Gasoline prices are on the rise again. Inflation is too (thanks, in part, to rising gas prices). The Federal Reserve hasn't ruled out additional interest rate increases over the next several months. And the stock market's nice surge so far this year seems to have stalled out.
What should investors do?
Billionaire Ray Dalio offered his answer in response to the question last Thursday at the Milken Institute Asia Summit in Singapore. The successful hedge fund manager recommended four things for investors to do in today's volatile market -- and one thing to absolutely avoid.
Image source: Getty Images.
1. Focus on the right geographical markets
Dalio's first piece of advice on how investors should deploy capital is to focus on the right geographical markets. But which geographies are the best ones? It's pretty clear which areas of the world are hot right now and which aren't.
The Vanguard S&P 500 ETF owns the stocks of the 500 largest U.S. companies. The Vanguard FTSE Europe ETF owns European stocks. Four different iShares ETFs focus on the stocks of companies based in China, India, Japan, and Latin America.
This chart shows how these exchange-traded funds (ETFs) focusing on specific geographical regions have performed so far this year.
The western hemisphere is where investors have profited the most overall in 2023. U.S. and Latin American stocks have delivered much greater gains than stocks in most other parts of the world. However, Japanese stocks have also made an impressive comeback this year. While there's no guarantee these trends will continue, investors shouldn't ignore the clear momentum in the Americas and Japan.
2. Diversify your investments
Diversification is sometimes referred to as "the only free lunch in investing." Dalio didn't go that far in his comments last week at the Milken Institute Asia Summit. However, he's in full agreement that investors should build a diversified portfolio.
A portfolio that's well-diversified will include different asset types. The stocks owned should also be diversified based on geography (with Dalio's first piece of advice kept firmly in mind), industry, and market cap.
3. Watch out for disruptions
Dalio also believes that it's important for investors to watch out for disruptions. In particular, he thinks that disruptive technologies can play a critical role in driving future returns.
Where is Dalio's hedge fund, Bridgewater Associates, invested the most? Several of its top holdings are blue chip stocks that you might not necessarily view as disruptive. However, Bridgewater has significant stakes in Google parent Alphabet (GOOG 9.96%) (GOOGL 10.22%), Meta Platforms (META 0.43%), and Intuitive Surgical (ISRG 0.59%).
Some investors seemed to dismiss Alphabet after OpenAI's ChatGPT generative AI app took the world by storm. But the company roared back with its own artificial intelligence (AI) innovations and is working on a generative AI model that's reportedly more powerful than ChatGPT. Alphabet also ranks as a top leader in self-driving car technology and quantum computing.
Meta is another AI leader that's taking the open-source route with some of its technology. The company is also betting heavily on virtual reality and the metaverse.
Intuitive Surgical pioneered the field of robot surgical systems. The company remains the 800-pound gorilla in that market. It should be able to continue to grow as aging populations drive demand for more surgical procedures and technological advancements expand the types of procedures that can be performed with robotic assistance.
4. Invest in asset classes creating new technologies
Dalio's fourth recommendation builds on his previous one. He thinks that investors should invest primarily in asset classes that are creating new technologies.
There are only four major types of asset classes:
- Cash
- Equities (stocks)
- Fixed income (bonds)
- Alternative investments (including real estate, gold, silver, and cryptocurrency)
It's pretty clear which one of these achieves Dalio's objective. Only equities represent businesses that are actually creating new disruptive technologies. Unsurprisingly, Dalio's hedge fund has most of its money invested in stocks. However, he told the audience last week, "Temporarily, right now, cash, I think, is good."
1 thing to avoid
So what does Dalio think investors should avoid? Bonds. When asked about how he would personally invest in today's environment, he replied, "I don't want to own debt, you know, bonds and those kinds of things."
But couldn't interest rates fall in the not-too-distant future and cause bond prices to rise? Yes. However, Dalio is looking at things from a broader perspective, especially at the issue of rising global debt. He stated, "I personally believe that the bonds longer term are not a good investment."
