Ray Dalio’s Principles of Investing in a Changing World | WSJ News

Summary

In this interview, Ray Dalio discusses his book 'Principles for Dealing with the Changing World Order,' where he examines historical cycles and their impact on the present. He identifies unprecedented events like debt and money creation, internal conflicts, and the rise of China as a world power. Dalio stresses the importance of studying these patterns to make informed decisions in investing and life. He also touches on the role of gold as a diversifier in a portfolio, given the current economic and political uncertainties.

Takeaways

• 📚 Ray Dalio's book 'Principles for Dealing with the Changing World Order' offers a historical perspective on economic and social cycles, aiming to understand the present and predict the future.
• 🌐 Dalio identifies three unprecedented events in modern times: massive debt and money creation, internal conflicts and populism, and the rise of China as a rival to the United States' dominance.
• 💵 The study of reserve currency cycles, including their rises and declines, is crucial for understanding global economic shifts.
• 🌪️ Acts of nature, such as pandemics and climate change, have historically had significant impacts on societies, often more so than economic factors.
• 🛠️ Technological evolution is a major force shaping the world, with AI and automation set to redefine the future landscape.
• 📊 Dalio emphasizes the importance of data and indicators to objectively measure and anticipate trends in the economy and society.
• 🔮 By understanding historical patterns, one can make better investment decisions and prepare for various scenarios, much like anticipating the progression of a disease.
• 💼 For young professionals, Dalio advises prioritizing financial security and diversification to hedge against future uncertainties.
• 🌟 The power of diversification can significantly improve risk-adjusted returns, allowing investors to manage risk more effectively.
• ⚖️ In a changing world, the correlation between assets can shift, making it essential to regularly reassess and adjust investment strategies.

Q & A

What are the three significant things happening in our lifetimes that have never happened before according to Ray Dalio?

The three significant things happening now are the amount of debt and money creation, the internal conflict and populism, and the great power conflict between China and the United States.

How does Ray Dalio approach studying historical cycles to understand the present?

Ray Dalio studies historical cycles by looking at broad historical views, studying the rises and declines of reserve currencies, and analyzing the patterns and cause-effect relationships over a 500-year period.

What does Ray Dalio consider as the 'Fourth Force' that influences the world order?

The 'Fourth Force' Ray Dalio refers to is Acts of Nature, such as droughts, floods, and pandemics, which have historically killed more people and toppled more orders than the first three forces.

How does technology fit into Ray Dalio's analysis of the changing world order?

Technology is considered the 'Fifth Force' by Ray Dalio. He sees it as a giant force that will significantly influence the world order, especially as it evolves our understanding and capabilities.

What does Ray Dalio suggest for turning historical observations into actionable decisions?

Ray Dalio suggests converting historical observations into data and indicators to objectively see things, which then helps in forming decision rules or principles that guide actions.

What is the 'arc' Ray Dalio refers to when discussing the cycles of the world order?

The 'arc' Ray Dalio refers to is the progression through different stages of a cycle, starting from a new world order post-war, rebuilding, prosperity, increasing debt, internal and external conflicts, and eventually leading to a period of greater conflict.

How does Ray Dalio view the role of compromise in the current political climate?

Ray Dalio sees compromise as essential but notes that in the current polarized environment, the idea of compromise sounds weak and is often rejected, which creates threats to the system.

What advice does Ray Dalio give for someone starting their career with $10,000?

Ray Dalio advises first to immunize oneself against financial risks by securing essentials like housing and education. Then, consider real returns and the power of diversification in building a portfolio.

How does Ray Dalio explain the current rise in gold prices despite rising real interest rates?

Ray Dalio attributes the rise in gold prices to the large amounts of debt being created and the likely monetization of that debt. Gold serves as a hedge against conflict and the devaluation of currency.

What is Ray Dalio's perspective on the future of interest rates given the current economic conditions?

Ray Dalio does not foresee interest rates coming down due to the current economic conditions like low unemployment, high stock market, and chronically high inflation relative to the target.

How does Ray Dalio define diversification in the context of investing?

Ray Dalio defines diversification as finding optimally 15 good uncorrelated return streams to reduce risk by 80% without reducing expected returns, thus improving the risk-return ratio.

