Ray Dalio’s Law of Smart Investing – And Why It Works
Bridgewater Associates founder and legendary investor Ray Dalio has navigated many economic cycles while building a multi-billion dollar portfolio. One of his simple rules for reducing the risk of loss is to diversify your portfolio.
Getting this rule right can lead to steady growth and less volatility in your retirement years. Here’s what you need to know.
Ray Dalio’s Law explained
Dalio says you shouldn’t put all your eggs in one basket. That means you can’t get completely into one stock or sector, even if you believe you’re about to take off. The stock market goes through cycles of ups and downs, but it is impossible to reliably predict every rally and downturn. That means putting all your eggs in one basket can risk you pulling out when the market is down.
Dalio’s systematic diversification helps him spread his money across sectors and helps him thrive in all areas instead of adopting a boom-or-bust portfolio.
Gold Investor Kit Gift: Sign up with American Hartford Gold today and get a free investor kit, plus up to $20,000 in free silver on qualifying purchases.
Why diversity works
If one area of the financial market such as stocks is underperforming, another asset such as gold may hold up. The same goes for sectors and sizes of stocks within the stock market: Consumer and industrial fundamentals can hold steady or even move higher if technology stocks suffer.
Diversification allows you to take advantage of that, ensuring that your portfolio is spread over a variety of assets so that when one area is underperforming another well-managed area or outperformance. Ideally, your entire portfolio doesn’t work at the same time.
A diversified portfolio may underperform during economic booms compared to a portfolio focused on growth stocks, but that same portfolio is unlikely to decline as much during a market correction.
Free Trades: Check out Robinhood’s online trading platform and get your first trade with it
How to diversify your portfolio
To diversify, create exposure to a mix of goods of different types, sizes and sectors. Young, long-term investors may want to have more stock exposure than older investors nearing retirement who want to take risk off the table. You also want to make sure you have some cash available so you’re never forced to sell during a downturn to meet your needs.
Low-cost index funds are one way to easily gain exposure to a wide range of assets. For example, an exchange-traded fund (ETF) that tracks the S&P 500 will give you exposure to the top 500 companies in the US.
Extra Cash: Get up to $1,000 in stocks when you fund a new active SoFi investment account
Re-evaluate regularly – such as quarterly or annually – to ensure proper diversification. Rebalancing involves buying and selling assets to get back to your ideal asset allocation, such as 70% stocks and 30% bonds. Your asset allocation should be consistent with your goals, time horizon and risk tolerance.
Diversification can be especially important for investors nearing retirement, as they don’t have much time to recover from market downturns.
