Ray Dalio’s All Weather Portfolio vs. The Golden Butterfly
A Comprehensive Guide to Investment Success
Investing successfully over the long term can feel challenging in the face of economic uncertainty. With recessions, bull and bear markets, political turbulence, and even potential depressions all part of the investment landscape, timing the market around these events isn’t the key to building lasting wealth. Instead, investors need a strategy that’s resilient through varying market conditions—allowing them to "set it and forget it." This is where Ray Dalio’s All Weather Portfolio stands out.
Ray Dalio, founder of Bridgewater Associates, one of the world’s largest hedge funds, is renowned for his understanding of macroeconomic forces and his ability to design portfolios capable of weathering any financial storm. The All Weather Portfolio is a strategic asset allocation model designed to perform well in all economic environments.
However, Dalio’s All Weather Portfolio has competition in the form of the Golden Butterfly Portfolio, designed by Tyler from PortfolioCharts.com. While Dalio’s strategy emphasizes stability across market cycles, the Golden Butterfly leans more toward growth, particularly during economic expansion. This guide compares both strategies, exploring their benefits, risks, and suitability for investors seeking long-term success.
The Need for a Recession-Proof Portfolio
The question many investors ask is whether it’s possible to build a portfolio immune to recessions. Periods of economic downturn are inevitable, as even Ray Dalio has pointed out. Central banks face a delicate balancing act between stimulating the economy and controlling inflation, making future recessions likely.
The All Weather Portfolio was designed as a safety net for all market conditions, ensuring that whether growth or inflation is rising or falling, the portfolio can still thrive. On the other hand, the Golden Butterfly Portfolio takes a different approach by focusing more on economic growth, though it still provides protection during downturns. It’s a compelling option for investors who want to capitalize on prosperity while minimizing risks.
Key Ingredients of a Resilient Portfolio: Diversification and Risk-Weighted Return
To build a successful portfolio that withstands various market conditions, two critical elements are required: diversification and risk-weighted return.
Diversification involves spreading investments across different asset classes—such as stocks, bonds, real estate, and commodities like gold—so the risk of one asset performing poorly is offset by others performing well. This protects your portfolio from excessive volatility. Index funds, which pool investments across many sectors, offer an affordable way to achieve diversification.
Risk-weighted return measures how much return you get for the risk you take. Ideally, investors aim for high returns with lower risk. For instance, while the Vanguard Total Stock Market Fund (VTSMF) has averaged 9.4% annual returns, it saw a 49.3% drawdown during the 2008 financial crisis. In contrast, the Golden Butterfly Portfolio averaged 7.94% returns but experienced only a 10.8% drawdown during the same period—offering a superior risk-weighted return.
The All Weather Portfolio: What’s Inside?
The All Weather Portfolio was created by Dalio to handle any market condition—whether inflation is rising or falling, and whether the economy is booming or in recession. Dalio’s strategy divides assets into categories that perform well depending on these economic variables. After rigorous back-testing, he found a balance that could perform across all environments.
The typical asset allocation of the All Weather Portfolio includes:
30% stocks: Perform well during periods of economic growth.
40% long-term U.S. Treasury bonds: Excel during deflationary periods.
15% intermediate-term bonds: Serve as a stabilizer.
7.5% gold: Protects against inflation.
7.5% diversified commodities: Provides additional inflation protection.
This diversified allocation ensures that the portfolio remains resilient, regardless of market conditions, and is designed for long-term steady returns without the need for market timing.
The Golden Butterfly Portfolio: A Competitor
The Golden Butterfly Portfolio was derived from the Permanent Portfolio, which was developed by Harry Browne. While similar to Dalio’s portfolio in its focus on risk management and diversification, the Golden Butterfly adds an extra asset class and skews slightly more toward equities. This portfolio aims to optimize growth during periods of prosperity while still providing protection during downturns.
The Golden Butterfly’s asset allocation typically includes:
20% total stock market: Large-cap stocks.
20% small-cap value stocks: Historically higher growth potential.
20% long-term U.S. Treasury bonds: Offer protection during deflationary periods.
20% short-term U.S. Treasury bonds: Stabilizes the portfolio.
20% gold: Protects against inflation and market turbulence.
Back-testing shows that the Golden Butterfly Portfolio provides almost the same long-term returns as a 100% stock portfolio, but with 60% less volatility. This makes it an attractive option for investors seeking both growth and stability.
The Battle of Portfolios: All Weather vs. Golden Butterfly
Which portfolio is better? Both strategies have their advantages, depending on an investor’s goals.
The All Weather Portfolio is ideal for conservative investors seeking stability in all market conditions. Its diversified allocation across multiple asset classes means investors don’t need to worry about market timing, and the portfolio is resilient through economic expansions and contractions alike.
The Golden Butterfly Portfolio, while offering a more growth-focused approach, still protects against downturns. Its higher allocation to equities makes it better suited for investors who want to capitalize on economic growth while maintaining safety during recessions.
One area where the Golden Butterfly shines is in retirement planning. The portfolio’s stability allows for a higher safe withdrawal rate in retirement. For instance, retirees can safely withdraw up to 5.3% annually from the Golden Butterfly Portfolio without running out of money, compared to the 4% rule with most other portfolios. This translates into more retirement income—$53,000 per year from a $1 million portfolio, compared to $40,000 with traditional stock-heavy strategies.
Conclusion: Which Strategy Is Best?
In the competition between Ray Dalio’s All Weather Portfolio and the Golden Butterfly Portfolio, the better choice depends on your investment goals:
All Weather Portfolio: Best for those looking for a stable, recession-proof portfolio that performs well in all economic environments. It’s a solid, long-term strategy for investors who prioritize minimizing risk.
Golden Butterfly Portfolio: Best for investors who expect more periods of economic growth and want to optimize returns while still maintaining protection against downturns. This portfolio offers a better balance of growth and stability for those who can handle a bit more risk.
Ultimately, the key to long-term investment success isn’t choosing one portfolio over another—it’s about aligning your strategy with your personal risk tolerance, time horizon, and financial goals. Whether you lean toward Dalio’s All Weather Portfolio or the Golden Butterfly, understanding your needs and building a diversified portfolio around them will set you on the path to success.