 Good day fellow investors. We have been mentioning quite a few times an all-weather portfolio. Well, it's finally here. In this video, we'll discuss what an all-weather portfolio is, what are its pros and cons, and how to create an all-weather portfolio with actual stock picks, stock sectors, where to invest at this point in time. So let's first start with what an all-weather portfolio is. The main premise of an all-weather portfolio is that it works in any kind of macroeconomic environment. If you take a look at this figure, where the blue line is the U.S. National Home Price Index, the red line is the effective federal funds rate, and the green line is inflation. And as you can see that since the 1980s, both inflation and the effective federal funds rate has been constantly declining. The consequence was that asset prices in this case real estate went up. That environment has been going on for the last 45 years. But before that, the situation was completely different. We had increasing interest rates and increasing inflation. Nobody knows what will happen in the future. In the short time, those macroeconomic environments change rather quickly, but also long-term trends, two, three decades, they take a while to change. But if you're invested in the wrong sector, then you will lose a lot. You are exposed to high risks. The main focus of the all-weather portfolio is to have a portfolio that has exposure to every kind of economic environment. For example, if there is a recession, this part of the portfolio does good. If the economy is booming, the other part of the portfolio does good. If there is high inflation, low inflation. So an all-weather portfolio tries to perform well in all kinds of environments by owning asset classes that are not correlated and that perform well in different environments. For example, here we can see the expected rate of return for various asset classes. You can see that, of course, bonds have the lowest risk and the lowest expected return. US equities have a bit higher risk, a bit higher return. And emerging market equities have very high return, but also high risk. The riskiest asset of all is private equity, so extremely high risk, but also high expected returns. Nevertheless, when those returns are risk adjusted, then you can see that they all fall almost in the same corridor, except for commodities. Commodities are not a yielding asset. Thus, the return is lower. But if you buy commodity producers, then the return also falls into that corridor. So you can see that risk adjusted returns are equal. This means that in whatever class you invest, over time, your returns will likely be equal to all other asset classes, because if the markets are very efficient in the long term, all returns risk adjusted are equal. Therefore, if you want an all-weather portfolio, you have to expose your portfolio risk, which we'll talk later, to each asset class. When we sum up all what can happen in economy, we have four scenarios. We can have an economy growing above expectations with inflation above expectation, or with inflation below expectation, or we can have an economy growing below expectation falling economy with rising inflation or declining inflation. And that's it. So when you sum up everything what can happen in an economy, all the factors into a simple diagram like this, everything what can happen is in here. So if you own asset classes that do well in one of those four scenarios and allocate the same percentage of risk to those asset classes of your portfolio, you have an all-weather portfolio. What does it mean to allocate the same percentage of risk? For example, if you invest one million dollars in short-term US treasuries, the risk of loss is minimum. Let's say if all hell breaks lose with Trump, you lose 5%. However, if you invest one million in US stocks and all hell breaks lose, you lose 70%. So it's not I invest one million in treasuries, one million in stocks and I'm well diversified. No, you have to look at the risk. So if you invest one million in treasuries, the risk of loss is 50,000. It means that to be a real all-weather portfolio, you have to invest 80,000 in stocks, one million in treasuries, 80,000 in stocks. And then the risk is equal. So an all-weather portfolio looks at portfolio locations with equal risk weights. Risk is the key here. Now, if you invest in such an all-weather portfolio, what you can expect is low risk and a decent return. For example, from 1928 to 2013, an all-weather portfolio with 25% risk allocation to each different macroeconomic environment has lost money only in 14 years, while the SAP500 lost money in 24 years. The average loss for the SAP500 was 13.66% in those years, while the average loss for the all-weather portfolio was 3.65%. Now, it's difficult to calculate returns from 1928 in an all-weather portfolio because gold was fixed to the currency. So we can calculate from 1984. And since then, the all-weather portfolio returned an annual return of 9.7%, which is similar to the SAP500. Now, you would say, what's the point of an all-weather portfolio then? Well, the risk of the all-weather portfolio was much, much lower than the SAP500. And remember, since the 1980s, interest rates were just going down, which means that assets like stocks go up. So we have much less risk in an all-weather portfolio and much higher returns. All right, let's now create an all-weather portfolio, but not so technical because now, at this moment in time, 80%, 85% of the portfolio allocation would have to be in US Treasuries, short-term US Treasuries. Because if you allocate the risk reward, then 85% in Treasuries, 5% in Gold and 10% in US and emerging market stocks. That would be an all-weather portfolio now. And when stocks fall, when Gold rises, then you rebalance around the Treasuries or where when bonds become