Ray Dalio Portfolio: How does He Allocate his Money & Why?

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Ray Dalio Portfolio

The Ray Dalio Portfolio is an excellent tool for traders and investors to design their own portfolios. Why so? Because this is the portfolio that enables you to hit success in any market conditions – be it an uptrend, downtrend, sideways, or whatever. And most importantly, this portfolio perfectly lives up to the standard if we look at its historical performance. 

The portfolio of a trader or investor is the key to success. However, it’s never an easy task to build a portfolio that guarantees positive returns irrespective of market conditions. That said, it is quite astonishing to know about the Ray Dalio Portfolio. Do you want to know more about this portfolio? If yes, then you are on the right platform. Because we are going to discuss this portfolio, its origin, and everything else in today’s post. So, stay tuned for numerous good things coming your way.

Who is Ray Dalio?

What he does

Ray Dalio is the mastermind behind the world’s famous Ray Dalio Portfolio. He is the founder of Bridgewater Associates. The firm is the world’s largest hedge fund according to Forbes. Bridgewater is also widely popular for its Pure Alpha fund. This fund holds approximately $40 billion. So, what are the reasons behind such a magnanimous success of Bridgewater Associates? Undoubtedly, it is the genius mind of Ray Dalio. 

Ray Dalio belongs to a working-class Italian-American family. He had a relatively modest upbringing and worked as a golf caddy from a very young age. Afterward, he started his professional career on the New York Stock Exchange. Dalio soon realized that only working on the floor of the stock exchange won’t help him achieve bigger things. Therefore, he established Bridgewater Associates in 1975 and his first office was his Manhattan apartment. Later on, the entire world witnessed his skills and efficiency as a hedge fund manager. His firm became the largest hedge fund within the time span of 30 years. Now, Bridgewater Associates owns net assets of more than $160 billion. This is nothing short of a mesmerizing spectacle. 

Book & performance

The prediction of the 2008 financial crisis is also at Dalio’s disposal. He correctly predicted in 2007 that the boom in the housing and lending industry would face catastrophic downfalls. He also predicted that many large banks in the world would end up near insolvency. Both his predictions turned out to be true and 2008 proved to be a disastrous year for those businesses. Moreover, his own firms rose in value when most of his competitors faced huge losses. This all proves the intellect and geniuses of Ray Dalio. 

Ray Dalio revealed his portfolio in an interview with Tony Robbins. Tony Robbins is a life coach and a motivational speaker. He published an interview with Dalio in his book Money Master the Game: 7 Simple Steps to Financial Freedom. Robbins says about the Ray Dalio Portfolio that it “stands the test of time.” 

Let’s discuss Ray Dalio Portfolio in detail now and see how Dalio allocates assets in his portfolio. 

What is in the Ray Dalio Portfolio? 

The Ray Dalio Portfolio, also known as All Weather Portfolio, is a very diverse one. Dalio allocates assets in the following proportion. 

  1. Long-term bonds = 40%
  2. Stocks = 30%
  3. Intermediate-term bonds = 15%
  4. Gold = 7.5%
  5. Commodities = 7.5%

Why does Dalio choose and divide those assets in such a way? The reason behind this selection of assets and their division in the portfolio is his theory on economic “seasons.” This theory states that four factors affect the value of assets. These four factors are;

  1. Inflation – Inflation refers to the increase in prices of goods and services whereas the decline in overall purchasing power of a currency. 
  2. Deflation – Deflation refers to the declining prices of goods and services. 
  3. Economic growth – Economic growth means when the economy grows and flourishes.
  4. Decreasing economic growth – Decreasing economic growth means when the economy stops growing and begins to shrink.

Furthermore, Dalio further explains how these factors lead us to four different economic seasons.

  1. Lower than expected inflation or deflation
  2. Higher than expected inflation
  3. Lower than expected growth of the economy
  4. Higher than expected growth of the economy 

So, these are four economic seasons according to Dalio. Therefore, he chooses assets for his portfolio that perform well during those seasons. The result is a portfolio that is well-diversified and empowers you to earn money consistently irrespective of inflation and economic growth. Moreover, it also keeps you financially secure even when markets decline significantly. 

The investment philosophy behind the Ray Dalio Portfolio

It is also important to understand the investment philosophy behind Ray Dalio Portfolio. It helps you to understand the logic behind his portfolio. The following are five major takeaways of Dalio’s investment philosophy. 

1. Investment opportunities, as well as risks, are brought forward by the economy

There are two types of investment perspectives – micro and macro. Micro perspective involves only technical analysis involving a specific company’s performance. Micro investors conduct company-specific technical research to make investment decisions. Conversely, the macro perspective refers to analyzing the overall economy and economic trends. Macro investors make investment decisions based on a macro perspective. And Ray Dalio is a macro investor. 

Dalio is a very good student of the economy. He understands the economy and economic trends better than experts. That is the reason that he accurately predicted the 2008 financial crisis. He not only saw the signs of trouble before the great recession but also adjusted his firm’s portfolio. As a result, Bridgewater Associates and Pure Alpha significantly grew while many other hedge funds lost a lot of value. So, what can we deduce from this perspective of his philosophy? We can deduce that looking at the overall economy is the way to do it.

