They do well in certain environments and poorly in others. Translation: all asset classes have environmental biases. Rather, by viewing the data through a prism of knowing the current economic environment, a balanced portfolio can be designed.ĭalio explains it best: "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. Once again the principle of reality comes into play as he does not try to predict deflation and inflation pressures. Knowing how to optimize your portfolio regardless of inflationary shifts is a key to consistent returns over time.
Inflation has a considerable impact on financial markets. Investors can diversify across and within asset classes, geography, currencies, markets, and even time.ĭalio's next primary investment rule is to balance your portfolio based on inflation risk. So, what the investor needs to do is have a balanced, structured portfolio - a portfolio that does well in different environments." "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. "I think the important thing here if I'm an investor is that the most important thing you can have is an excellent strategic asset allocation mix," Dalio says. Specifically, Dalio believes that it takes 15 uncorrelated investments to reduce the risk factor by 80%. Even with Dalio's massive research team he still does not know what the future holds, that is a reality! This reality forces the diversification rule to be critical for long-term investment success. Many investors do not see truth when choosing investments and become delusional about the worth of particular investments and their investment choosing ability.
In investing, the reality is that many of your investment choices are going to provide lackluster returns and even lose money. This principle teaches to always see the world for what it is and not what you wish it to be. His diversification strategy is based on the principle of reality. While diversifying your investments may sound obvious, Dalio's take on the subject is specific and unique. Having studied how Dalio was able to pull off such an incredible growth story, I have distilled Dalio's investment philosophy into five rules that every investor can apply.
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