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Chapter 5.2: It’s Time to Thrive: Storm-Proof Returns and Unrivaled Results
startling stats. (Please note that in order to go back further in time, we had to use different “indexes”
to represent the asset allocation because certain indexes didn’t exist prior to 1983. See the end of the
chapter for a full explanation on the methodology used.)
Let’s go back even further, all the way to 1927, which includes the worst decade in our
economic history, the Great Depression:
If a house is deemed storm-proof, the only way to know for sure is to endure the test of time and the
worst of storms. Below is a chart showing the seven worst drops since 1935. As you will see, the All
Seasons portfolio was actually up in two out of seven of those “winters”! And the losses it did
sustain were relatively small in comparison with the US stock market. Talk about bucking the trend.
While winter was kicking everyone’s butt, this portfolio would have allowed you to spend the winter
skiing or snowboarding and enjoying your hot chocolate!
If you look at how the All Seasons portfolio would have performed against the market in more
recent years, the difference is even greater! From January 1, 2000, through March 31, 2014, the All
Seasons portfolio destroyed the returns of the market (the S&P 500). During this time frame, we
endured all kinds of what Ray calls “surprises”: the tech crash, the credit crisis, the European debt
crisis, and the largest single-year drop in gold (down 28% in 2013) in more than a decade. This time
frame includes what experts call the lost decade, in which the S&P 500 was flat for ten years, from
the beginning of 2000 to the end of 2009. Take a look at the difference in how his design performed:
BURN ’EM DOWN
It’s fascinating and quite sad that we live in a time where the media is salivating to take down anyone
considered to be “best in class.” Culture seems to lift them onto a pedestal of perfection only to hope
they come crashing down. Whether it’s an athlete, a CEO, or a money manager, any false move or
seemingly slight crack in the armor is exploited to the fullest. Stone them in the town square of
television and the internet.
I found it mind boggling that with more than 30 years of stellar returns, Ray’s All Weather strategy
received intense criticism when he was down approximately 4% in 2013. A whopping 4%. Not the
whopping 37% hit that the S&P took just a few years earlier. Remember, based on history, the All
Seasons approach will take losses, but the goal is to minimize those dramatic drops. Let’s be honest:
you could buy into this portfolio and see a loss the first year. This portfolio is not meant to shoot out
the lights. It’s a long-term approach for the smoothest possible ride. It would be a mistake to judge it
by any single year, rather we need to evaluate its overall long-term performance—like any other
investment opportunity. At the time of this writing (mid-2014), the media is back on the Dalio
bandwagon, as his All Weather fund was up 11% through June.
Imagine, all this media attention over a 4% loss? Never mind that over the last five years, between
2009 and 2013, the All Weather has averaged over 11% per year, even including this single down
year! But the fact he lost even a small amount when the market was up and that he received big media
attention shows how his incredible performance has become expected. You are only as good as your
last “at bat” when it comes to the financial media. How ridiculous. Never mind the fact that Ray’s
clients have enjoyed incredible returns year after year, decade after decade, as the New Yorker
reported in a 2011 article on Bridgewater called “Mastering the Machine”:
“In 2007, Dalio predicted that the housing-and-lending boom would end badly. Later that
year, he warned the Bush Administration that many of the world’s largest banks were on the
verge of insolvency. In 2008, a disastrous year for many of Bridgewater’s rivals, the firm’s
flagship Pure Alpha fund rose in value by 9.5% after accounting for fees. Last year, the Pure
Alpha fund rose 45%, the highest return of any big hedge fund.”
The point is, there are a number of pundits who will sit back and criticize any strategy you may
deploy. To echo my favorite quote from Dr. David Babbel, “Let them criticize; let us sleep.”
When it comes to the All Weather approach, the biggest question from the bloggers is: What happens
when interest rates go up? Won’t the government bonds go down and cause a loss to the portfolio
because of the large percentage allocated to bonds?
It’s a fair question, but deserves more than a sound bite from an armchair quarterback. First,
remember that by having a large allocation to bonds, it’s not a bet on bonds alone. This portfolio
spreads your risk among the four potential economic seasons.
