Happy 2025 All. As 2025 unfolds, many analysts are anticipating a potential market downturn fueled by high interest rates, slowing global growth, and persistent geopolitical tensions. Adding to the uncertainty, the U.S. presidential election, with Donald Trump emerging as the next US President, is injecting a layer of volatility into markets.
As part of a defensive strategy, many have suggested to using alternative investment instruments and diversified models like the All-Weather Portfolio to mitigate risks from market volatility. While these approaches offer innovative solutions, in this article, I aim to demonstrate—using data-driven insights—why the classic 60/40 equities and bonds allocation continues to be a reliable and effective strategy.
Let's use these 3 periods to backtest both the All-Weather and the 60/40,
- Jan 2000 to Apr 2009 (known as lost decade)
- Apr 2009 to Dec 2024 (best bull run)
- Jan 1995 to Dec 2024 (buy and hold approach for 30 years)
Jan 2000 to Apr 2009 (known as lost decade)The Ray Dalio All Weather Portfolio obtained a 6.27% compound annual return, with a 7.70% standard deviation. It suffered a maximum drawdown of -11.57%. The 60/40 Portfolio obtained a 1.94% compound annual return, with a 10.22% standard deviation. It suffered a maximum drawdown of -28.11%.
Winner - Ray Dalio All Weather Portfolio
Apr 2009 to Dec 2024 (best bull run)
The Ray Dalio All Weather Portfolio obtained a 6.79% compound annual return, with a 7.54% standard deviation. It suffered a maximum drawdown of -20.58%. The 60/40 Portfolio obtained a 10.26% compound annual return, with a 9.60% standard deviation. It suffered a maximum drawdown of -24.41%.
Winner - 60/40 Portfolio
Jan 1995 to Dec 2024 (buy and hold approach for 30 years)
The Ray Dalio All Weather Portfolio obtained a 7.67% compound annual return, with a 7.47% standard deviation. It suffered a maximum drawdown of -20.58%.
The 60/40 Portfolio obtained a 9.15% compound annual return, with a 10.02% standard deviation. It suffered a maximum drawdown of -28.11%.
Winner - 60/40 Portfolio
Conclusions
Both portfolios have their merits and can perform well during normal market conditions with periodic upsides and typical corrections. However, I believe a 60/40 approach is not too defensive, especially given the historical trend that markets are in an upward trajectory most of the time. While overly defensive strategies may provide stability, they risk sacrificing potential returns during market rallies. The 60/40 approach ensures that investors can capitalize on long-term market gains without being overly exposed to short-term volatility.
