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Hey everyone! Today I’m gonna talk about asset allocation and creating a well diversified portfolio. Why is this important? Let me remind you of the first rule of investing, according to Warren Buffett: Don’t lose your money! And let me remind you of the second rule of investing: Never forget rule number 1!
But when we talk about diversification, Buffett is not the right person to quote, we will have to look at the advice of the so-called Leonardo Davinci of investing, whose biggest genius is the application of the rule of investing I mentioned a few seconds ago. Yes, your guess is right, I’m talking about Ray Dalio, the founder of Bridgewater associations the world’s largest hedge fund, with nearly $130 billion under its watch.
This amount is astonishing, considering most “big” hedge funds these days hover around $30 billion. Ray is more than just a money manager. He is a master of markets and risk. There is a reason why the world’s biggest players, from the largest pension funds to the sovereign wealth funds of foreign countries, invest with Ray.
Let’s sit at the feet of this economic master and let him take us on a journey! [intro] First, I want to talk about the All Weather strategy, revealed in this book: Money Master the game. Let us hear it in essence from the author himself - Tony Robbins. [interview with Tony Robbins] So what’s the secret sausse of Ray Dalio?
Let’s break it down in numbers. First, we need 30% in stocks (for instance, the S&P 500 or other indexes for further diversification). Well, that might sound low to you, but remember, stocks are three times more risky than bonds. Then you need long-term government bonds. Fifteen percent in intermediate term [seven- to-ten-year Treasuries] and forty percent in long term bonds [20- to 25-year Treasuries].
Because this counters the volatility of the stocks. Then we can round out the portfolio with 7.5% in gold and 7.5% in commodities. This is piece of the portfolio that will do well with accelerated inflation. Because there are environments where rapid inflation can hurt both stocks and bonds. And the idea is to constantly rebalance the portfolio.
When any of your assets is performing well, you need to sell it and reinvest the profit into the other asset classes which have lost in value during the same period. So you basically sell when something has got expensive and buy from the component that has become cheaper. So this is the All weather strategy.
And you can read more in Tony Robbins’ book, I’ll put a link to it in the description below. But then we have the pandemic, this absolute Black swan event, we have all the money printing going around. We have zero interest rates. The monetary policy. And I asked myself, is this portfolio still actual?
How does it perform today? What has Ray Dalio to say about today’s situation? Would he do some updates? [Bridgewater: Ray Dalio] So, in essence, what Ray Dalio is telling us is that governments and central banks are currently influencing the markets more than ever. Monetary policy is a major driver of the markets.
And with their impact the price of most asset classes will go up faster than their expected returns and it might take a decade for things to recover, or the so-called lost decade may be in front of us. But he still thinks that having a well balanced portfolio is more important than ever. What is your thought on this?
Let me know it by writing a comment! And smash the like button, as the YouTube algorithm really loves it. One other important takeaway from Ray’s interview is that it’s a zero sum game. And money never disappears, wealth is not getting destroyed; it just moves from one asset class, from one economy, from one currency to another.
So we must be careful and observe where the money goes during and after this crisis. So what is the takeaway from all this information? How should we design our portfolio? Let’s take a look at the bonds. [Bloomberg interview] The safe investment brings one percent in return. But is it reasonable to invest with 1 percent return, when the inflation rate eats your returns?
In opinion the answer is no. I prefer to invest in relatively safe P2P lending platforms with 6-7% return on investment. That said, my investment portfolio is definitely influenced by the All weather portfolio concept of Ray Dalio. But I’ve replaced some parts of it with other asset classes, because I’m living in Europe.
and instead of US bonds I’ve large part of my portfolio on the European peer to peer lending market. You can follow my monthly portfolio updates to track how my portfolio is settled and how the different parts of it are performing at the time. Thank you for watching! Smash the like button, subscribe if you`re new here! And comment below.
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