Outlines

00:00

🌟 Historical Cycles and Current Implications

The speaker begins by discussing his book 'Principles for Dealing with the Changing World Order,' which offers a broad historical perspective on cycles of history. He emphasizes the importance of understanding where we are in these cycles to predict future trends. As a global macro investor, he has observed unprecedented events in recent times, such as high levels of debt and money creation, internal conflict, and great power conflicts, particularly between China and the United States. These observations led him to study historical patterns, including the rise and fall of reserve currencies, and to identify five major forces shaping the world: debt, internal conflict, great power conflict, acts of nature, and technological evolution. The speaker outlines his approach to converting historical observations into data and indicators to inform his investment decisions and life choices.

05:01

🌐 The Post-War World Order and Its Evolution

In this segment, the speaker delves into the historical context of the world order established after World War II in 1945. He describes the typical cycle of war, rebuilding, and prosperity that follows a significant conflict. He notes the tendency for countries to accumulate debt and the challenges that arise as other nations rise to challenge the dominant power. The speaker discusses the increasing wealth and values gaps that characterize capitalist systems and how these contribute to internal and international conflicts. He also touches on the current state of affairs, highlighting the ongoing issues of debt, power conflicts, and the potential for future conflict due to a lack of experienced leadership and the inclination towards polarization.

10:02

💹 Economic Insights and Market Predictions

The speaker shifts focus to economic insights, particularly regarding interest rates. He explains the balance needed between satisfying creditors and not overburdening debtors, using real interest rates as a key measure. He forecasts that interest rates are unlikely to decrease given the current economic indicators, such as a strong stock market, low unemployment, and high inflation. The speaker also discusses the supply and demand dynamics of bonds, suggesting that the risks for interest rates are more likely to rise than fall. He then transitions to the topic of gold, explaining its rise as a hedge against debt monetization and great power conflicts. He suggests that gold can serve as a safe haven and an alternative investment in the current economic and political climate.

15:05

💼 Career Advice and Financial Strategies for the Future

In the final paragraph, the speaker offers career and financial advice, emphasizing the importance of understanding the purpose of money and how to use it to immunize against future uncertainties. He suggests considering how long one could sustain themselves without income as a measure of financial security. The speaker advocates for a diversified investment strategy, highlighting the power of diversification to reduce risk without sacrificing returns. He encourages thinking about real returns and the importance of having a well-diversified portfolio, especially in a changing world order where uncertainties are heightened. The speaker also addresses the challenges of finding truly uncorrelated assets in a world where many investments seem to move in tandem, suggesting a structural approach to diversification based on the underlying drivers of asset pricing.

Keywords

💡Historical Cycles

Historical cycles refer to the patterns of rise and fall that societies and economies experience over time. In the video, Ray Dalio discusses how studying these cycles can provide insights into current and future events. He mentions that by examining history, one can identify recurring themes such as debt accumulation, internal conflicts, and great power struggles, which are relevant to understanding the present world order.

💡Debt and Money Creation

Debt and money creation are economic activities that involve the issuance of new debt and the printing of new currency. The script highlights this as one of the three significant events happening in our lifetimes that have never happened before on such a scale. Dalio expresses concern over the large amounts of debt and the creation of money, which he sees as a major influence on the economy and a potential source of instability.

💡Internal Conflict

Internal conflict in the context of the video refers to the divisions and struggles within a country, often manifesting as political or social unrest. Dalio points out the rise of populism on both the left and right as a form of internal conflict that can threaten the stability of a system. This is seen as a significant challenge in the current world order, contributing to the complexity of managing a nation's affairs.

💡Great Power Conflict

Great power conflict denotes the tensions and rivalries between leading nations, particularly the United States and China as mentioned in the script. This concept is central to understanding the shifts in global power dynamics and the potential for geopolitical instability. Dalio's discussion of this conflict underscores the importance of studying history to anticipate and navigate the complexities of international relations.

💡Acts of Nature

Acts of nature, such as droughts, floods, and pandemics, are events that have historically caused significant disruptions and changes in the order of societies. In the video, Dalio includes these as a 'Fourth Force' that has a profound impact on the world, often more so than man-made conflicts. The reference to pandemics in the script is a timely reminder of the unpredictability and influence of natural events on human history.

💡Technology

Technology is highlighted as a driving force for change in the video, with a specific mention of artificial intelligence (AI). Dalio sees technology as a key influencer in the evolution of society, the economy, and the world order. The discussion implies that understanding and adapting to technological advancements is crucial for navigating the future, both in terms of investments and daily life decisions.