Ray showed us that the point is not to plan for a specific season or pretend to know what season is
coming next. Remember, it’s the surprises that will catch most off guard.
In fact, many have been trying to proselytize and predict the next season by calling for interest rates
to rise quickly. After all, we are at all-time lows. Yet Michael O’Higgins, author of the famous book
Beating the Dow, says that people may be waiting quite some time for any significant interest rate
increases, since the Fed has a history of suppressing interest rates for long periods to keep costs of
borrowing low: “To the great number of investors who believe interest rates will inevitability go
higher in the coming year (2014), remember that the US Fed kept long (duration) rates below 3%
for 22 years from 1934 to 1956.”
The Fed has kept rates low since 2008, so who knows how long interest rates will remain low.
Nobody can tell you with certainty. In early 2014, when everyone was expecting rates to rise, they
dropped yet again and caused a spike in US bond prices. (Remember, as rates go down, prices go
HOW DID THE ALL SEASONS PERFORM IN A RISINGINTEREST RATE MARKET?
A revealing exercise is to look back in history at what happened to the All Seasons portfolio during a
season when interest rates rose like a hot air balloon. After interest rates declined for many decades,
the 1970s brought rapid inflation. Despite skyrocketing interest rates, the All Seasons portfolio
had just a single losing year in the 1970s and had an annualized return of 9.68% during the
decade. This includes enduring the back-to-back drops of 1973 and 1974, when the S&P lost 14.31%
and then another 25.90% loss, for a cumulative loss of 40.21%.
So let’s not let the talking heads persuade us to believe that they know what season is coming next.
But let’s certainly prepare for all seasons and the series of surprises that lay ahead.
LET’S GET REAL
One final and crucial advantage of the All Seasons portfolio has a much more human element. Many
critics will point out that if you could stomach more risk, you might have been able to beat this All
Seasons approach. And they would be right. But the point of the All Seasons portfolio is to reduce
volatility/risk while still maximizing gains!
If you are younger and have a longer time horizon, or you are willing to stomach more risk, you
could still take advantage of the All Seasons foundation but make a small adjustment in the stocks
versus bonds to, hopefully, produce a greater return. But keep in mind, by adding more stocks and
decreasing your bonds, this change will increase risk/volatility and have you betting more on one
season (in which you hope stocks will go up). In the past, this has worked quite well. If you visit the
Stronghold website, you can see how, over time, by adding more stocks, the portfolio would have
produced a greater returns but also produced greater downside in certain years. But here is what’s
incredibly interesting. When compared with a standard 60%/40% balanced portfolio (60% in the
S&P 500 and 40% in the Barclays Aggregate Bond index), the All Seasons approach, with more
stock exposure, outperformed handily—and you would have to have accepted nearly 80% more
risk (standard deviation) with the traditional 60/40 portfolio to still achieve results that would
still fall slightly short of the All Seasons with increased equity focus.
But let’s be honest with ourselves. Our stomach lining is much weaker than we let on. The research
firm Dalbar revealed the truth about our appetite for risk. For the 20-year period from December
31, 1993, to December 31, 2013, the S&P 500 returned 9.2% annually, but the average mutual
fund investor averaged just over 2.5%, barely beating inflation.14 To put this in perspective, you
would have received a better return by investing in three-month US Treasuries (which is nearly
a cash equivalent) and avoided the stomach-turning drops.
Why did the average investor leave so much on the table?
Dalbar president Louis Harvey says investors “move their money in and out of the market at the
wrong times. They get excited or they panic, and they hurt themselves.”
One of the more startling examples is a study conducted by Fidelity on the performance of its
flagship Magellan mutual fund. The fund was run by investment legend Peter Lynch, 15 who
delivered an astonishing 29% average annual return between 1977 and 1990. But Fidelity found
that the average Magellan investor actually lost money!!! How in the world? Fidelity showed that
when the fund was down, people would cash in—scared of the possibility of losing more. And when
the fund was up again, they would come running back like the prodigal investor.
