Our Thoughts about Risk Parity and All Weather

Bridgewater

Ray Dalio, Bob Prince

Research

13 Pages

This paper explains the logic behind Bridgewater’s risk parity and All Weather approach, arguing that balancing risk rather than capital can improve diversification. The authors challenge the traditional 60/40 portfolio, claiming a more balanced structure historically delivered comparable returns with less risk and shallower drawdowns.

Key Takeaways

Risk Adjusted Diversification: A levered stock and bond portfolio generated 8.0% returns versus 6.5% for a 50/50 stock bond mix while maintaining roughly 7% portfolio risk.
Improved Efficiency Metrics: Bridgewater estimates a balanced portfolio improved the return to risk ratio from 0.4 to 0.6, representing roughly a 50% increase in efficiency.
Long Horizon Advantage: Since 1925, All Weather outperformed a global 60/40 portfolio in 80% of rolling 20 year periods and 72% of rolling 10 year periods.
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