An investment portfolio of different asset classes to dodge volatile market phases could earn healthy returns without investors facing the challenge of predicting an uncertain future, said Kalpen Parekh, MD & CEO, DSP Mutual Fund and Aashish Somaiyaa, CEO, White Oak Capital Management at FinancialExpress.com’s Manage Your Money. Both Kalpen Parekh and Aashish Somaiyaa were discussing billionaire investor Ray Dalio’s famous All Weather Portfolio, which has delivered steady returns over the last few decades. Both Parekh and Somaiyaa lauded Ray Dalio for the investment strategy popularised by the founder of Bridgewater Associates, which is now the world’s largest hedge fund.
Watch full conversation: Deep dive into Ray Dalio’s All-Weather Portfolio with Kalpen Parekh and Aashish Somaiyaa
With an example, Kalpen Parekh pointed out that an investor investing into Nifty 50 at the peak of 2000 or 2008, would have earned a return less than or equal to fixed income assets. “If you had invested in Nifty at the peak of 2000, the return would be 12%, investing in global market (MSCI All country world index) returns would be 8%, Gold returns were 11%, and investing in government bonds would give a return of 8%,” he said. During this period, equity in the first four years would be down 30% and government bonds were up 16% CAGR. “When you blend these four asset classes together, the final return would be 11%, but the journey would be less volatile,” he said.
Only a very few investors can time the market at such a stage which is far away from the peak; hence for others, diversification is important, Kalpen Parekh said. “If you invest at the peak of the cycle, what happens in the next two years you could lose 20-30% of your capital. The moment you lose 30% of your capital, you will be out and it will be rare to come back into long-term compounding and earn 12-14% desired returns,” he added.
Staying away from predicting the future
Aashish Somaiyaa said that creating an all-weather portfolio such as that of Ray Dalio while sitting in India would be difficult. However, he said that what the idea is behind the strategy is something that should be learnt. “All forecasts of best stock, sector or asset class to invest in, are situational and come with a heavy dose of precision,” he added.
All expectations on a stock or sector or even a country have an impact on growth and interest rates or inflation, Aashish Somaiyaa said. With a recent example, he explained that public sector stocks were expected to post strong returns after the Union government decided to go big on the privatisation drive. However, the government only privatised Air India and came with a small stake sale in LIC via IPO, changing expectations.
Shield from risk
Explaining what an all-weather portfolio tries to do, Kalpen Parekh said that Ray Dalio’s strategy hinges on understanding risk and knowing the drivers of return. “There are various regimes such as a growth cycle of 4-5 years, then there are inflationary cycles of many years which different markets or asset classes can go through,” Parekh said. He added that betting everything on one idea could have a catastrophic effect on wealth-creation dreams as various asset classes go through various phases. However, he added that diversification does reduce risk but also cautioned that it impacts returns in a certain time frame.