2. Inflation is the enemy of investors

The Ray Dalio Portfolio allocates 7.5% to gold. Moreover, Bridgewater Associates holds gold funds as well as stocks of companies associated with gold mining and production. Why so? Because it enables investors to manage through times of higher inflation. According to his philosophy, inflation is one of the biggest threats to investors. Therefore, he proposes investors protect themselves against inflation by holding gold funds.

3. Combination of uncorrelated assets helps in managing risks

The Ray Dalio Portfolio is very diversified. Dalio suggests investors diversify their portfolios as much as possible. He suggests diversifying portfolios across 15 or even more financial instruments to reduce the risk-to-return ratio. Specifically, he suggests diversification across uncorrelated assets that don’t move together. Uncorrelated assets either move directly or inversely. 

For example, if you look at Bridgwater’s portfolio, it is well diversified across assets, currencies, and sectors. That means the firm has uncorrelated assets in its portfolio. 

4. Biased decisions lead to losses

Dalio also suggests that investors stop being biased. He advises not to choose between bullish and bearish directions. According to Dalio, directional biases lead to losses because investors hold positions for too long and miss profitable opportunities. He advises you to protect yourself from biases by diversifying your portfolios.

5. Rotate stock portfolio

Ray Dalio is an expert at rotating portfolios. He never buys and holds stocks for long. Dalio suggests taking profit on fully priced stocks and reinvesting. Again, if we look at Bridgwater’s portfolio, the firm reduced its position in S&P 500 and invested heavily in emerging markets. 

How is the Ray Dalio Portfolio a well-balanced portfolio? 

If we look at the Ray Dalio All Weather Portfolio, we can see that;

  • The portfolio allocates a major proportion to bonds. Long-term bonds with 40% and intermediate-term bonds with 15% give a total of 55% allocation. That means you can significantly minimize your risk while maximizing overall gains because bonds are less volatile. According to Dalio himself, a major portion of bonds enables you to counter the volatility associated with stocks. 
  • Stocks make up a relatively low proportion of the Ray Dalio portfolio. What does such a decision do? It also helps you minimize risk. How so? Because having less proportion of stocks means having a low proportion of assets with high volatility. 
  • Gold and commodities make up the remaining 15% of the portfolio. This is because gold and commodities generally do well during times of higher inflation. Therefore, they are in the portfolio to minimize risk while maximizing profits. 

These are the reasons that make us believe that Ray Dalio Portfolio is a well-balanced portfolio. 

How has the Ray Dalio Portfolio performed in the past?

Tony Robbins states in his book that the Ray Dalio Portfolio has offered approximately 10% annually. Moreover, it has made money 85% of the time during the last three decades. This is quite amazing. It isn’t only Robbins who testifies to the remarkable performance of the All Weather Portfolio. Moreover, Robbins tested the portfolio tracing back 30 years. He concludes that there would only be 4 years of losing out of 30 years. He also states that the maximum loss would only be 3.9%.

Many investors have tested the effectiveness of the portfolio. All of them have concluded that the portfolio makes money for you even during times of recession. So, we can say that the Ray Dalio portfolio has done wonderful work in the past and it will continue to yield the best results for investors. 

What does the All Weather Portfolio tell investors? 

After understanding the Ray Dalio Portfolio, its asset allocation, and the investment philosophy behind the portfolio, it’s easy to determine what this portfolio tells traders. 

  • Firstly, the portfolio tells traders to diversify their portfolios as much as possible. Dalio is a proponent of diversification and his firms’ portfolios are great sources to understand how to do it.
  • Secondly, the portfolio tells traders to diversify portfolios with uncorrelated assets. Uncorrelated assets don’t move in the same direction and are, therefore, good for diversification as well as risk management. 
  • Thirdly, the portfolio also tells traders to diversify portfolios according to the allocation criteria described in the portfolio. 
  • Fourthly, the portfolio also indicates how to invest in asset types that perform during all types of economic conditions. 

The pros and cons of the Ray Dalio Portfolio

Pros

  • Highly diversified portfolio
  • A portfolio with well-managed risks
  • Less volatility as compared to traditional portfolios
  • Fully tested portfolio with remarkable past performance

Cons

  • 55% allocation to bonds isn’t enticing when interest rates are high
  • Exposure to gold and commodities may underperform during long-term

The wrap-up

Ray Dalio is a highly successful and skilled hedge fund manager. His firms are also among the biggest hedge funds in the world with net assets of almost $160 billion. This is all because of his investing genius. He shared his famous Ray Dalio Portfolio in an interview with Tony Robbins. The Ray Dalio Portfolio is a well-diversified as well as a well-balanced portfolio. It contains different asset types that perform well during all economic conditions. This is what makes it one of the best portfolios for investors. 

However, it is important to note that we are just sharing information about the All Weather Portfolio. It isn’t investment advice. You should do your own analysis and research before making any investment decision.

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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