How To Build A 6%-Yielding All-Weather Portfolio

Billionaire hedge fund tycoon and founder of Bridgewater Associates, Ray Dalio, designed the All-Weather Portfolio to serve as a model for how investors can achieve remarkable portfolio performance stability across all sorts of macroeconomic environments. He accomplishes this by diversifying the portfolio across asset classes so that regardless of whether the economy is in expansion or contraction, inflation or deflation, investor principal should be experiencing either minimal losses or even increasing over time.

In this article, we will review what the All-Weather Portfolio looks like and then share how we would adapt it to accommodate a portfolio for high-yield investors.

Ray Dalio’s All-Weather Portfolio

As the chart below illustrates, the All-Weather Portfolio breakdown is as follows:

• 30% U.S. Stocks
• 40% Long-Term Treasury Bonds
• 15% Intermediate-Term Treasury Bonds
• 7.5% Commodities
• 7.5% Gold

We can build a sample portfolio with ETFs that mirror this allocation by pursuing the following allocations:

• 30% SPDR® S&P 500 ETF Trust (SPY)
• 40% SPDR® Portfolio Long Term Treasury ETF (SPTL)
• 15% Schwab Intermediate-Term U.S. Treasury ETF (SCHR)
• 7.5% abrdn Bloomberg All Commodity Strategy K-1 Free ETF (BCI)
• 7.5% SPDR® Gold Shares ETF (GLD)

However, the weighted average yield of this portfolio is a meager 2.5%:

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Moreover, even that number is misleadingly high given that BCI pays out very inconsistent distributions and the 4% yield is quite high relative to its history:

As a result, we will seek to modify this portfolio to see if we can turn it into a high-yielding portfolio without sacrificing too much of the diversification benefits.

The High Yield All-Weather Portfolio

Our methodology for this will be to find higher-yielding substitutes for each of the components of this portfolio based on them having similar fundamental characteristics as well as similar correlations with the other asset classes. The goal of this portfolio will be to maximize current income while minimizing overall volatility across economic cycles. Correlations are based on the lives of the funds in question

We can substitute the JPMorgan Equity Premium Income ETF (JEPI) for SPY given that it has an 8% yield and since its inception, it has had a sufficiently high correlation of 0.93 with SPY.

For SPTL, we can increase the yield without taking on too much risk by substituting the Vanguard Long-Term Corporate Bond Index Fund ETF (VCLT) with its 4.83% yield and 0.90 correlation with SPTL.

The Vanguard Intermediate-Term Corporate Bond Index Fund ETF (VCIT) can be substituted for SCHR given its 0.91 correlation and higher yield of 3.82%.

BCI will be replaced with the Energy Select Sector SPDR® Fund ETF (XLE). XLE is chosen because its dividend yield of 3.6% is still close to BCI’s most recent payout, its dividend is much more consistent than BCI’s, its expense ratio is quite low at just 0.09% compared to BCI’s 0.26%, and its correlation is fairly high at 0.85.

Last, but not least, we replace GLD with the Credit Suisse Gold Shares Covered Call ETN (GLDI). GLDI has an extremely strong correlation with GLD of 0.99, which is not surprising given that GLDI simply employs a covered call-like strategy on GLD to generate yield (9.59%).

In summary, we see that the modified All-Weather Portfolio is structured as follows:

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While maintaining a weighted average correlation of 0.94, we dramatically increased the yield from 2.5% to 5.9%, while also improving the payout consistency of the portfolio by substituting extremely lumpy and unpredictable payouts from BCI with the much more consistent and rising over-time payouts from XLE:

Moreover, this portfolio may arguably experience even less total return volatility than the traditional All-Weather Portfolio given that 37.5% of it (via its positions in JEPI and GLDI) employ monthly covered call options strategies that reduce downside during bear markets and cap upside during bull markets, though this will be offset somewhat by the slightly higher volatility in VCLT and VCIT relative to their treasury counterparts. XLE may or may not be more volatile than BCI depending on the scenario.

Investor Takeaway

While it is certainly possible to get even higher yields in a fairly conservatively-positioned, diversified dividend portfolio such as this one that yields 9%, the advantage of the portfolio outlined in this article is that it adheres quite closely to the All-Weather Portfolio advocated for by Ray Dalio. As a result, for investors who find themselves having a difficult time sleeping at night during steep market sell-offs, this portfolio might be a good fit. Moreover, a 6% income yield is still more than sufficient for funding a retirement in many scenarios given that many subscribe to the 4% Rule for retirement. As always, consult with a financial advisor and/or financial planner before crafting your own portfolio to ensure that your unique circumstances and goals are accounted for.