Financial Advice from Ray Dalio.

Financial Advice from Ray Dalio.

His first recommendation is to focus on savings, and to think about how many months of living expenses your savings can get you through. Savings, explains Dalio, is “freedom and security.” Savings can also provide you with opportunities. If you need to further your education, start a new business, or invest in a discounted asset, it’s easier if you have extra money. If you can accumulate enough savings to last you for the next 300 months then you can be considered financially independent. 🙂

Dalio’s next advice is about what to do with your savings. He says “it’s important to realize that the least risky investment that you can make, which is cash, is also the worst investment you can make over time. You can judge that by comparing the rate of inflation to the after tax rate of return you will earn.” So if inflation is 2%, and you’re only making 1% on your cash investment then you are actually losing purchasing power and getting poorer. “So you have to move into other assets that will do better over a longer period of time.” This is why some people like myself don’t have a cash emergency fund.

The last advice Dalio gives is a bit of surprise to me. Instead of going with the mainstream and buying an index fund, he suggests that millennials should do the opposite of what their instinct tells them to do. This can be emotionally difficult to pull off. The market reflects the crowd and your instincts will usually lead you to do the same thing the crowd is doing. But herd mentality won’t get you any further than the rest of the herd. So you want to buy when no one else wants to buy. Famous investor Warren Buffett has a similar saying: “Be fearful when others are greedy and greedy when others are fearful.” The best way to approach this last advice for me is to apply original research and critical thinking to your investment strategies if you want to outperform the market. But then again, a lot of people are perfectly happy earning market returns and I think indexing is an acceptable way to invest as well.

Ray Dalio created a 30 min YouTube video about his famous work, Principles for Success. He believes that dreams, reality, and determination can all help to create a successful life. And that pain plus proper reflection will give us the tools to progress. It’s an interesting watch if you’re into mental models and self development.

Motivational speaker Tony Robbins interviewed self-made billionaire Ray Dalio for his book, Money; Master the Game. Ray heads the largest hedge fund in the world, Bridgewater Associates, which has over $150 billion in assets under management.

The All Weather Portfolio.
According to Ray, “there is one thing we can see with absolute certainty: every investment has an ideal environment in which it flourishes. In other words, there’s a season for everything.” The four seasons he refers to are the following.

Inflation.
Deflation.
Rising economic growth.
Declining economic growth.

He suggests that these 4 economic environments will ultimately affect whether an asset’s price will increase or decrease. So for example, bonds should outperform in a deflationary period. Ray elaborates by saying we should have 25% of our risk spread out evenly across all 4 economic seasons. This is why he calls this investment approach “All Weather.” There are 4 seasons in the financial world and nobody knows for sure which one is coming next. So the idea is to keep a balanced portfolio that will not only make us money, but also help protect us against any surprises in the markets. Here are some assets we can allocate to each of the four categories, and keep in mind it’s possible for two of these conditions to overlap.

This is an interesting strategy. I’ve always had a bullish bias towards investing. In other words, my investment decisions are based on the idea that financial markets tend to increase with economic growth over the very long run, so I don’t try to short anything. But Ray’s approach suggests that it’s possible to make money even in environments of economic decline and deflation that doesn’t involve timing the markets.

Asset Allocation.
Using the philosophy behind his All Weather portfolio, Ray has developed the following asset allocation for the average investor which should work with his strategy.

30% stocks via low fee index funds such as the ones that track the S&P 500 index.
15% intermediate-term government bonds.
40% long-term government bonds.
7.5% gold.
7.5% commodities.
And the results speak for themselves. 🙂 This all weather portfolio has performed quite well from 1984 to 2013. During that period, the portfolio earned a positive return 26 out of 30 years. The average annual return was 9.7%. According to Tony Robbins, this portfolio never lost more than 3.95% in any given year over the past 75 years. Gold and commodities are known for being highly volatile in price, but it appears having a 15% allocation in this case might actually reduce portfolio volatility.

Over the last 20 years, Bridgwater had annualized returns of 14.7%. To put that into perspective, the S&P 500 index returned about 8.7%. During the financial crisis Bridgewater even managed to earn a positive, albeit modest return in 2008 when the general stock market was down. So when Ray Dalio speaks about investing, I’m inclined to listen. 😀 It doesn’t matter how poor people are, anyone can at least afford to pay attention.😄

The only thing I’d change about the all weather portfolio is to buy investment grade corporate bonds instead of government bonds because the yields on T-Bills and other government debt are abysmal right now. For me, the key point is to maintain a balanced asset allocation, and rebalance it once a year.