Global Asset Allocation - All weather

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Category : Finance

In this series, I am going to explore several asset allocation portfolio. Particularly, I am going to study Ray Dalio’s all weather portfolio from Tony Robin’s book: Master of the Money Game, 2014.

Asset type Asset class Proportion
US Large Cap Stocks 0.18
US Small Cap Stocks 0.03
Foreign Developed Stocks 0.06
Foreign Emerging Stocks 0.03
Corporate Bonds Stocks or Bonds 0
T-Bills Bonds 0
10-year Bonds Bonds 0.15
20-year Bonds Bonds 0.4
10-year Foreign Bonds Bonds 0
TIPS Real Assets 0
Commodities Real Assets 0.08
Gold Real Assets 0.08
REITs Real Assets 0

I used SPY to represent US large cap, VB to represent US small cap, VGK to represent equities in foreign developed markets, VWO to represent foreign emerging markets, BWX to represent 10-year bonds, TLT to represents T-bills, DBC to represent a basket of commodities, and IAU to represent gold.

I ran the backtest from the 1st of January 2008 to the 3rd of April 2020. The start date is determined by the availability of the BWX.

Quantopian algorithm backtesting platform has provided a summary of the performance.

Annual return 5.163%
Cumulative returns 85.198%
Annual volatility 8.878%
Sharpe ratio 0.61
Calmar ratio 0.22
Stability 0.91
Max drawdown -23.842%
Omega ratio 1.12
Sortino ratio 0.86
Skew -0.26
Kurtosis 9.31
Tail ratio 0.97
Daily value at risk -1.097%
Gross leverage 1.04
Daily turnover 0.21%
Alpha 0.03
Beta 0.25

The portfolio’s returns during different time periods or events are summarized below.

Stress Events mean min max
Lehman -0.12% -2.29% 1.20%
US downgrade/European Debt Crisis 0.18% -1.45% 2.08%
Fukushima 0.13% -0.33% 0.71%
EZB IR Event -0.02% -0.67% 0.78%
Mar08 0.01% -0.99% 1.11%
Sept08 -0.18% -2.29% 1.20%
2009Q1 -0.36% -2.45% 1.23%
2009Q2 0.18% -1.93% 3.17%
Flash Crash -0.06% -0.70% 1.05%
Apr14 0.08% -0.41% 0.51%
Oct14 0.05% -0.99% 0.73%
Fall2015 -0.10% -1.28% 1.00%
GFC Crash -0.05% -3.28% 4.83%
Recovery 0.05% -1.59% 2.22%
New Normal 0.02% -5.39% 2.33%

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Below shows an overall summary of the performance over the entire period.

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It seems this portfolio is mitigating or reducing the loss of capital most of the time during the test periods. It also seems its returns are less during New Normal compared with the benchmark. However, during New Normal, we have seen a very strong and long bull market, shown by the high rate of returns of the US equities. This portfolio has only a relatively small portion of fund allocated to US stocks.

Resources used: Asset_allocation_portfolio_backtesting_python_script

About

Hello, My name is Wilson Fok. I love to extract useful insights and knowledge from big data. Constructive feedback and insightful comments are very welcome!