Ray Dalio's Trading Rules for Success
The American Billionaire Investor
Raymond Dalio is an American billionaire investor, hedge fund manager, and philanthropist. Most people know Dalio as the founder of the investment firm Bridgewater Associates, one of the world's largest hedge funds with over 124 billion dollars AUM. He's also the author of the renown book "principles" which discusses many life lessons and decisions Dalio has experienced and passed on.
Rule 1. Diversification
There's mixed opinions when it comes to diversification, some people don't like it, some love it and some think it's an integral part of an investors portfolio. So, how does Dalio approach diversity?
His diversification strategy is based on the principle of reality. This principle teaches to always see the world for what it is and not what you wish it to be. So, never wishing for certain scenarios to happen and always objectively being in the now.
In investing, the reality is that many of your investment choices, especially if you're uneducated in the subject will return subpar returns or even cause you to lose money. Many investors do not see truth when choosing investments and become delusional about the worth of particular investments and their investment choosing ability.
Putting it into perspective Dalio controls a large research team in his fund to analyse economies, equity markets etc. Even then he does not know what the future will hold, that's the reality of it. This forces diversification to be a key component in his approach towards the markets and to achieve long term investing success.
Specifically, Dalio believes that it takes 15 uncorrelated investments to reduce the risk factor by 80%.
What the investor needs to do is have a balanced, structured portfolio, a portfolio that does well in different environments.
Investors can diversify across and within asset classes, geography, currencies, markets, and even time.
So, what we can take away from this as forex traders is not funneling all your ideas based on one currency idea. What I mean by this is If you’re limiting yourself to one trade at a time, not only are you concentrating your risk on that trade but you’re not allowing yourself to diverse your overall portfolio to reduce the risk factor as Dalio mentions.
2. Understand Inflation Risk
Dalio's next primary investment rule is to balance your portfolio based on inflation risk. As you may already know inflation is a huge factor in the financial markets. Knowing how to optimize your portfolio regardless of the inflationary environment is important.
Interestingly, Dalio does not try to predict deflation and inflation pressures. What he does instead is looks at the data and viewpoint of knowing the current economic environment (recession, deleveraging...) and only then can he decide on what should be within his portfolio.
Bonds will perform best during times of dis-inflationary recession, stocks will perform best during periods of growth, and cash will be the most attractive when money is tight. All asset classes have environmental biases. They do well in certain environments and poorly in others.
Basically, as forex traders you want to understand what’s driving inflation, where’s it tending towards and how it’s going to affect the currency. Which is all covered in our Academy if that is of your interest.
3. Learn what moves the Interest Rates
It all comes down to interest rates. As an investor, all you're doing is putting up a lump-sum payment for a future cash flow….
The main thing you need to ask yourself is when is the interest rate structure going to change and why. That's the question to be worried about. "He who lives by the crystal ball will eat shattered glass." Meaning, trying to predict interest rates is a dangerous game, instead you should be looking towards understanding the structure of interest rates and why they move which gives you a better understanding of the overall picture.
