correlation with TIPS; but BW holds truck loads of the latter, if you're looking into replication strategies. The short answer to your question is that "risk parity" covers a multitude of sins (and graces). It's an approach, not a strategy. Equal Risk Contribution is but one way to try to achieve risk parity. And it's far from infallible. Build a portfolio with eg the S&P500, the NASDAQ, the Russell2000, and Treasuries. ERC across these four is still going very heavy on the stocks. Dalio's original All-Weather approach was to diversify the portfolio to positive and/or negative growth and/or inflation shocks. Indifference to these simply requires an estimate of the long-term beta of each market to each flavour of shock. From which the (unlevered) portfolio composition becomes a simple simultaneous equation to solve. hope this helps ## Answer by Vitomir (score 0) https://quant.stackexchange.com/a/48972 Probably this does not answer your question at all, but as a portfolio manager I believe it is very much worth sharing: the number of successful funds not using asset allocation techniques is very high out there. This does not mean firms are unefficient, rather raises questions over the reliability of such optimization tools. Plenty of literature over their issues: instability, curse of dimensionality, non-representative, etc. To conclude, it does not surprise me seeing weights far from literature-backed allocations
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.