💡Investable Actions

Investable actions are the practical steps or strategies that can be taken based on an analysis of historical patterns and current events. Dalio talks about converting observations into data and indicators to inform decision-making. This concept is central to the video's theme of applying a deep understanding of historical cycles to make informed decisions in investment and life planning.

💡Diversification

Diversification in the context of the video refers to the strategy of spreading investments across various assets to manage risk and enhance returns. Dalio emphasizes the importance of diversification, suggesting that it can significantly improve the risk-return ratio of a portfolio. He also discusses the challenge of finding truly uncorrelated assets in a world where many investments tend to move in tandem.

💡Real Interest Rates

Real interest rates are the rates of interest an investor earns after allowing for inflation. In the video, Dalio discusses real interest rates in relation to bond investments, suggesting that they should be high enough to satisfy creditors without overly burdening debtors. This concept is integral to understanding financial markets and making sound investment decisions.

💡Portfolio Optimization

Portfolio optimization is the process of selecting the best mix of assets for an investment portfolio, given an investor's risk tolerance and return objectives. Dalio mentions this in the context of diversification and the role of gold as a potential hedge against economic uncertainties. The concept underscores the video's theme of strategic financial planning in a changing world order.

💡Immunization

Immunization in the financial context refers to采取措施 to protect one's financial health against potential risks or adverse events. Dalio advises thinking about the purpose of money in terms of securing one's future and immunizing against financial risks. This concept is crucial for understanding personal financial planning and the importance of creating a financial safety net.

Highlights

Ray Dalio discusses cycles in history and how they relate to the present moment, indicating a broad historical view is crucial for understanding the world's evolution.

Three unprecedented events in our lifetimes are highlighted: debt and money creation, internal conflict, and great power conflict between China and the United States.

The study of history reveals five big influences shaping the world, including Acts of Nature and technological evolution.

Dalio emphasizes the importance of studying patterns and cause-effect relationships over 500 years of history for practical decision-making.

The concept of 'arcs' in history is introduced, helping to understand the progression of events and make informed decisions.

Dalio explains the stages of a typical cycle, from the establishment of world order post-World War II to the current period of conflict and debt.

The role of capitalism in creating wealth and value gaps is discussed, contributing to internal and international conflicts.

Dalio outlines the determinants of interest rates, emphasizing the balance between satisfying creditors and not overburdening debtors.

The potential for monetization of debt is explored as a historical pattern in response to debt crises.

Gold is positioned as a diversifying asset, especially in times of conflict and questioning of fiat currencies.

Dalio advises on the importance of diversification in investment, reducing risk without compromising expected returns.

The concept of immunizing oneself against financial risks through smart investment is emphasized for long-term stability.

Dalio suggests considering the purpose of money and how to use it effectively to secure one's future and hedge against uncertainties.

The importance of understanding the changing world order and its impact on investment strategies is discussed.

Dalio addresses the challenge of finding uncorrelated assets for diversification in a world where markets seem increasingly correlated.

Advice for career starters includes creating financial security and considering real returns and diversification in investment strategies.

Transcripts

I want to start Ray,

you have a book Principles for dealing with the changing world order in

which you take a very broad historical view of a

very broad view of history and look at cycles and think about and study them and think about

how the world is evolving and has evolved.

And if I can sort of summarize it a little bit,

it's,

you're looking at the cycles and then you're looking at the present moment and you're seeing where we are in those cycles

and it doesn't look so good.

Is that,

is that,

is that it in a nutshell in a nutshell?

I will embellish on it a little bit.

Like I'm a very practical market guy who's got a global macro investor

who's got a place bets.

And in my life,

there have been a number of times where things came along that I never saw before and

they surprised me cost me money.

And then I realized that when I studied history,

that they happened many times in history repeatedly.

So there were three things that are happening now in our lifetimes that never happened

before.

And that led me to do the study and then I found that there are five big influences.

OK.

Uh The three things is the amount of debt and money creation,

the monetization of the debt and creations of huge amount of debts.

And I wanted to study the rises and declines of reserve currencies.

And all of that.

The second is the amount of internal conflict,

populism of the left populism of the right that is operating as a

conflict,

almost a threat to our system.

And number three was the great power conflict between particularly China and the United

States.

