All Weather portfolio: ready for every economic climate?

Basics9 min read · updated 3 September 2026 · 5 sources

The All Weather portfolio is designed to hold up in any economic environment: in booms and recessions, with rising and falling inflation. The idea comes from the hedge fund Bridgewater, led by Ray Dalio. Related concepts are Harry Browne's Permanent Portfolio and the Golden Butterfly. All three deliberately spread not just capital but risk across different scenarios. Here you will learn how they are built, what they achieve and where their limits lie.

The idea: four economic scenarios

Markets move mainly when growth and inflation turn out differently than expected. This gives four scenarios: growth higher or lower than expected, inflation higher or lower than expected. Each asset class thrives in some scenarios and struggles in others. Equities benefit from surprisingly strong growth, nominal government bonds from weak growth and falling inflation, and inflation-linked bonds and commodities from rising inflation.

Because nobody can reliably predict which scenario will come, the All Weather concept puts the same amount of risk on each scenario. This is how Bridgewater (2012) describes it: the founders sketched four quadrants and wanted to give each scenario the same risk in order to achieve balance.

According to the report, the strategy started in 1996, initially for Ray Dalio's private wealth. Two building blocks were decisive: inflation-linked bonds, which at the time hardly featured in many portfolios, and moderate leverage on the low-risk bonds so that they carry enough risk to balance the equities.

The well-known allocations

The widespread 30/40/15/7.5/7.5 allocation is not Bridgewater's fund, but a simplified version without leverage that became known through a popular personal finance book from 2014. The real All Weather fund uses leverage, futures and inflation-linked bonds worldwide. Harry Browne described the Permanent Portfolio in his book “Fail-Safe Investing” (1999): each of the four quarters is meant to carry the portfolio in a particular phase (equities in prosperity, long-term bonds in deflation, gold in inflation, money market in recession). The Golden Butterfly is a more recent variant from the investor community that contains more equities and an allocation to small, cheaply valued companies.

Worked example: spreading risk instead of capital

How much capital allocation and risk allocation differ is shown by the risk contribution of each holding. For the Permanent Portfolio we assume: equities have a volatility of 16%, long-term bonds 10%, money market 0.5%, gold 15%; equities and bonds are uncorrelated, and gold is slightly correlated with equities (0.1) and bonds (0.2).

The principle becomes even clearer with just two assets. Equities have a volatility of 16%, bonds 5%, correlation 0.1. You roughly achieve equal risk by weighting inversely to volatility: 23.8% equities and 76.2% bonds. Each side then carries 50.0% of the risk. The mix has a volatility of only 5.65% and, with expected returns of 7% and 2.5%, delivers 3.57% a year.

Whether leveraged risk parity performs better therefore depends on whether low-risk assets deliver at least as much per unit of risk as equities. That is exactly what Asness et al. (2012) argue: because many investors are unwilling or not allowed to borrow, they favour risky assets. Safe assets are therefore relatively cheap and deliver more return per unit of risk. Whether this will hold in future is an open question.

Implementation for euro investors

Almost all the allocations come from the US and rely on US Treasuries in dollars. If you measure in euros, this brings exchange-rate risk into your portfolio that can be larger than the interest rate risk of the bonds. For the bond portion, euro government bonds of good credit quality are therefore a natural choice: long maturities for the part meant to carry the portfolio in recessions, short maturities or money market for the stable part. Alternatively, there are currency-hedged bond ETFs.

Gold is priced in dollars; for euro investors its price also fluctuates with the exchange rate. Commodities are usually tracked via index funds on futures contracts, whose returns depend heavily on roll costs. Inflation-linked euro bonds exist, but the range of broad, low-cost ETFs is smaller than for nominal bonds. In the end, the exact replica matters less than the principle: several assets that carry the portfolio in different scenarios, and fixed rebalancing that resets the weights at regular intervals. Without rebalancing, the share of the winners would grow and the balance would be lost.

What the research shows

Weighting by equal risk contributions is well researched. Maillard et al. (2010) show that the volatility of such a portfolio lies between that of the minimum variance portfolio and that of equal weighting, and that it requires no return forecasts. This is an advantage, because return estimates are particularly prone to error. With leverage aversion, Asness et al. (2012) provide an economic explanation of why the approach may have worked over long periods.

On the role of gold: Baur and Lucey (2010) find for the US, the UK and Germany that gold is on average a hedge against equities and acts as a safe haven in extreme downturns, but only briefly. Erb and Harvey (2013) critically examine popular stories such as “gold protects against inflation” and point out that the real gold price fluctuates strongly. More on this in the article Gold in the portfolio.

How to compare the portfolios

Because the variants carry different amounts of risk, comparing pure returns is misleading. A low-volatility Permanent Portfolio should be judged with risk-adjusted metrics such as the Sharpe ratio, the maximum drawdown and the recovery time after losses, and compared with a 60/40 portfolio of equal risk, not with pure equities. Long periods with different interest rate and inflation regimes matter more here than the last ten years.

Criticism and limitations

• Tailwind from the past: many backtests fall into a period of sharply falling interest rates, in which long-term bonds performed exceptionally well. When rates rise, it is precisely the large bond allocations that suffer (see duration).
• No protection against everything: if interest rates and inflation rise together, equities and bonds can fall at the same time. Gold and commodities only partly offset this.
• Lower return without leverage: the versions for private investors fluctuate less than 60/40, but often also deliver less on average. This is not a flaw, but the consequence of lower risk.
• Deviating from the crowd: anyone who lags behind an equity portfolio for years often gives up on the strategy, usually at the worst possible moment.
• Currency: the well-known allocations come from the US. Euro investors should choose bonds in euros or currency-hedged bonds (see currency risk).

How Portfolio Lab calculates it

Portfolio Lab includes the allocations as templates: All Weather in a European version, All Seasons and Permanent Portfolio from US index funds, as well as long series from asset classes in euros, plus the Golden Butterfly. In the Backtest you see the gain contribution and risk contribution of each holding, the drawdowns and crisis periods. In Optimisation, “Risk Parity” calculates the weights with equal risk contributions from the historical covariances, without leverage. Exactly how these calculations work is described in the backtest methodology and the optimisation methodology.

This article explains a method; it is not investment or tax advice. Worked examples are simplified and rounded. All terms in the glossary.