Here is the reality: most people couldn’t stomach another 2008 without selling some or all of
their investments. It’s human nature. So when people talk about better performance, for the most part
they are talking about a fictitious investor; one with nerves of steel and a drawer full of Tums. Case in
point: I was reading MarketWatch recently and came across an article by Mark Hulbert. Mark’s
financial publication tracks the performance of subscription newsletters that tell investors exactly
how to trade the markets. The best performing newsletter over 20 years was up 16.3% annually!
Outstanding performance, to say the least. But with the ups come major downs. As Mark explains,
“[T]hat high-flying performance can be stomach churning, with his performance during the downturns
of the last three market cycles—since 2000—among the very worst of his peers. During the 2007–09
bear market, for example, the service’s average model portfolio lost nearly two-thirds of its value.”
Two-thirds?! That’s 66%! Can you imagine investing $100,000 and now seeing only $33,000 on your
monthly statement? Or $1 million of your life savings reduced to just $333,000? Would you have
white knuckled it and held on?
When Mark asked the newsletter publisher about whether or not investors could actually hang on
during the roller coaster ride, he provided quite the understatement by saying, in an email, that his
approach isn’t for an investor who “bails out of his/her broadly diversified portfolio the first time a
I would call a 66% drop more than “a worry.” He makes it sound like us mere mortals are prone to
overreaction, as though I jumped out of a moving car when the check engine light came on.
Remember, a 66% loss would require nearly 200% gains just to get back to even—just to
recoup the portion of your nest egg that it may have taken your entire life to save!
Without exception, the “money masters” I interviewed for this book are obsessed with not losing their
money. They understand that when you lose, you have to make significantly more to get back to where
you started—to get back to breakeven.
The reality is, if we are being honest with ourselves, we all make emotional decisions about our
investments. We are all emotional creatures, and even the best traders in the world are always
fighting the inner fear. This All Seasons portfolio protects you not only from any potential
environment but also from yourself!!! It provides “emotional scaffolding” to keep you from making
poor decisions. If your worst down year in the last 75 years was 3.93%, what is the likelihood that
you would have freaked out and sold everything? And in 2008, when the world was burning down but
your All Seasons portfolio was down just 3.93% while everyone else seemed to be melting down,
how peaceful would have you felt?
So there you have it! The All Seasons recipe from the master chef Ray Dalio. And rather than wait
until you have a $5 billion net worth, you get access here, for the few dollars you invested in this
book! He has simplified it by taking out the leverage and also making it a more passive approach (not
trying to beat the market by being the best picker or predictor of what’s coming next). You are
welcome to implement this portfolio yourself, but if you do, let me just add a few points of caution:
• The low-cost index funds or ETFs you choose will change the performance. It’s crucial to find the
most efficient and cost-effective representations for each percentage.
• The portfolio will need to be monitored continually and rebalanced annually.
• The portfolio is not tax efficient at times. It’s important to use your qualified accounts
(IRAs/401[k]s) or other tax-efficient structures to maximize tax efficiency appropriately. You
could also use a low-cost variable annuity like the ones offered by TIAA-CREF or Vanguard.
(However, those are the only two that experts seem to agree are worth the cost.)
ALL SEASONS + LIFETIME INCOME
The team at Stronghold (www.strongholdfinancial.com) currently uses the All Seasons portfolio as
one of the many options available to their clients. Some readers will want to implement this on their
own, while others will be better served using the expertise and assistance of a fiduciary advisor like
Stronghold. Please take action in whatever form supports you most.
TAKE MASSIVE ACTION
The ball is now in your court. If you have a better strategy that has proven effective to minimize
downside and maximize upside, maybe you should be running your own hedge fund. You now are
armed with info to do this on your own, or if you choose, you can have a fiduciary implement and
monitor this for you as part of a comprehensive plan.
If you want to create your own personal plan in less than five minutes, go to the website now
(www.strongholdfinancial.com) to see how your current portfolio approach stacks up against a
variety of strategies, including the All Seasons approach provided here.
