In addition, he likes to balance his portfolio between inflation risk and growth. He observes data through the prism of knowing the economic environment. All potential environments are illustrated in this diagram from Bridgewater:
The ideal portfolio is one that does not rely on predicting deflationary shifts yet provides balance. The explanatory report from Bridgewater’s All Weather fund puts this idea is a practical manner:
“Bonds will perform best during times of disinflationary recession, stocks will perform best during periods of growth, and cash will be the most attractive when money is tight. Translation: All asset classes have environmental biases. They do well in certain environments and poorly in others. As a result, owning the traditional equity-heavy portfolio is akin to taking a huge bet on stocks and, at a more fundamental level, that growth will be above expectations.”
Dalio said it best in an interview from Davos with CNBC:
“I think the important thing here if I’m an investor is that the most important thing you can have is a good strategic asset allocation mix.
In other words, you’re not going to win by trying to get what the next tip is — what’s going to be good and what’s going to be bad. You’re definitely going to lose. So, what the investor needs to do is have a balanced, structured portfolio — a portfolio that does well in different environments.”
In other words, diversification within a balanced structured portfolio is the key to Dalio’s investing success. What I find most useful is his saying that despite all its researchers and market experts and spending hundreds of millions of dollars, Bridgewater doesn’t know what’s going to win and what’s going to lose — which is why the firm makes a lot of diversified bets.
Dalio isn’t a speculator who has singular big wins or losses. He makes many diversified bets rather than a handful of all-in plunges.
Ray Dalio’s Portfolio: What’s He Holding Now?
As a macro-oriented fund, Bridgewater has more than 90% of its holdings in ETFs of emerging markets and the S&P 500 index. This breaks down to 33% allocated to Vanguard MSCI Emerging Markets ETF (NYSEARCA:VWO), 30% in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), and 28% in the iShares Trust (NYSEARCA:AXIT). The most recent stock additions include Boston Properties, Inc. (NYSE:BXP) and Expeditors International of Washington (NASDAQ:EXPD).
Action to Take –> Every investor should take the time to read Ray Dalio’s “Principles.” This manual provides a powerful case for his philosophy and worldview. Regardless of whether you agree or disagree with his overall ideas, there are nuggets of wisdom that can help provide true understanding. In addition, note Dalio’s insistence on the need for diversification within an investment portfolio. He obtains this diversification through ETFs built upon his macro outlook of the economy.
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This article was originally written by David Goodboy and posted on StreetAuthority.
