Over the past several years, we have beat the S&P 500 on both risk AND return. In this article, I’m going to show you how we did (do) it.
You see, when people talk about their portfolio performance, how often do they say, my portfolio had less volatility and better returns than the S&P? Never. They only talk about returns.
Portfolio performance is not just a measure of return but a measure of return minus risk. If you earned a 20% ROI but had 3X the volatility of the stock market, you had to take on substantially more risk to earn that additional 10% return. That’s not savvy investing, that’s simply irresponsible investing.
So, ignore those talking a big game about their portfolio return because in the end, there is one formula that signifies true portfolio performance:
Return = Cash + Beta + Alpha
Here’s is a fun fact, only 8% of money managers beat the market and less than that do it year over year.
In our portfolio strategy, we not only consistently beat the S&P 500 on returns by 3.2% but we have less than half of the risk. Our formula is a combination of a few investment theories combined to reduce the risk and boost the ROI.
This is how we do it:
33% in the All Weather Strategy
33% in Private Money Lending
33% in Real Estate Rentals
Here are the hard figures:
We are going to walk you through exactly how we build this portfolio and how you can too. If you want to sign up to this FREE Bootcamp series, click the link below:
Until then, I’ll give you this, the exact foundation of the All Weather Portfolio
Here is how it has performed against the S&P 500, and pay close attention to the drawdown (max loss) during the COVID crisis:
So, What is the All Weather Portfolio and Who is Ray Dalio?
First, we’ll take a brief look at what this portfolio is comprised of, and why. The All Weather Portfolio is an available-to-the-masses portfolio modeled somewhat after the risk-parity-based All Weather Fund from the famous hedge fund Bridgewater Associates. The portfolio idea was created by the legendary Ray Dalio, Harvard educated and founder of Bridgewater, arguably the world’s most successful hedge fund with over $160B under management. The strategy was then popularized by Tony Robbins.
Dalio has become almost like a god in the world of finance and investing, and rightfully so. I would highly recommend his bestselling book Principles, as well as his more recent book Big Debt Crises.
Note that the All Weather Portfolio as it is prescribed is not based on true risk parity. It is simply the product of an interview between Tony Robbins and Ray Dalio in which Dalio suggested that these weightings, without leverage, would be suitable and easy to manage for the average investor. Dalio even suggested that these weightings “would not be exact or perfect.” I explore options for true risk parity below later on in this post.
As the name suggests, the All Weather Portfolio is designed to be able to “weather” any storm. It uses asset class diversification based on seasonality in the interest of limiting volatility and drawdowns. The holdings and the allocations thereof correspond to Dalio’s view on economic “seasons.” Dalio’s strategy and expertise are so pervasive that the phrase “all weather” is now used to describe other portfolios that behave like his in surviving any economic climate, e.g. “investing in an all weather portfolio.”
Dalio proposes that the following four things affect asset value:
- Rising economic growth.
- Declining economic growth.
Based on these, Dalio expects we can see 4 “seasons” of the economy:
- Higher than expected inflation.
- Lower than expected inflation.
- Higher than expected economic growth.
- Lower than expected economic growth.
Dalio chose asset classes that performed well in each of these different seasons, with the goal being diversification that allows for consistent growth and small drawdowns. To minimize volatility, the portfolio is mostly bonds, and only allocates 30% to stocks.
The All Weather Portfolio looks like this:
30% US stocks
40% long-term treasuries
15% intermediate-term treasuries
7.5% commodities, diversified
In conclusion, beating the S&P 500 can be done but it is incredibly difficult to do it when playing in the same game as those on Wall St. doing it every day.
Come join us in our newest Bootcamp Series, Private Money Lending & Modern Day Investing Strategy. See you there!