LET’S TAKE YOUR BROKER FOR A TEST DRIVE
Stronghold’s complimentary analysis allows you to “look under the hood” and find out how much you
a r e really paying in fees and how your current investments are really performing. It will also
highlight how much risk you’re currently taking as well as your true performance over the past 15
years, during which we have seen two near 50% declines (2000–02 and 2008–09)!
If you choose to take action, you can transfer your accounts online and begin the process today. If
not, you’ll have all the information you need for free.
WHAT ABOUT MY 401(K)?
The All Seasons approach can be implemented in your existing 401(k) plan so long as there are fund
choices available that represent the recommended investments. This you can do on your own or with
the help of an advisor. If you use Stronghold, it will automatically link your 401(k) account to your
overall plan and make sure that the 401(k) portfolio is set up correctly. Again, America’s Best 401k
can provide you with the All Seasons strategy as well.
INCOME IS THE OUTCOME
Whew! Wow, we covered a ton of territory in these last two chapters. But by now I think you can see
why. What you hold in your hands is an investment plan with a track record of “smooth” returns that is
second to none! You can implement it in a few minutes, and you no longer have to live with the worry
about the ups and downs of the market. Of course, nobody knows what the future holds, but history
would tell us that by doing so, you will be set up to do well and be protected in any environment.
So now let’s go back to our “personal Everest” metaphor of investing. By using the All Seasons
strategy, you have the best odds of having a smooth and steady climb to the top. Yes there will be
surprises, but you will be set up to succeed over the long term. Now remember, once you have built
up the value of your investments to a critical mass where you have enough to be financially free, you
will need to ultimately turn your nest egg (those investments) into a guaranteed income stream—your
own lifetime income plan. A paycheck for life without ever having to work again. That’s ultimately
where financial freedom comes from. Let’s turn the page now and learn why “All Seasons + Income
for Life Can = Real Financial Freedom.” Let’s learn how to create an income for life!
HOW DOES HE DO IT?
How does Ray Dalio keep generating such extraordinarily consistent returns? He has learned that this
giant economy is one big machine, and everything is linked together in some way. Sometimes it’s
obvious, many times not. He can look at the machine and know that there are predictable patterns he
can take advantage of. In fact, the culmination of his findings on the economic machine is packed into
a brilliant 30-minute video that, in my opinion, should be required viewing for every American! Ray
decided to produce the video only to make an impact on society and help demystify the economics
that make our world go round. Take the time to watch it, and you will be glad you did:
HOW DID WE CALCULATE THE RETURNS?
In order to insure the accuracy and credibility of the results produced by the All Seasons portfolio
shared here, a team of analysts tested this portfolio using the annual historic returns of low-cost,
broadly diversified index funds where possible. Why is this important to you? By using real fund data
as opposed to theoretical data from a constructed index, all the returns listed in this chapter are fully
inclusive of annual fund fees and any tracking error present in the underlying funds. This has the
benefit of showing you realistic historic returns for the All Seasons portfolio (as opposed to
theoretical returns that are sometimes used in back-testing). This insures that the investment holdings
and numbers used in back-testing this portfolio were and are accessible to the everyday man on the
street and not only available to multibillion-dollar Wall Street institutions. Where they were unable to
use actual index fund data because the funds didn’t exist at that time, they used broadly diversified
index data for each asset class and adjusted the returns for fund fees. Note that they used annual
rebalancing in the calculations and assumed that the investments were held in a tax-free account with
no transaction costs. Finally, I would like to thank Cliff Schoeman, Simon Roy, and the entire Jemstep
team for their in-depth analysis and coordination with Ajay Gupta at Stronghold Wealth Management
in this effort. (Past performance does not guarantee future results.)
13. This assumes the portfolio was rebalanced annually. Past performance does not guarantee future results. Instead, as I mentioned
prior, I am providing you the historical data here to discuss and illustrate the underlying principles.
14. Source: Richard Bernstein Advisors LLC, Bloomberg, MSCI, Standard & Poor’s, Russell, HFRI, BofA Merrill Lynch, Dalbar,
FHFA, FRB, FTSE. Total Returns in USD.
