What Does the World’s Largest Hedge Fund Manager Say to Do Now?

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What Does the World’s Largest Hedge Fund Manager Say to Do Now?
By Hedge Funds [CC BY 3.0], via Wikimedia Commons

The goal is to build a portfolio that can weather any scenario, no matter what the factors are.

That’s the message Ray Dalio recently shared with Business Insider when explaining how he would tell investors to position their money and feel comfortable about what might happen in the economy and the markets. It’s worth noting that Dalio is founder and co-CIO of Bridgewater Associates, the world’s largest hedge fund … and his message makes us wonder if Dalio knows about our own 25/4 Portfolio.

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We are, of course, joking about that last comment, but we aren’t surprised to hear such sound advice.

We share the same investment philosophy with Ray: Be prepared for whatever the economy throws at you – inflation, deflation, growth, stagnancy, whatever.

As Dalio laid out, his all-weather portfolio would look something like this:

  • 30% stocks
  • 15% intermediate-term bonds (7- to 10-year Treasurys)
  • 40% long-term bonds (20- to 25-year Treasurys)
  • 5% gold
  • 5% commodities.

Our asset allocation in 25/4 largely broadly mimics that, with some slight tweaks. Our portfolio holds:

  • 25% stocks
  • 25% bonds
  • 25% gold/commodities
  • 25% cash

The differences are that we hold 10 percentage points more exposure to gold and commodities, since we are believers in gold as the purest form of financial insurance today that guards against inflation as well as geopolitical and central banking risks.

Second, we favor cash (or, in our case, ultra-short-term bonds) rather than long-term Treasurys. At this point in the interest-rate cycle, the greater risk is rising rates. Long-term bonds, in particular, feel the impacts of that more than any other segment of the bond market. In the near-term we can make a case for the Federal Reserve actually cutting rates again, which would benefit long-term bonds temporarily. But over the medium- to long-haul – which is what our 25/4 strategy focus on – interest rates will have to go higher, which means long-term bond prices will go lower.

But, those small points aside, the message of both portfolios mirrors one another: Be prepared! For anything.

Because anything can happen in this economy.

We very well could have a bout of inflation, depending on what comes on presidential policies vis-à-vis the economy (a benefit to gold and cash, and the particular kinds of bonds we own).

We could see gold rally strongly because of inflation, or because of a currency crisis in the Western world (a benefit to gold and cash).

We could see the economy pick up because of the right kinds of infrastructure spending and meaningful, smart tax reform (a benefit to stocks), or we could see the economy downshift for a variety of reasons (a benefit to bonds).

The reality, as we all know, is that no economic projection is ironclad, and no economic commentator has cornered the market on accuracy. Everyone who dares divine the economy future is working with the same cracked crystal ball. The best any of us can hope to do over the long-term is to be prepared for whatever situation might arise.

In Wealth & Prosperity,

Erika Nolan

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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