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Investing like Ray Dalio

For a famous billionaire fund manager, Ray Dalio offers a surprising amount of useful information and insight for the everyday person. He's not afraid to ask the tough questions, like:

Why in the world would you own bonds, when the economics of investing in bonds (and most financial assets) has become stupid?

That's just a taste of his outstanding and thought-provoking article, Why in the World Would You Own Bonds When... from earlier this year. Another quotable, this time from Bloomberg:

Right now there is far more financial wealth than can ever be converted into real wealth so it has to be devalued. When you are seeing your financial wealth go up as is happening now don't think you are gaining real wealth when your buying power is going down.

Maybe I sound like a fanboy. Here's the thing: I'm not particularly interested in famous-for-being-famous types, or Instagram celebrities. What I admire about Dalio is:

  1. A proven track record of success (Bridgewater Associates is the world's largest hedge fund)
  2. A deep thinker (Former U.S. Treasury Secretary Hank Paulson called Dalio a "big thinker and brilliant academic disguised as an investment manager")
  3.  An accurate forecaster (Dalio famously made a bundle during Black Monday back in '87 and called the 2008 Financial Crisis, probably a major contributor to Bridgewater's success)

I believe he's someone worth listening to.

And following his investment advice probably won't make you a billionaire (despite what clickbait titles would say), unless you're already close. On the other hand, if you're interested in financial security and learning how to create it for yourself, Dalio has some excellent pointers.

Ray Dalio manages Bridgewater Associates, not only the world's largest hedge fund ($223 billion), but a top-performing one. A whole lot of Bridgewater's capital is in gold. Dalio himself has professed he owns gold, and is vocal in his warnings against holding many paper assets. More recently, Dalio commented on a recent U.S. stock market tumble and an ill-advised capital flight.

Any flight out of a high-risk market, especially one that is as historically overvalued and running on fumes as today's equity market, starts with a frantic question: Where to?

Cash is the first choice, of course. ("Cash" usually means just that to you and me, but for big institutions "cash" might be extremely short-term sovereign bonds or high-quality commercial paper.) There's just one problem…

Since we're seeing the highest inflation in over three decades, investors can't afford to make the mistake of thinking cash is safe. And they can't afford it in the most literal sense. The longer you hold cash, the less purchasing power you have. (People would notice if their bank balance changed, but since it doesn't, it's easy to miss how rapidly inflation robs you.) It's probably why Dalio speaks out against it. Remember "cash is trash"?

Being a fund manager, Dalio is, of course, going to advocate for a balanced portfolio. But how balanced can a portfolio be when most available assets are terrifying?

We're left with bonds, a traditional safe haven that these days mostly ensures you are paying to own a piece of paper. And with the kind of anything-goes attitude from governments these days, bonds are actually becoming something with a lot of counterparty risk, as is cash. See above, "Why in the world would you own bonds when…"

What's left? Alternative assets, like rare wines or antiques? Maybe, if you can avoid breaking them and have a Fort Knox-type storage option. And they're not particularly liquid even in that case.

Another asset to consider are precious metals. Gold isn't going to collapse, it won't pay a negative yield, is undefaultable and only slightly less liquid than cash. Even if you somehow manage to break a Valcambi gold bullion bar, it's worth almost as much as it was before.

Ultimately, Dalio seems to believe in diversification:

Know how to balance a portfolio. When equities go down, then you see the bond market, gold go up. Wealth is not destroyed as much as it is transferred. And if you know how to balance those investments, that's the most important thing. Be in a safe, well-balanced portfolio. You can reduce your risk without reducing your return. [emphasis added]

In other words, if your savings are well-diversified, and you rebalance, you can reduce risk, smoothing out the volatility roller-coaster. (That's why the SEC calls it, " The Magic of Diversification.")

To be sure, there's a lot of difference between a hedge fund's investments in gold and the kind of investments people like you and me would consider.

Hedge funds can and do invest in highly-speculative derivatives of all kinds in order to turn a quick and sizeable profit. That's really not what physical gold is for. Nope, physical gold is where you put the money you don't want to risk.

Regardless of what Bridgewater's investing in today, I bet you Dalio himself has a significant chunk of his personal wealth in physical gold bullion.

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