So in my whole lifetime,

the United States was a more dominant power and now we have a great power conflict.

So I needed to study those three things.

And then in studying that history,

I found out that the Fourth Force was Acts of

Nature,

droughts,

floods and pandemics killed more people and toppled more orders than the first

three.

So they're a big issue and of course,

climate is a very big issue,

cost wise what it means.

And number five,

of course,

is man's evolution in their understanding and particularly

technology.

And so we know that technology is going to be a giant force.

So I needed to study the patterns and or the histories and the cause effect relationships.

And by studying it over that 500 years,

um it,

it helped me a lot which by the way is not just in the book,

but also um I did a video that I think it's about 40 minutes called

The Changing World Order.

And if you want to see the video,

you can get it in a nutshell.

So help us understand how you think about taking five very,

very broad observations,

trends,

things that you see from history.

How do you take that and turn that into investable actions or,

or even forget about investing or take investing.

But then also take how you live your life,

how you think about your aspirations,

how you think about where you want your life to go,

where you want your children's life to go.

How do you take those big things and turn them into daily decisions?

The first thing I I need to do is uh is convert it into data

so that I can objectively see things.

So you'll see in the book,

for example,

there's relative education levels,

relative 18 measures that go back over the 500 year period

so that you can see the cause effect relationships.

I then take those and convert those into indicators.

And then um that then helps me in my decision rules.

I call those principles.

But in other words,

if this this and this is happening.

Um So for example,

um I wrote the book about three years ago and there's an arc there about

the cause effect relationships.

And since then,

there's the January 6th,

there's the internal political conflicts.

There are these conflicts,

you know,

blossoming and I understand them better because I know how to measure them and use them as

indicators such as economic warfare proceeds,

military warfare doesn't mean anything is predestined.

But when you can understand it,

like the progression of a disease or something,

it's important.

And I think that a lot of people make the mistake of seeing everything close up,

up close.

And so they don't see a lot of the big things that are happening.

They're focus on today's news,

today's developments and then they don't have that arc,

but there is an arc since over the last three years.

It's sort of playing out in the direction of that arc.

So I understand it better.

I use the indicators and then I make the decision.

So you see the arc and we can,

I think if I'm not over interpreting the arc as sort of in this,

this side of the arc,

not this side of the arc.

Well,

I,

I guess so let me,

I'll describe a,

I'll describe a little bit the,

the arc.

Um If you,

if you want.

Um OK,

there's,

there's a world Order and there's a um domestic order.

And so at the beginning,

this world order began in 1945.

The end of World War two,

there's usually AAA civil war or an external war that

changes who wins,

who loses and how the system works.

Then a new system,

a new order comes into power.

And then at that time,

um then there's a rebuilding and also nobody wants to go back to war and

there's a dominant power because whoever won,

nobody wants to fight the war.

And because there's a restructuring of,

of everything,

it begins an new that you eliminate the debts,

you will let you do that cleansing and then you rebuild and that's a period of

prosperity and so on and it goes on and people extrapolate that

prosperity,

they become comfortable with it.

But the issue is then as they do that,

they tend to require more debt for a variety of reasons.

And also um when the country becomes the world's reserve currency,

other countries want to save in that currency and that creates more debt and more

more.

Um uh and then also by its very nature,

capitalism creates very big income and wealth gaps.

So as it emerges,

you have these larger wealth,

uh larger and larger wealth gaps and you also have uh larger values

gaps.

So,

and that happens domestically internationally,

the same sort of thing happens in that countries rise.

In other words,

the gap in the control doesn't any longer remain dominant.

So there's competitors and countries and so on and they rise and we don't have a legal

system that resolves those disputes.

So because of that,

then you come into a period of greater conflict and and and later,

so you have the elements that I talked about in the beginning,

the debt element,

the capitalism element,

the splitting and between the various interests

and also the wealth and the values differences.

And then you have the great power conflict.

Now how that's produced,

what transpires is that after such a long

time after wars,

people,

the new generation never experienced war.

And then there is an inclination to have conflict because let's say

today,

I think we're in the environment that we see that you have to

pick a side and choose and then there's a conflict on that side.

The idea of compromise sounds weak.

It's one of those things what compromising,

what's essential to me,

I can't do that and that creates then threats in the system.

You're describing the current,

that's how you see the current moments.

That's where you see us right now in Yes.

