Ray Dalio Investing Philosophy

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Billionaire investor Ray Dalio founded Bridgewater Associates, the world's largest hedge fund.

The assets managed by Bridgewater amount to about $150 billion. At the age of 70, Dalio has a net worth of over $20 billion. Among American billionaires, he boasts more wealth than Walmart (NYSE:WMT) heir Lukas Walton and fellow hedge fund manager Carl Icahn.

We'll look at the investment strategy that made Dalio famous (and very, very rich). Find out what he holds in his portfolio and his best trading strategies.

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Who Is Ray Dalio?

At the age of 12, Dalio began to play the market, collecting tips from golfers he caddied for. He invested the money he earned caddying and doing odd jobs. After graduating from CW Post College in 1971 with a BS in Finance, he began his career as a financial analyst. From his two-bedroom apartment in New York City, he launched Bridgewater in 1975 after earning an MBA from Harvard Business School.

Dalio founded Bridgewater Associates, which manages $154 billion, the world's largest hedge fund. A number of endowments, governments, foundations, pensions, sovereign wealth funds and pension funds are among the clients of the Westport, Connecticut-based firm.

During his tenure at Bridgewater Associates, the company ranked fifth in Fortune's list of most important private companies. By introducing new ways of investing, he built it into what it is today. In addition, Ray provides macroeconomic advice to many policy makers around the world. According to TIME magazine, Ray was named one of the "100 Most Influential People in the World" for the impact his thinking has had on global macroeconomic policies.

Over the past 50 years, Ray has been an active global macro investor. His New York Times #1 bestseller Principles: Life & Work, Principles for Navigating Big Debt Crises, and his forthcoming Principles for Dealing with The Changing World Order are among his most notable works.

As part of his efforts to ensure Bridgewater survives him, Dalio turned Bridgewater into a partnership and gave employees more ownership. In the past decade, Dalio has donated more than $1 billion to philanthropic causes. As part of his Dalio Foundation, he has supported microfinance and inner-city education.

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How Did Ray Dalio Make His Money?

His desire to spend money led him to work as a caddie at age 12. His colleagues often discussed stock trading, so he began investing. He bought Northeast Airlines shares for $300, which tripled when the airline merged with another.

During his early attempts at investing, he learned that he needed to think independently, that overconfidence could be disastrous, that stress-testing his opinions with experts could be beneficial, and that he needed constant improvement. His decision-making was improved by meditation inspired by the Beatles, a famous English rock band in the 1960s.

Dalio attended Harvard Business School in 1971, and he worked on the floor of the New York Stock Exchange. He became fascinated by the currency markets after being introduced to them. His interest in commodities trading was sparked by an internship with Merrill Lynch's director of commodities.

Two years later, commodity futures trading became popular, and Dalio joined Dominick & Dominick LLC at the director of commodities position. As a futures trader and broker, he moved on to Shearson Hayden Stone. After being fired by Shearson Hayden Stone, Dalio founded Bridgewater Associates, which has its headquarters in Westport, Connecticut.

In the 1980s, Bridgewater took off. The firm would become the world's largest hedge fund by 2011. In 2016, Bridgewater ranked sixth in Institutional Investor's Alpha's 15th annual hedge fund 100 rankings for the sixth consecutive year.

For its global clientele, which included a number of influential figures, the firm managed approximately $150 billion. It was in 2007 that Ray became famous for predicting the global financial crisis. He outlined his model of economic crisis in the essay "How Economic Machine Works: A Template for Understanding What Is Happening Now."

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Ray Dalio Net Worth

Forbes estimates Ray Dalio's net worth at $22 billion. He credits his success to one simple lesson: Learn from your mistakes. His net worth has gradually risen over the years, and has reached its peak in 2023 at $22 billion. Dalio’s network saw the largest boost from 2020 to 2021, jumping from $18 billion to $20.3 billion.

