Quarterly Outlook
Q3 Investor Outlook: Beyond American shores – why diversification is your strongest ally
Jacob Falkencrone
Global Head of Investment Strategy
Investor Content Strategist
Gold has done a great job for investors in shielding them from inflation. It’s recently overtaken the euro as the second-largest central bank reserve. But the performance of the metal has begged a question – how much allocation should be in gold and how should you invest in it?
We’ve been discussing some ideas and looking at some examples for how you might do this. One theme that cropped up here was the Ray Dalio All-Weather Portfolio. It's a globally diversified portfolio designed to do well whatever the economic conditions. It’s 30% stocks, 55% bonds (a mix of Treasuries across a range of maturities), and 15% commodities, usually split evenly between a mix of gold and a basket of other commodities. The idea behind this portfolio is that it works whatever the weather – good if you get emotional when your investments lose you money.
We took this as the basis for creating a portfolio that is admittedly a little heavier on gold but hopefully a little easier to put together. It’s also got more of a UK feel to it as I feel it’s instinctively easier to go for gilts than Treasuries, though this could be a mistake.
Firstly, it should be noted that gold has had a very good run already this year. But given the cloudy macro outlook, the ever-changing picture from tariffs and perhaps crucially for US interest rates – which are a key driver of gold prices and the US dollar – the uncertain future for the Federal Reserve, it’s reasonable to assume it’s not going away, even if there are new forms of ‘digital gold’ that are increasingly forming a portion of a lot of investor portfolios.
I wanted to show a simple multi-asset approach using ETFs. I’ve selected 5 that deliver a mix of gold, gilts and equities. These are the Vanguard S&P 500 ETF (VUSA), the MSCI Emerging Markets Index Fund (EMIM), and the Vanguard FTSE All-World UCITS ETF (VWRL). To balance these equity trackers I've landed on the Core UK Gilts ETF (IGLT), and the Physical Gold ETC (SGLN). There are all kinds of alternatives to these from other providers, so do look around – this is just an example.
A simple weighting of 20% of each creates a strategy that closely mirrors the classic 60:40 passive strategy but with an admittedly heavy skew towards gold. This means it’s a little closer to Ray Dalio’s All-Weather Portfolio than the 60:40, although he has 55% weighted to bonds and a wider variety of commodities. You may prefer to dial back gold exposure, say from 20% to 10%, and look at using the Diversified Commodity Swap ETF (ICOM) to introduce some wider commodity exposure, particularly as increasing demand for materials from global megatrends such as AI and the energy transition are seen providing long-term support. To diversify your bond holdings, you could opt for a mix of Treasuries and Gilts, for instance by including the iShares USD Treasury Bond 7-10yr UCITS ETF (IDTM).
It’s worth noting that price changes mean weightings change and need to be recalibrated from time to time. If you’d bought 20% weighting of each a couple of years ago you would be overweight gold now and underweight gilts, for instance.
This approach – like the All-Weather Portfolio – may be more resilient at times of economic stress, but could reduce returns in the long run compared to a strategy more heavily weighted towards stocks.
While the approach here is simple in principle, your specific asset choices and rebalancing can be a little more complicated.
But I leave it to Ray Dalio to explain the thinking: “Overconfidence often pushes people to tinker with things they do not deeply understand, leading them to over-complicate, over-engineer, and over-optimize. All Weather is built very intentionally to not be that way.”