Right.

There are irreconcilable differences.

We're now talking about the political part of that.

Right.

Number two is what I'm referring to.

We also number one,

the increasing debt loads,

the increasing power conflicts.

So all of those things are kind of on the they all relate to each other.

Right.

Right.

So,

so you have the increasing debt and then the question is,

can you cut spending or do you monetize the debt?

And OK,

so think about how we're going to deal with the debt issue in the future and the

political parts of that and that has an influence of how you

obey or are you going to monetize the debt?

I can't believe that.

I mean,

I'm a journalist,

I'm a professional skeptic,

but can I take the optimistic side for a moment?

And there have been a lot of predictions that the US would

decline and the US would lose its reserve currency status and the Euro would take over and China would become the

world's largest economy.

And the US was on a sort of inexorable decline and none of that has happened.

I'm not,

I'm just describing what is and the cause effect,

relationships,

what we do now determines what will happen.

You don't think it's baked into a cycle of history that inevitably we're going to have some

crash or some big.

No,

I think that the whole,

it all comes down to how people deal with each other.

OK?

It all comes down.

We have more resources than we've ever had in the world.

We have uh more of almost anything that we have and how we

deal with each other,

whether we're going to fight about those things or whether we're going to deal smart.

The issue is in this dynamic is that the polarity becomes so great that

the decision making becomes so bad that it makes it difficult.

And then in,

in addition,

there are the realities that have to be dealt with such as,

OK,

it's not the same when you,

when you have a lot of debt and that you have to get into a lot of more debt in order

to have your spending than if those circumstances weren't the same.

So when I look at countries I look at,

you know,

basically what I would look as individuals do they earn more than they spend?

Are they operating well together?

And are they at risk of a war?

And so I think that,

uh,

those are going to be the drivers of what happens in the future.

I think we're going to see it in the elections and so on.

I think that it,

but it's not just those,

it's the five.

So like for example,

if we're dealing with,

let's say the climate issue,

the climate issue estimated cost of that is $8 trillion a year.

That's monetary part of that $8 trillion a year is equivalent of eight

and a world GDP.

I mean,

that's all very expensive.

So there's an economic component and environmental component and then of course,

technology is going to have a giant effect.

We know we're talking about A I and so on.

So we can see that the interrelations between those are,

you know,

going to be important.

So basically what I do is there's a cycle think of it,

like if there's a disease,

I use cancer as an example.

There's stage one,

there's stage 234 and so on.

Um you could see what the stages are by the symptoms and you can know how it

ordinarily progresses.

So you have to know those kind of cause effect relationships.

Those stages are *** out in the book.

There's six stages of a typical cycle.

So all I'm doing is I'm following.

How is it going according to those stages?

What are the cause effect relationships?

And I'm understanding it better and helps me bet,

which was the same as in the thirties.

I studied my studies,

the thirties allowed me to make the good decisions in 2008

because I understood that dynamic.

I want to zoom in on the helps you understand how to bet and really zoom way in

from the big,

the big to the very small.

So maybe we could ground this with a very basic straightforward markets question,

which is everybody has been thinking about interest rates.

The thinking about consensus thinking about interest rates has changed massively over the last year.

What do you think will happen with interest rates by the end of this year?

Are we going to see cuts,

no cuts,

hikes?

What,

what is your take on?

I,

I'm gonna answer your question and I'm,

but I'm going to preface it with what are the determinants that make

that?

I'm trying to see how you get from and I'm trying to,

I'll tell you so.

So um for example,

when I look at the bond rate,

bond interest rates,

you have to have interest rates um high enough that it satisfies the creditor

without having them so high that it hurts the debtor.

So too badly.

And so um we look at the real interest rate to be a measure of that.

So as you look at the sort of the core inflation rate at a,

at you,

you whether you say it's 2.5,

3,

3.5 in that vicinity,

let's for simplicity,

call it um three.

And then what you do is uh on a real rate basis,

you need 22 and 2,

2.5 under normal conditions.

So that brings you up to the vicinity of a,

of fiveish give or take a little bit in terms of the bonds.

Uh let's say,

and then you ease monetary policy when you have a crisis and you have an unemployment.

So you,

you have a situation where um are,

do we have a crisis?

Um No,

you have the stock market making new highs.

You have the unemployment rate at low levels and you have a chronically high

inflation rate relative to the target.

