Billionaire Ray Dalio’s simplified investment portfolio

“You should have a strategic asset allocation mix that assumes that you don’t know what the future is going to hold” – Ray Dalio

There are some large investors who have consistently managed to “beat the market” and one of the most successful ones is a man called Ray Dalio. He has quite recently explained how he has managed so well for such a long time and in an interview with Tony Robbins he explained how and in a simplified manner also how it can be done by the average investor (you and me!). Of course there are no guarantees it will work in the future, but looking back it has worked extremely well and Tony Robbins decided to help make it accessible (see the end of the post) by sharing the shortcut in his book Money Master The Game (recommended reading).

The very interesting part with his portfolio is that it has been consistent over time with only relatively small losses compared to what happens every now and then in the equity market.

Key thing (again) is diversification, so spreading the risk over different assets (investments) and below I will explain what and how that is done in a simplistic manner.

If the strategy continues to work even remotely as good as it has, it will be pretty stress-free and very limited time will be spent on managing your assets which are invested according to his principles. This sounds great to me and most others who want to spend their time on other things they enjoy more.

Who Ray Dalio is and why you should listen to this advice?

He is worth approximately 17 BILLION USD
He runs (and started) the biggest hedge fund in the world, which has 160 BILLION USD under management
To become an investor, you had to have 5 BILLION USD and invest a minimum of 100 Million USD with him (but that was when he was still taking money which he isn’t doing any longer…)
The 30-year average annualized back-tested (not based on Ray Dalio’s actual portfolio but a simplified version) shows returns of 9.72% from 1984 through 2013 with the largest annual loss of just below 4% and it made money 86% of the time!!

His strategy and how it works

The key point with Ray Dalio’s famous All Weather Fund (should perform in any and every market scenario, hence the name) has been diversification (spreading the risk) amongst different asset classes with low correlation (meaning they are not expected to move in the same direction). Equities tend to be the most volatile asset class over time and if you have a large part of your portfolio in equities and just a small one in bonds (usually seen as a safer asset), you will experience pretty large swings in your portfolio.

Mr Dalio’s most important point (wholy grail) is to divide your assets amongst different types of assets to lower the risk (volatility/swings) and make your returns over time more stable. Based on Ray’s extensive experience he has found that the below weights are the best ones over time (in his own clients’ portfolios they use leverage and change assets more frequently but this is a simplified version for you and me) as stated on their website:

For more information on his strategy, have a look at this extract (a bit dated but still), just click here.

How you can get a similar exposure at a low cost!

If you believe that Ray Dalio’s expertise could help you when investing, the below is one way you could put together a fund to mimic his weights to the different asset classes, using exchange-traded funds (ETFs). This is by no means any recommendation but a way to simplify how to do it if one believed in Dalio’s way of investing. The following list of ETFs could be used and they can be purchased via your online broker (if you don’t have one yet, it’s easy to open an account, just make sure you choose one that is cost effective and suits your needs!).

Buying these ETFs yourself via your online broker would cost you around 150 USD in management fees per annum on $100,000 invested. This is ONLY 0,15% of your asset value and should be compared to the average balanced fund in the US, which would cost you approximately 1,200 USD per year!! That is a massive saving per year AND because of that you will have more money invested which can grow over time so it’s a double win!!

Perhaps history won’t repeat itself, even though Ray Dalio has showed stellar performance to limited risk over decades. Still, his way of investing and lowering the risk over time by investing in assets that tend to move in different directions in different market scenarios will probably continue being a sensible way to invest. Something that might change is of course which kinds of assets that will work best in the future, since how they move in relation to each other can change.

Key takeaways

Spread your risks as in general (and historically) stocks tend to move a lot more than bonds and hence will have a much bigger impact on the value of your portfolio (if you are heavily weighted towards stocks). This is one of the main reasons why you should be wary of the composition of your portfolio. Even if you feel that you have a bit of bonds, the portion might be too small to really make a difference when the stock markets fall, again because stocks tend to move a lot more than bonds!

In the current environment I would personally be a bit cautious towards the equity market, especially if you have less than 10 years of experience as you might not know how you will feel or react when your portfolio is down more than 50% (which is even likely if you only invest in stocks). It happens, not very often but it does. Your allocation should therefore be such that you can stomach the potential movements occurring form time to time. Maybe today is a good day to have a look at the risk you are currently taking based on what your portfolio looks like!

One key concern for me regarding this portfolio is the high allocation to bonds as interest rates have over the last 30 years (roughly) been high and just gotten lower and lower (so the return of those investments have continued to climb higher), which has been great for the All Weather Fund’s performance.

Currently most rates are at all time low and when they start to increase (some have already started, like in the US) bonds will fall in value and the coupons being paid out will not be able to offset that fall. Even if the central banks don’t increase interest rates, the risk premium might increase which will have the same impact (prices falling). Historically when interest rates have fallen, bond prices have risen (and you still get your coupons on top of that). Because of the extremely low interest rates, this is almost guaranteed not to continue (rates can’t go much lower..).

Remember that when/if you are spreading your investment towards different assets, you should of course not only compare your returns with the equity market as you will most likely only have a small exposure to equities (so when they rally, your portfolio will not move as much)! I often see people comparing their portfolio with this or that index, even if their portfolio is completely different! What you really want is a great return based on the risk you have taken and over the long run, maybe this alternative of a portfolio might give you just that. It for sure has worked extremely well for Ray Dalio.

Invest for the long term, focus your time and energy on what you do best to add value to others and stick to your strategy of investing so that it becomes passive on your behalf.