Ray Dalio Portfolio

PG The Procter & Gamble Company 970.2 4.1%

JNJ Johnson & Johnson 769.1 3.3%

IEMG iShares, Inc. - iShares Core MSCI Emerging Markets ETF 751.0 3.2%

SPY SPDR S&P 500 ETF Trust 695.4 2.9%

KO The Coca-Cola Company 680.7 2.9%

IVV iShares Trust - iShares Core S&P 500 ETF 643.7 2.7%

VWO Vanguard International Equity Index Funds - Vanguard FTSE Emerging Markets ETF 642.8 2.7%

PEP PepsiCo, Inc. 634.8 2.7%

COST Costco Wholesale Corporation 580.5 2.5%

WMT Walmart Inc. 571.1 2.4%

MCD McDonald's Corporation 511.4 2.2%

ABT Abbott Laboratories 304.2 1.3%

PDD Pinduoduo Inc. 297.5 1.3%

CVS CVS Health Corporation 291.5 1.2%

SBUX Starbucks Corporation 247.7 1.0%

MDT Medtronic plc 224.8 1.0%

TGT Target Corporation 220.3 0.9%

GLD SPDR Gold Trust 220.1 0.9%

CL Colgate-Palmolive Company 183.5 0.8%

BIDU Baidu, Inc. 170.1 0.7%

XOM Exxon Mobil Corporation 163.5 0.7%

PFE Pfizer Inc. 158.2 0.7%

BRK.B Berkshire Hathaway Inc. 156.1 0.7%

EL The Estée Lauder Companies Inc. 156.0 0.7%

DG Dollar General Corporation 154.9 0.7%

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What Is a Ray Dalio Strategy?

In order to be successful in investing, Ray Dalio recommends being both defensive and aggressive simultaneously. A person who is aggressive earns money, and a person who is defensive protects their money. Nevertheless, it's a fine line between attack and defense.

His investment methods are qualitative, focusing on macroeconomic and macro-political factors to identify new investment areas. He and Bridgewater aim to construct portfolios that produce uncorrelated investment returns rather than allocating assets.

In terms of investments, Dalio divides them into two categories:

  • Beta Investments: By combining passive management with normal market risk, this type of investment produces returns.

  • Alpha Investments: Active management ensures that these investments generate better returns than the benchmarks. There is no connection between these investments and the general market.

Diversification

The key to success, according to Dalio, is diversification. By spreading risk across multiple asset classes over time, it reduces risk.

The diversification of investments works as a panacea for reducing fear of potential losses caused by market volatility.

A diversified portfolio should include something like this, according to Dalio:

  • 30% stocks

  • 40% long-term U.S. Bonds

  • 15% intermediate U.S. Bonds

  • 7.5% gold

  • 7.5% raw materials

In addition to diversifying the portfolio by asset class, sector, and currency, he recommends diversification based on industries.

Investing across 15 or more uncorrelated assets reduces your risk-to-return ratio significantly since they don't move together or discourage each other.

S&P 500 and gold, for example, are the least correlated. Investing in gold reduces the risk of a market crash due to the fact that gold's price can soar without affecting the S&P 500.

All-Weather Portfolio

Dalio and his partners developed the All-Weather Portfolio at Bridgewater Associates to withstand market crises. A well-diversified All-Weather Portfolio, as the name suggests, is one that does not flinch in any economic climate, whether inflationary or deflationary.

In Dalio's opinion, the market has four seasons that can affect asset value:

  • Higher than expected inflation (rising prices)

  • Lower than expected inflation (or deflation)

  • Higher than expected economic growth

  • Lower than expected economic growth

According to Dalio's model, a well-balanced portfolio with all assets in appropriate proportions can weather all market seasons.

Pure Alpha Fund

A risk factor approach to stock market investing was popularized by Dalio's hedge fund Bridgewater Associates as a way of earning high returns with limited risk.

In spite of its rivals' heavy losses, Bridgewater Associates avoided the 2008 market implosion due to this strategy. In 2008, Pure Alpha grew by 9.5%.

Using computer models and algorithms, Pure Alpha invests in stocks, bonds, commodities, and currencies by anticipating macroeconomic trends. To filter securities applicable to its algorithms, the Pure Alpha strategy relies on the Smart Beta system's data ranking.

Portfolios are built by collecting algorithms with the lowest correlations. Using a market-neutral algorithm, Pure Alpha builds a portfolio that generates income regardless of market conditions. Under Pure Alpha investment method, holding periods vary from several days to several months for each security, unlike short-term algorithm trading.

Ray Dalio's Advice for Beginners

Be your own judge, but be open to others' input as well

A successful trader is one who is independent of the consensus and bets against it and wins. This is due to the consensus view being baked into the price. Being painfully wrong a lot is an inevitable part of life, so learning how to do it well is crucial.

Daolio's painful mistakes changed his perspective from “I know I am right” to “How do I know I am right?” It helped balance his audacity by giving him a sense of humility.