cheaper, then you rebalance it. But that would be an all-weather portfolio now. However, that's not a portfolio that I think 95% of investors look for. So let's go with allocations that we equalize the risks so that you can invest 25%, 25%, 25%, 25% of your portfolio at an equalized risk allocation. So the first scenario is the rising economy with inflation below expectations. This is the environment we are in now. Inflation is below 2%, while the economy is growing at 2%. In Europe, we have just started to see some economic growth. But okay, now we have a global economy that is growing, but inflation is still low. Where to invest now? Well, the best exposure is stocks. And then you can choose what kind of stocks you want to invest. I prefer value stocks that give me a return, a higher return than, let's say, growth stocks, because those are less risky. They have higher dividend yields, a higher margin of safety. Nevertheless, if a crisis comes, stocks could easily fall 50%. So that's the risk you have to take into account. Stocks to invest in are Berkshire, Nike, Synchrony Financial, Whirlpool. So those are stocks that offer higher returns than what the current market offers. So if you allocate your portfolio with 25% to such stocks, you know the risk is 50%, but the return is a bit higher than the current market return. The second scenario is a scenario with growing economy and growing inflation. We might enter into such an environment pretty soon as emerging markets spore up demand, commodities prices increase, and we can see global inflation alongside global economic growth. We'll see how that work out, but it is a scenario that's very possible, has been there in the 1960s, 70s, so be sure it can happen. What to invest in in such a scenario? My favorite are commodity stocks, so commodity producers. That can be a food stock like the Andersons, Amir Nature Foods that we have discussed. Oil prices would go up in inflation, so we have discussed Gazprom, Norilsk, Nickel, Amir Nature Foods, and all those kind of stocks that have a strong backing from some kind of commodity that will benefit from inflation. The third scenario, and here we're always already talking, recession scenario is a recession, so economy growing below expectations and low inflation. What does well in a low inflation environment with an economy doing not so good are of course treasuries. That's it. If you invest in treasuries, you know that you will get a decent return during that time and your portfolio capital will be protected. There are various ways to invest in treasuries and various ways to expose your risk. If you invest in 30 year treasuries and interest rates go up, then the risk is pretty high of what you own if you have to sell immediately. However, now the 20 year treasury is about 2.6% something, so it is a decent return, but I wouldn't allocate too much of my portfolio to that return, because the risk is high and the return is low. So let's say 25% in treasuries, different time horizons, so the risk is around 30, 40, 50%, which makes it an equal risk to the other portfolio parts. So if we invest in treasuries, we get a yield and we get protection. If interest rates decline further, treasuries will increase in value and you have to then rebalance the treasuries and buy other asset classes. So always remember the key is rebalancing. And the fourth possible scenario is slowing down on economy and rising inflation, or as we call it, stagflation. And the answer to this one is very easy. You have to be exposed to gold, or other things that will increase alongside inflation, think real estate in this case. So I would, of the 25% of risk exposed, 12.5% to gold, 12.5% to real estate. Because with inflation, real estate prices, if it's a good piece of real estate, will probably increase. In such an environment, I also would not exclude gold going to 5000 and above. You think it's too much? Well, in 2001, gold was trading at $260 per ounce. Now we are at 1200. So I wouldn't exclude 5000 in the next 5, 10, 20 years. Therefore, it's good to be exposed to such an asset class. There are various ways to be exposed. You can buy gold, physical gold, then the risk of loss is 50% if the economy does extremely well and nobody wants to invest in gold anymore. So gold can fall to 800, 600 per ounce. However, if you prefer more leverage on that, you can invest in miners. I'll be making a video on gold royalty streaming companies that are much less riskier than miners and also have a return, a dividend or something. So I'll be comparing that. So please subscribe for more ways of protecting your portfolio and increasing your return. I will conclude with the key to an all-weather portfolio and that's rebalancing. As soon as you own gold stocks, if they increase by let's say 20%, then the portfolio weight is not 25% anymore. The portfolio risk becomes 30% or 40%, then you lower it to 25% and you buy something else. By doing constant rebalancing, some do it every six months, some do it every year, you always have the same risk, but your returns and you practically sell high and buy cheap. And that's the key of rebalancing. So that was in short an all-weather portfolio. You have to see how each of those things applies to your asset portfolio allocation, how do you see the risks, can you manage those, can you rebalance and then the hardest part of an all-weather portfolio is our mind. You have to stick to it if you want to do such a strategy. If you don't stick to it, if you get greedy, then the risks are out of balance and it's not more an all-weather portfolio, it's an all-risk portfolio. So be very careful to really stick to the game when you're investing an all-weather portfolio. If you have any questions, I can't wait for your comments below, click like if you like the content and I'll see you in the next video.