Home/Blogs/How to create an all-weather portfolio for yourself?

How to create an all-weather portfolio for yourself?

28 Jun 2023

Your investment portfolio is, by definition, dynamic in conception. It is designed to manage the risk as you create wealth in the long term. But there are some key challenges. Different asset classes are driven by different considerations. There are times equities will perform better and there are times when debt will perform better. The question is about how to build an all weather portfolio that can continue to perform under various market conditions? Let us also compare the merits of an all weather portfolio vs permanent portfolio. Here is how your approach to an all weather portfolio 2018 should look like..


Understand risk and diversification

That is the basic thing to understand about an all weather portfolio. When you invest in any asset class there is risk involved. Equity has market risk, debt has interest rate risk and commodities have price risk. The first step will be to understand the risk profiles of each of the asset classes and allocate accordingly. There is a lot of merit in diversification. For the year 2018, the markets are already seeing a strengthening of gold and industrial commodities while bond yields are rising and equities are trading at record highs. That is where diversification comes in handy. The key to creating an all-weather portfolio is to diversify your risk across a variety of asset classes so as to be able to play across a greater span of economic possibilities.


Look at asset correlations

What is meant by asset correlations? They show how closely assets are correlated to each other. For example, there is asset correlation within the asset class and also across asset classes. For example, debt tends to give stable returns even when equities may be giving sharply negative returns. Similarly, even with the equity class, defensive sectors do not move in tandem with the high beta sectors. Then there are specific asset classes like gold and other commodities which shares a negative correlation with other asset classes. The key to creating an all-weather portfolio is to mix assets that have low correlations or even negative correlations


Balanced funds can be your answer

Balanced funds mix debt and equity to give a combined flavour of wealth creation and stable income. Thus balance funds automatically have an all-weather flavour to them. Even within the balanced funds category, there are options available which makes it a lot more flexible. You have balanced funds with a predominance of equities. At the other end you have MIPs with a predominance of debt. These two extremes can be effectively combined with a dynamic investment plan which keeps moving the equity/debt mix based on the market conditions. That will give you a very good all weather portfolio approach.


Look at a phased approach to investing

We have heard of the SIP approach to investing quite often, but one of the best ways to create an all-weather portfolio is to adopt a phased approach to investing. When you adopt a phased approach, the rupee cost averaging automatically works in your favour. This is helpful in all types of market conditions, especially if you evaluate it over a longer time frame.


How about gold as a hedge

One of the best ways to create an all-weather portfolio is to allocate 10-15% of your portfolio to gold. You need not keep it invested in physical gold but you can also hold in the form of gold bonds or gold ETFs. These are equally effective. The advantage of gold is that it automatically outperforms in turbulent market conditions and thus gives you a natural hedge against negative returns in other asset classes. Also, gold has been traditionally uncorrelated with assets like equity and that makes it a genuine advantage in creating an all weather portfolio.


Take a serious look at commodities

Commodities are yet to emerge as a genuine asset class in India and hence you need to find ways of allocating money to commodities. Typically, industrial commodities follow a much longer down cycle and up cycle and are a lot more predictable. Hence by including commodities it is possible to ride the uptrend, spread the risk of the portfolio and also reduce your exposure risk to the regular asset classes. One can invest in commodities either through commodity stocks or through global commodity funds. In fact, global commodity funds will be the best method of participating in this theme as they represent commodities as an asset class.


The key to creating an all-weather portfolio is three fold. Firstly, you need to get your asset class mix right and build in diversification. Secondly, you need to adopt a more dynamic approach to asset allocation. Lastly, the phased approach always works best in volatile markets!

Checkout more Blogs

You may also like…

Get Exclusive Updates

Be the first to read our new blogs

Intelligent investment insights delivered to your inbox, for Free, daily!

Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C