So no un under those circumstances.

No,

I don't think interest rates should come down and I think it becomes a bad deal.

If they come down.

In addition to that,

you have a supply demand issue,

that's important under normal circumstances.

What I just described determines the pricing.

But if I,

but what you also have a supply demand,

so we're going to have to sell a lot of bonds because if the government makes a lot of debt,

you've got to sell a lot of bonds.

There's issues in terms of supply demand issues for

those bonds I won't get into but foreign buyers of those bonds,

other people in terms of those bonds.

So I would say that if I'm looking at the bond rate or if I'm looking at interest rates,

I don't like bonds and I don't,

and I think that the risks are more on the upside of rates than they are in the downside of

rates.

How do you,

one thing that did interests me is that a lot of the kind of conventional ways of

thinking about um about markets have kind of been jostled in the

last several years and 11 that's uh prominent right now is gold.

So,

you know,

you,

you real interest rates have been rising.

Gold is rising.

What's up with that?

We,

we have a huge amount of debt and we're creating a huge amount of debt and most

likely uh there's gonna be a monetization of debt because if you look at history,

when it all comes down to,

how do you deal with the debt if you pay it back in heart money,

that's a deflationary contraction.

And there's usually the monetization if you take what's going on with Japan.

Now,

example is a very classic example.

What they've done is the Bank of Japan has bought a huge amount of

bonds,

ok?

And all central banks who have bought these bonds have big losses in these bonds.

Ok.

Now there's a dynamic that's underway of um,

they need to have interest rates at a higher level.

Why shouldn't their interest,

real interest rates be comparable to our real interest rates?

If that happens,

then they,

they're gonna have losses in addition to others having losses.

And when that happens,

it makes the bonds less attract active unless you get to that attractive real rate with,

let's say if they go from a minus 1% to a plus 2% or,

or a 3% change in real interest rates,

it's a devastating thing.

So when we look at Japan or we look at other countries right now,

we have that dynamic going on.

It's a dynamic by the way that we're not used to seeing but has happened repeatedly in history.

Um And then if you take the question of what is money.

Um and,

and you look at issues of conflict,

wars who can trust what want money in this environment of great

conflict.

Historically,

in wars,

each country does not want to even lend to the other country because they're worried

that if they're lending it,

they're going to be paid back into valued money and that political element,

they don't accept even each other's money.

We're going into that pattern that we may not accept each other's money in different ways.

So what becomes an alternative money?

So you could think of gold as almost being the mirror image of the value of those

bonds in a sense as an alternative investment,

it was the core,

it's of,

of what money is until and then the cycle we have the evolution

cycle in 1971 it changes.

But you're,

now the question is,

what kind of money do you have?

And so it's a safe haven kind of money.

It's the third largest reserve currency of central banks and getting bigger and

getting bigger.

And so so in that sense,

gold is sort of a,

a I,

I'm losing the,

the numbering of your,

of your,

of your,

of your topics.

But gold is sort of like a,

a hedge against number three.

Again,

it's a,

it's a great conflict hedge again as opposed to a and uh it's both

conflict and also value of money.

So if you have a lot of debt,

um you're gonna have to pay it and you'll have a choice,

you'll pay it in hard money or you're gonna pay it in soft money and when the central banks get into that

position,

they play it in soft money.

So when you look at the prospective situation of just the debt money question and then you

overlay that on top of the political situation question,

it's a favorable investment and it's not a hot investment and in terms of

sentiment and so on,

you know,

there's not much talk about gold,

which also is a good sign in terms of that.

Now,

I'm not saying that people,

let me be clear.

I'm not saying people should run out and get a lot of gold and I don't,

I don't want to get can you,

you can,

you can wow,

isn't that interesting?

But,

but I am saying that is for the reasons I'm

describing it is a diversify against the other

aspects of the portfolio.

If you were to do a portfolio optimization of saying how much would you have in that

because of the divers benefits and so on under normal circumstances.

Without having a view of gold,

you would have almost 15% in the portfolio.

I'm not saying it should be that number.

I'm not saying that.

But if you look at it,

I think people are long money and debt and their

short gold as a percentage of their portfolio and the dynamic

is changing,

it's making new highs.

But so I think it has to be a part of a relatively small part but it

has to be a part of subs.

Can,

can I ask you to con continue on this on that theme?

