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3 Investing Tips From Investing Legend Ray Dalio That You Shouldn't Ignore

By Catherine Brock - May 17, 2020 at 12:30PM

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This billionaire hedge fund manager has some advice about avoiding the stock market's pitfalls.

Ray Dalio started investing at age 12, when he spent $300 to acquire 60 shares of Northeast Airlines. In short order, the airline merged with another, and Dalio tripled his money. Today, Dalio is a billionaire hedge fund manager and co-chief investment officer and founder of Bridgewater Associates.

Dalio is a realist, and he's vocal about the challenges amateur investors face. As he sees it, the markets are crowded and competitive, and fraught with uncertainty, which can lure individual investors into making exactly the wrong moves. Don't take that to mean you shouldn't be in the market, however. It's quite the opposite, since Dalio has also said, "Cash is almost always the worst investment."

Man analyzing stocks

Image source: Getty Images.

The cold, hard truth is that most people have to put their money in the stock market. Investing may be complex and laden with risk, but it's nearly impossible for an individual to amass enough wealth for retirement without investing. So, what's the amateur investor to do? Dalio has some advice that's straightforward enough for anyone to follow.

1. Spread out the risk, above all else

Diversifying well is the most important thing you need to do in order to invest well.

-- Ray Dalio

Diversification spreads out your risk across multiple assets. It's the practical application of not putting all your eggs in one basket. And the benefits are clear: If you own only a few positions, a single stock or fund gone south can wipe you out financially. But if you own 20 or more different investments, one failure has a much lower impact on your overall wealth.

So diversification reduces your dependence on the performance of any one security. And when it's done right, diversification also protects you from the extremes of market volatility. To get that benefit, you have to hold securities that behave differently under similar market conditions: stocks versus bonds, for example. Stocks appreciate in value over time, while bonds generate stable income. A portfolio with both will blend growth with stability, which is exactly what you want as an investor.

Dalio recommends diversifying across industries, asset classes, and even currencies. You could do this by hand-picking a broad selection of securities. But it's easier and more efficient to invest in a handful of low-cost mutual funds, with each fund representing a specific asset class or geography.

2. The past doesn't guarantee future performance

Don't make the mistake of thinking those things that have gone up are better, rather than more expensive.

-- Dalio

The price of any investment should represent that investment's ability to create value in the future. Unfortunately, the stock market doesn't always work that way. When investors get excited about a sector or company, stock prices rise. That investor excitement and the resulting price increase may or may not be accompanied by an improvement in underlying fundamentals.

Remember the dot-com bubble in the late 1990s? Investors went crazy for internet stocks, which drove up prices and, in turn, fueled more craziness. All that growth made it seem like anyone could get rich by investing in technology. But alas, the bubble burst in 2000 when it became clear that so many of those tech stocks were grossly overpriced.

Don't assume there is still upside in stocks that have recently performed well. That performance may be an indication that the stock is merely overpriced, which means you've already missed the opportunity.

3. Ignore your gut

Do the opposite of what your instincts are.

-- Dalio

Even seasoned investors grapple with this concept. Our instincts are to follow trends, not buck them. The urge to sell when the market is in free fall, for example, can be overwhelming. But it's precisely that urge that lures you into selling at or near the market bottom. And then, because you're spooked, you stay out of the market until you see signs of recovery, which means you'll be watching those early recovery gains instead of benefiting from them.

As an investor, you have two options for timing the market. The simple approach is to ignore all market volatility and hold your positions for the long haul. Alternatively, you can operate against the grain -- buying low when everyone else is selling, and selling high when everyone else is buying.

The one approach you cannot take, though, is that of a trend follower. Do that and you'll end up buying high and selling low, every time.

Respect the risk

Dalio, who notched investment wins before he could drive a car, deeply respects the inherent risks of stock market investing. He recommends managing that risk through diversification, along with a strong dose of independent thinking.

That independent thinking prevents you from the worst of investing mistakes, which happen when you jump on bandwagons, follow trends, or let market cycles pressure you into trading decisions.

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