Thursday, September 13, 2012

Invest As If You Don't Know What The Future Will Hold

Ray Dalio runs Bridgewater Associates, the world's largest hedge fund and probably the most successful.

I wrote several pieces last year about Mr. Dalio. Last October, for example, he had just been interviewed on the PBS show Charlie Rose, and I had been very impressed on what I had heard.

Here's what I wrote in my October 25, 2011, blog posting:

Ray Dalio is one of the most successful money managers of our generation. Starting in 1975, his firm now manages approximately $125 billion for a wide variety of clients, including some of the largest public pension plans. Last year, Bridgewater was the top performing hedge fund in the United States, proving that size isn't necessary a deterrent to performance....

One of the most interesting parts of the interview, in my opinion, is how much Mr. Dalio says that his firm focuses on what they don't know. Unlike many investors - who make a specific forecast, then invest accordingly - Bridgewater considers a wide range of scenarios, and tries to figure out investments that will do well in a variety of different outcomes.

In this tendency Bridgewater is not alone. It seems to me most of the best investors - including Warren Buffett - spend more time on downside risks than they do opportunities. Despite their enormous success, Dalio and Buffett are humble enough to recognize that events often take place that virtually no can anticipate, and they make their investments accordingly.
Dalio was interviewed recently by Maria Bartiromo of CNBC.  It was a long interview - almost an hour - but I liked what he described as his approach to asset allocation.

Here's an excerpt from the blog Business Insider:

First, Dalio explains what you need to think about when setting up a portfolio.  The key here is asset allocation

"So I think I'm going to answer it in the following way that I think that is the right way for people to look at it. It's the way I look at it. I think that the first thing is you should have a strategic asset allocation mix that assumes that you don't know what the future is going to hold.  And I think most people should..." 

Dalio's thoughts are consistent with Vanguard founder John Bogle's idea that patient investing based on long-term thinking are the best way for most people to handle their investments.

Here's the entire interview:



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