15. I had the privilege to interview Peter Lynch on his core investing principles while he was on his great winning streak, when he spoke
at my Wealth Mastery program in the early 1990s.
FREEDOM: CREATING YOUR LIFETIME INCOME PLAN
Lifetime Income Stream Key to Retirement Happiness
—TIME, July 30, 2012
I have enough money to retire comfortably for the rest of my life. Problem is, I have to die
In 1952 Edmund Hillary led the first expedition to successfully climb Mount Everest, a feat once
thought to be impossible. The Queen of England promptly knighted him, making him “Sir” Edmund
Hillary for his amazing trek.
Despite his accomplishment, many people believe Sir Edmund Hillary may not have been the first
person to reach the peak of Everest. In fact, it is widely believed that George Mallory may have been
the first person to reach the peak, nearly 30 years prior!
So, if George Mallory reached the peak of Mount Everest in 1924, why did Edmund Hillary
receive all the fame—including being knighted by the Queen?
Because Edmund Hillary didn’t just make it to the peak, he also successfully made it back down the
mountain. George Mallory was not so lucky. Like the vast majority of those who have died on
Everest, it was coming down that proved fatal.
INVESTING FOR WHAT, EXACTLY?
I often ask people, “What are you investing for?”
The responses are wide and diverse:
Rarely do I hear the answer that matters most: Income!!!!!
We all need an income that we can count on. Consistent cash flow that shows up in our account
every single month, like clockwork. Can you imagine never worrying again about how you will
pay your bills or whether your money will run out? Or having the joy and freedom of traveling
without a care in the world? Not having to worry about opening your monthly statements and praying
the market holds up? Having the peace of mind to give generously to your church or favorite charity
and not wonder if there will be more where that came from? We all know intuitively: income is
Shout it from the hilltops like Mel Gibson in the movie Braveheart: “Income is freedom!!!”
And lack of income is stress. Lack of income is struggle. Lack of income is not an acceptable
outcome for you and your family. Make this your declaration.
Dr. Jeffrey Brown, retirement expert and advisor to the White House, said it best in a recent
Forbes article: “[I]ncome is the outcome that matters most for retirement security.”
The wealthy know that their assets (stocks, bonds, gold, and so on) will always fluctuate in value.
But you can’t “spend” assets. You can only spend cash. The year 2008 was a time when there were
lots of people with assets (real estate, in particular) that were plummeting in price, and they couldn’t
sell. They were asset “rich” and cash “poor.” This equation often leads to bankruptcy. Always
remember that income is the outcome.
By the end of this section, you will have the certainty and the tools you need to lock down exactly
the income you desire. This is what I call “income insurance.” A guaranteed way to know for
certain that you will have a paycheck for life without having to work for it in the future—to be
absolutely certain that you will never run out of money. And guess what? You get to decide when
you want your income checks to begin.
There are many ways to skin the proverbial cat, so we will review a couple of different methods
for getting the income insurance that makes sense for you.
One of the more exciting structures for locking down income has other powerful benefits as well. It
is the only financial vehicle on the planet that can give you the following:
• 100% guarantee on your deposits.16 (You can’t lose your money, and you keep total control.)
• Upside without the downside: your account value growth will be tied to the market, so if the
market goes up, you get to participate in the gains. But if the market goes down, you don’t
lose a dime.
• Tax deferral on your growth. (Remember the dollar-doubling example? Tax efficiency was the
difference between having $28,466 or more than $1 million!)
• A guaranteed lifetime income stream where you have control and get to decide when to turn it
• Get this: the income payments can be made tax-free if structured correctly.
• No annual management fees.
You get all of these benefits by using a modern version of a 2000-year-old financial tool! How is
this possible? I am sure it sounds too good to be true, but stick with me. It’s not! I use this approach,
and I am excited to share the details with you.
As we have highlighted throughout the book, the financial future that you envision is very much like
climbing Mount Everest. You will work for decades to accumulate your critical mass (climbing to the
top), but that’s only half the story. Achieving critical mass without having a plan and strategy for
how to turn it into income that will last the rest of your lifetime will leave you like George
Mallory: dead on the back side of a mountain.