As he knew he could be painfully wrong and was curious why other smart people saw things differently, he began to see things from others' perspectives as well. By doing so, he was able to see things from a much wider perspective than he could have if he had only seen them from his own perspective.

The more people's inputs he weighed, the more likely he was to be right.

A different approach to goal-setting

Money has no intrinsic value - its value comes from what it can purchase, and money cannot buy everything. Start by identifying your real goals, and then work backwards to determine what you must do to achieve them.

It's important to weigh the things you really want based upon their relative values.

Understanding when to place a bet and when not to place one

Betting is not only about knowing what bets to place, but knowing when not to place them. You can significantly improve your track record by placing only bets you feel have a high probability of winning.

It is better to make choices that have more cons than pros, not those with no cons.

No matter what your current probability of being right is, any increase in that probability is valuable. Often, people make decisions if their odds of being right exceed 50%. The realization that they would be so much better off only comes after they have increased their chances even further. The more information you get, the better your chance of being right. Despite your confidence that you’re right about something, it's always a good idea to stress-test it.

Imperfection is a virtue

A rule of 80/20 suggests that you can get 80% of the value out of something if you put 20% of your effort or information into it. Additionally, you may have to exert 80% of your efforts to get 20% of the value.

After you have gained most of the information you need to make a good decision, this rule will help you avoid getting bogged down in unnecessary detail.

The pursuit of perfection leads perfectionists to focus too much attention on little differences at the margins rather than on what's important. When making a decision, there are usually just 5 or 10 important factors to consider. Understanding these is crucial.

Take notes

As Dalio progressed in his career, he learned the importance of reflecting on and writing down the criteria he used in making decisions.

We all have weaknesses, which are usually revealed by our patterns of mistakes. Success depends on knowing what your weaknesses are and working on them diligently. The first step to resolving your mistakes is to write them down and connect the dots.

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Taking a look at diversification

Dalio's portfolio quality (measured by return relative to risk) improved when he incrementally added investments with different correlations.

Combining 15 to 20 uncorrelated return streams would dramatically reduce his risks without reducing expected returns. All methods of making money are equally applicable to this principle, which he called the "Holy Grail of Investing." All businesses produce income streams, no matter what they are. It is better to have a few good uncorrelated return streams than to have just one, and to know how to combine them is even more effective than knowing how to choose them.

By making a handful of good uncorrelated bets, which are balanced and leveraged well, Dalio learned principles that he uses in all aspects of his life.

Failure is part of life

When people make mistakes, they feel bad because they are focused on the outcome and not on the evolutionary process in which mistakes play a crucial role. Learning from your mistakes will save you from making thousands of similar ones in the future.

People who succeed are only successful at what you're paying attention to. However, it’s likely that they're also failing at many other things.

Those who fail well are the people Dalio respects most. In fact, he respects them even more than those who succeed.

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Summary

Is there a secret to Ray Dalio's wealth? In line with most hedge funds, he charges a management fee as well as a performance fee. The fund has performed spectacularly, resulting in substantial performance fees. In addition, Ray Dalio also invests in his own funds.

Dalio’s success can be seen in his small failures. In the period 1991-2005, Bridgewater Associates lost money only three times, and the worst loss was only 4%.

How did he manage to do it? It takes a lot of learning to master Dalio's macro approach. Luckily, his economic theories are easy to understand, and he is outspoken about inflation and the economy.

Anyone who learns from him and staunchly follows his advice will put themselves on a path to success and fortune. But the key is to think for yourself (but keep others’ input in mind as wel), diversify, accept failure, and know when and when not to invest in an asset.

FAQs

What is Ray Dalio famous for?

Ray Dalio founded Bridgewater Associates, the world's biggest hedge fund, which manages $154 billion.

What stocks did Ray Dalio buy?

Dalio’s top stocks and ETFs are Procter & Gamble Co. (PG), Johnson & Johnson (JNJ), iShares Core MSCI Emerging Markets ETF (IEMG), SPDR S&P 500 ETF Trust (SPY), Coca-Cola Co. (KO), iShares Core S&P 500 ETF (IVV), and Vanguard Emerging Markets Stock Index Fund ETF (VWO).

What's Ray Dalio holy grail of investing?

In his 2017 book Principles, Ray Dalio coined the term "Holy Grail of Investing": diversification. Investing in a good, uncorrelated return stream can reduce your risks and increase your returns without reducing your expected returns, according to this principle.

What does Ray Dalio say to invest in?

"Real-return assets" are the best investments today, according to Dalio, rather than stocks or cash.

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