All-weather funds typically invest in a diversified portfolio of assets and aim to provide consistent returns regardless of market conditions. The main components of an all-weather fund include:
- Stocks – Equity investments in publicly traded companies.
- Bonds – Debt investments in government or corporate issuers.
- Alternative investments – Investments in assets such as commodities, real estate, or hedge funds that are not typically included in traditional stock and bond portfolios.
- Precious Metals or hedges – Gold, silver, etc… maybe some day Bitcoin!
- Cash and cash equivalents – Short-term, low-risk investments such as money market funds.
The specific mix of these components can vary between all-weather funds and is dependent on the fund’s investment objectives, management strategy, and target market conditions. Let’s dive into some of the non conventional aspects of all-weather funds (alternative investments, cash and international diversification).
Owning commodities is one of the key differences of an all-weather fund vs typical 60/40 portfolios (60% stocks, 40% bonds). Before and during the pandemic, commodities were an asset class everyone hated. They had gone through a decade long stagnation period. Then over the past few years, commodities have gone on a massive tear that would’ve been hugely beneficial to most investors. A key to the all weather fund is not taking out underperforming assets, but instead rebalancing. It’s a little counterintuitive but incredibly powerful.
Other alternative investments can play a role here, but from what I’ve seen, most people already have tons of real estate exposure. Some other fun alternatives include art, crypto, etc…
Gold (Precious Metals)
I’m not the biggest gold fan, but I do include it in all-weather portfolios because it is a key asset class that trades in a unique way. Gold isn’t directly correlated to stocks, bonds, etc… so it provides a unique way to diversify returns.
Why would anyone ever carry cash? Ironically, in the short term cash can be a relatively great inflation hedge. The drag (i.e how much it takes down returns) can be steep, so it’s important to be very cognizant of how much cash you are carrying.
Wrap It Up
I’m missing on some key aspects that play a role in all-weather funds, but I will cover those in future posts! I hope this gave you a little bit of a better idea on what makes up an all-weather fund.
If you are interested in checking out more on all-weather funds, check out my work at Follow (full disclosure – I am being paid by Follow).