The largest hedge fund company in the world, Bridgewater Associates, which oversees $154 billion, was founded by Ray Dalio.
Dalio, who is in his early 70s, has a $20 billion personal net worth. With more fortune than fellow hedge fund investor Carl Icahn and Walmart heir Lukas Walton, he ranks as the 36th-richest American.
The investment theory of Ray Dalio
The cornerstone of Dalio's investment theory is composed of five major principles.
1. Investment risks and possibilities are influenced by the economy.
Macro investor Dalio looks at economic patterns to spot possibilities and spot threats. In contrast, the micro investor gives more importance to business technical research.
In the 2000s, Dalio's macro outlook brought Bridgewater particular praise. Since he has studied the economy for a long time, Dalio recognised warning indications before the 2008 financial crisis. He made adjustments to the Bridgewater portfolios to get them ready for a downturn, and it worked. Bridgewater's Pure Alpha fund increased in 2008, whereas the typical hedge fund lost 19 percent of its value.
2. Investors are seriously threatened by inflation.
Inflation's capacity to erode higher incomes and wreak havoc on investment returns is something Dalio respects in a healthy way. He has therefore long advocated for using gold as a backup form of currency. The All Weather portfolio, a well-known Dalio investment approach, has a 7.5 percent allocation to gold. The All Weather portfolio is Dalio's go-to investment strategy for navigating uncertain economic periods.
In addition to holding gold miner and producer companies, Bridgewater also holds gold funds. With a 2.15 percent allocation, the gold ETF SPDR Gold Shares (NYSEMKT:GLD) is Bridgewater's 11th largest investment overall.
3. By incorporating assets that are uncorrelated, investors can reduce risk.
Dalio strongly supports diversification. To lower your risk-to-return ratio, he specifically advises diversification over 15 or more uncorrelated investments.
Assets that are not connected do not move in tandem, either positively or negatively. For instance, there is little link between gold and the S&P 500, so a decline in the S&P 500 doesn't always effect gold spot prices.
Bridgewater portfolios have a wide range of assets, industries, and currencies. In addition, Dalio has acknowledged using cryptocurrency as a diversification tool.
4. On entirely priced stocks, investors should take revenues.
Dalio does not just "purchase and hold" stocks. He favours selling pricey stocks for a profit and then reinvesting the proceeds. The portfolio is rotated, as he puts it. Undervalued stocks—good companies that are trailing the economy or their industry—make suitable targets for reinvestment.
This rotation is seen in the 2021 portfolio adjustments at Bridgewater. Bridgewater upped its investments in emerging economies funds while decreasing its stake in the SPDR S&P 500 fund. The action reflects the perception that the window of opportunity for US large caps may be closing. In the coming months, it might be preferable to choose smaller, developing economies.
Time will tell if Bridgewater's wager comes off, although the S&P 500 has exhibited weakness in January 2022.
5. One of the main causes of investor losses is bias.
Investors frequently have a positive or gloomy outlook on the market or a particular investment. Those are prejudices. Any type of directional thinking can persuade an investor to take positions for an excessive amount of time and miss the chance to sell at a profit.
Admittedly, letting go of biases is not humanly conceivable. You can examine your investment decision-making process on a regular basis. After recognising your directed beliefs, consider the alternative situation.
Dalio believes that diversifying is the best course of action in this situation, only in case your presumptions about a certain asset class, industry, stock, or the market as a whole prove to be incorrect.
The top investments made by Ray Dalio
You can see several themes as soon as you skim this list. Dalio is placing significant wagers on customer staples, gold, Alibaba, and emerging markets.
Emerging markets: Emerging markets ETFs make up the top three positions held by Bridgewater. It is noteworthy that Bridgewater has significantly boosted these three holdings over the past year, while decreasing its coverage to the S&P 500.
China is a geographical concentration for all three ETFs, and the financial and technology industries are sector concentrations. While VWO has minor holdings in the Philippines, Qatar, Turkey, Greece, and other countries, EEM also owns some South Korean stock. Bridgewater has exposure to both small and large businesses in these emerging economies thanks to the three funds.
Gold: The ETF GLD is backed by actual gold. Bridgewater's portfolio raised this investment by roughly 50% from the previous quarter. It is hardly surprising that Bridgewater would boost its gold holdings given the rising rate of inflation in the U.S.
Consumer goods: Based on the Bridgewater portfolio, manufacturers or sellers of consumer staples are the best individual equities to buy. This is just another play on inflation.
Consumer staples businesses frequently turn out better than discretionary goods and services in inflationary times. Even when prices are high, individuals continue to purchase items like toilet paper and bread.
Beverages also fall under this heading. As an illustration, Coca-Cola successfully increased their prices in 2021 in reaction to rising input costs. Bridgewater owns a significant stake in Coke. The CEO of Berkshire Hathaway (NYSE:BRK.A), Warren Buffett, also favours investing in the beverage manufacturer (NYSE:BRK.B).
Alibaba: Despite having a difficult year in 2021, Dalio remained enthusiastic about the Chinese internet behemoth. In spite of the declining share price of the company, Bridgewater increased the number of Alibaba shares it held in the second half of 2021.
Dalio currently prioritises the Chinese market, and Alibaba does experience consistent demand for its goods. He probably saw Alibaba's value decline as a chance to acquire more shares at a discount.
Investments To Prevent
Economic conditions determine which investments Dalio steers clear of. The liabilities and assets that you would prefer to have as well as those you are most likely to avoid alter with the framework that is in place at the time, in his words.
Dalio believes that the paradigm we are currently in produces negative inflation-adjusted returns for cash and bonds.
Cash: As previously mentioned, Dalio is worried about inflation in the United States, Europe, and Japan. According to him, these economies are at risk from three primary factors: spending that exceeds income, social and political turmoil, and China's growing influence as a global force. In light of these variables, he advises decreasing cash holdings, not just in dollars but also in euros and yen.
After obviously, the majority of investors still want some cash on hand. Although it may have poor to negative growth, cash is nonetheless very useful in times of monetary crisis.
Bonds: For the exact same reasons, Dalio advises limiting bond holdings. He encouraged "minimal exposures to dollar, euro, and yen cash and debt assets" in a January 2022 LinkedIn post.
More so than in the previous, Dalio now has a bearish outlook on bonds. That is clear from the fact that his 1996-developed All Weather allocation does suggest a substantial debt position. The All Season portfolio's specific composition is as follows:
- 30% in U.S. stocks,
- 40% in long-term Treasury bonds,
- 15% in intermediate-term Treasury bonds,
- 7.5% in diversified commodities,
- 7.5% in gold.
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