This is the future of everything.

Conference.

Um Many of the people in the audience here are starting out in their careers and

getting going and I was wondering what advice you would have for

them.

If they had $10,000 what would you not not Ray Dalio

you after a five decade career and,

and having made lots and lots and lots of,

more than $10,000.

What would you sort of Ray Dalio five decades ago in the

present suggests to people here with?

Well,

I,

yes,

so I would say the first thing that you have to do is think about the purpose

of money and that you're saving and immunizing yourself against the purpose of money.

And what is most valuable of that almost if you were to think?

Can I buy?

Well,

maybe it's buy my apartment or secure

my um future.

Um If I could pre buy my kids' education,

if I could pre buy those types of things so that I can immunize myself,

I can hedge myself that I'm gonna be good and I'm going to be stable.

I know when I started working out,

I was uh uh uh through when I was in the position you're describing,

I said to myself,

how many weeks,

months or years could I live

without our money coming in if I should be,

if I should be dropped and you know,

I lose my job or something.

How do I establish that security to basically immunize those types of things?

So I think that starting out with thinking about the purpose of the money and how

you immunize yourself against those things is very,

very important.

Then when you go to higher levels,

then you decide how you're going to take risks relative to that.

So I would say,

but I,

I,

I'd say if I was to say one headline,

it would be first immunize yourself against those things.

And secondly,

um think about um uh you know,

your returns in real returns.

And most importantly,

how you diversify.

Well,

the power of diversification,

the holy grail of testing that I,

when I discovered it,

it meant everything to me.

Uh was,

can I find um optimally 15

good uncorrelated return streams?

Because the power of diversification,

good diversification means that you can reduce your risks by 80% without

reducing your expected returns.

And by able that means you improve your risk return ratio by a factor of five.

And if you can understand how to diversify,

well,

immunize your um liabilities that you,

I think that that's the approach that I would take.

I I'd like to take some questions from the audience.

If you have a question,

please pop your hand up.

I'm gonna ask Ray one more thing.

But then um then we'll come to questions in the audience.

Um So um so sticking with that again.

Um How would you think about that question?

The answer that you gave is something that I think is kind of has been universally

true for quite a number of years.

Diversified investments,

diversified investments have been something that lots of people have have had at the

core of thinking about portfolio theory for a long long time.

You're describing this new changing world order,

things are shifting the world that will be around in 40 years for people in this room is not

going to look like what the world was 40 years ago.

Does your advice change or is it despite the

cycles of it means it more so it means the uncertainties are going to be great.

Think about the implications.

Let's say A I is going to have on companies who the winners and the losers are like we have a

lot more uncertainty about who winners and losers are.

If I take any one of these factors,

what it does is it creates much more uncertainties.

And so it makes diversification.

And then you think about diversification of asset classes,

diversification of countries where you're diversified in all of that

diversification is going to manage matter,

I think more,

not less there.

There's a question in the back there I saw but if that person has lost his hand,

how about right here in the front,

Mike behind,

things seem to be increasingly correlated and it's harder.

I'm sorry,

I didn't hear you.

Things seem to be increasingly correlated.

So it's harder to find the real diversification.

Can you mention some assets that are really uncorrelated these days?

So first of all,

correlation is an outcome of the

determinants of the pricing correlation doesn't intrinsically exist.

And if you look at the pricing of asset classes,

it makes sense.

So for example,

um stocks will go up when growth is

faster than discounted and it will go down if it's less

bonds are the opposite sort of way,

generally speaking.

So,

um I,

the way I think of the diversification is that there are four main

quadrants in,

in that,

that means inflation rises or declines or growth rises and

declines.

And if by looking at those and putting those into those four quadrants,

I'm trying to then create that,

that's the template how diversification changes through times is a

function of those drivers.

And so when I create the diversification,

those are the drivers I look at of course,

the tightness of money and the looseness of money raises or lowers

all boats or all all.

So if you look at the structure of the determination of the correlations and you,

so you have that structural diversification not just looking at what the recent

correlations are because correlations change over time.

So um but the the determinants of those correlations don't change

or they change very little because every asset is um

every investment is a lump sum payment for a future cash flow.

It's true of all investments.

So when you're looking at it and you say I'm gonna make a lump sum lump sum payment,

what are the determinants of those future cash flows?

Ok.

The determinants are those factors I just mentioned