Legendary investor Ray Dalio advises that right now, diversification is the strategy in investment. This means that investors shouldn’t own bonds or cash right now. At the Bloomberg New Economy forum last week, Dalio said that things are different now. Current policies of the central banks change the economics of borrowing. These policies include their ability to print money and buy financial assets.
Dalio Advises that ‘Cash is Trash’
Dalio is the founder of investment firm Bridgewater Associates, which manages $160 billion in investments. Previously, Dalio gave the same advice in 2018. He said that those who prefer to hold cash will “feel pretty stupid” while they miss out on the market’s runup. Now, he’s saying the same thing again.
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In fact, Dalio thinks investors shouldn’t miss out while the market remains strong. Investors should let go of cash and diversify portfolios. “In my opinion, don’t own bonds, and don’t own cash because they’re producing a lot of debt and producing a lot of money to fund it, and so that’s changing the nature of capital flows,” added the investor. Last January, Dalio declared that “cash is trash,” and that investors should diversify between currencies, asset classes, and countries. He said this is the best way in retaining opportunities while reducing risk.
Stay Out of Bonds
In addition, Dalio advised investors to stay out of bonds. Interest rates stay at historic lows, leading investors to question the wisdom of the 60/40 portfolio. JPMorgan Asset Management reported that a portfolio of 60% global equities and 40% bonds generated gains of 5.45% last year. For the next 10-15 years, the projection for the same 60/40 is now seen at 4.2%.
Also, Dalio advises that diversification shouldn’t be the only guide for investor portfolios right now. Instead, liquidity and differentiation should also play major considerations. Liquidity allows investor flexibility to change as “circumstances change,” he said. At the same time, investors need to differentiate between companies and countries that will prosper in this new environment and those prone to bankruptcy and disorder. By disorder, it refers to an entity’s income relative to its expenses, and its assets to liabilities. Meanwhile, differentiation means the “radical differences in financial consequences,” he added.
Gold Versus Bitcoin
In addition, Dalio also advocates keeping some gold. He advises investors to balance, “I think you have to have a certain amount of gold in your portfolio,” Dalio said. He reiterated that the precious metal will be a top investment in the years to come.
While Dalio endorsed gold, he warned against the fast-rising bitcoin. He finds cryptocurrency as a more speculative investment. “There’s two purposes of money, a medium of exchange and a store hold of wealth, and bitcoin is not effective in either of those cases now,” he said.
Top 5% Stocks In Bubble Territory
Last Monday, Dalio broke out his bubble indicator and said that 5% of the top 100 US companies have prices set at unsustainable levels. “I’ve seen a lot of bubbles in my time and I have studied even more in history,” he posted on LinkedIn. Also, he said his proprietary system tracks six measures including prices relative to traditional measures, new buyers, and leverage.
The billionaire investor said his overall “bubble gauge” for the US market is in the 77th percentile. “This market action is reminiscent of the ‘Nifty Fifty’ in the early 1970s and the dot-com bubble stocks in the late 1990s, both of which I remember well. It scores similarly to the bubble stocks of the late 1920s, which I can’t remember because I wasn’t alive then,” he wrote.
Next Five Years
While Dalio doesn’t think there will be an economic downturn in 2021, he said investors should look beyond last year’s elections. “If you get a downturn – and there’s a good probability in the next [presidential] term you’ll get a downturn – and you don’t have an effective monetary policy and you have people at each other’s throats, I’m worried about that,” Dalio said. “I would say there’s a 20% chance every year [of a downturn],” he added.
He believes the Federal Reserve can no longer stimulate the US economy the same way as before. In particular, he noted its powers to lower the interest rate. “You used to push a button and it would go up,” he said. But, if U.S. interest rates continue going down, while politics remain highly divisive, the economy may not bounce back as it did before. “We’re going to have larger deficits which we’re going to print money for. At a point in the future, we still are going to think about what’s a store holder of wealth. Because when you get negative-yielding bonds or something, we are approaching a limit that will be a paradigm shift,” he explained.
Watch the Bloomberg New Economy video where legendary investor Ray Dalio says: Don’t Own Bonds, Don’t Own Cash:
Do you agree with billionaire investor Ray Dalio for a more diverse portfolio instead of holding on to cash and bonds? Or, do you always subscribe to the “Cash is King” school of thought? Let us know what you think by commenting!