Ray Dalio's Blueprint to Eliminate Your Risk
By Michael Carr
Editor, Precision Profits
Banyan Nation,
Investors love studying billionaire investors. But like many college students, they don’t really work hard at their studies.
Warren Buffett, for example, might be the most studied investor ever. Yet no one knows what he really does. Models based on his public comments fail to identify his buys in real time.
Buffett does something no one else can do… He values things like brand names with stunning accuracy. Professionals and individuals are unable to replicate the Buffett magic.
In recent years, investors started studying Ray Dalio who founded Bridgewater Associates in 1975. Now the world’s largest hedge fund, Dalio has generated more than $55 billion in gains for his investors.
For many years, Dalio created wealth in relative obscurity. He shot to fame when he published Principles, a book describing his quirky management style that demands radical transparency.
But more importantly, Dalio also published his investing secrets — including what he calls the “Holy Grail” of investing.
It’s essentially diversification.
But it’s not the kind of diversification many investors think they know. By truly understanding Dalio’s secret, we can unlock the opportunity to remove market risk and profit in any kind of market.
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Decoding True Diversification
Many investors are familiar with traditional diversification, which requires holding 30 or more stocks. Done right, this limits risk in a portfolio.
However, this approach doesn’t eliminate it. And some investors don’t fully understand the way traditional diversification limits risk.
When you only hold a few positions, your portfolio can suffer large losses when one stock reports bad earnings. A diversified portfolio only suffers large losses when the stock market suffers a broad decline.
So no matter what investors do, they can’t entirely eliminate market risk with traditional diversification.
Dalio addressed that problem.
He found that investing in uncorrelated asset classes can make you money even in bear markets. As a hedge fund, Dalio can do that. He has access to assets like private equity funds that aren’t available to individuals.
So as individuals striving for diversification, we need to think differently. We should add asset classes that we understand. For example, bonds can work well if you understand the risks.
Now, in the stock market, adding more stocks won’t help you beat the market or decrease risk.
The more stocks you buy, the more closely you track broad market averages. To avoid that, some investors focus on sectors like tech. Yet that increases risk.
It also won’t help to add growth stocks to a value portfolio. Or to look at other popular factor strategies. They are all highly correlated with each other.
This means that in a broad market selloff, dividend stocks and the Magnificent Seven tech stocks will all decline.
Fortunately, true diversification is still possible in the stock market if you know the right approach.
Trading with a Non-Correlated Factor
One method is to add a strategy based on a factor that shows no correlation to other factors. The only factor meeting that requirement is seasonality.
And that’s one big reason I incorporated seasonality into my Apex Alert strategy.
Seasonal strategies are based on patterns found in the calendar. They’re grounded in the fact that some stocks do better at different times of the year.
It might be because of an earnings report, which tends to occur around the same time every year. Or it could be because of an investor conference or a sales cycle.
There are many reasons why stocks have seasonal trends, and the Apex Alert strategy works to identify those times of the year.
Then, I go one step further. I look for a confirming factor that’s non-correlated to seasonality, using Dalio’s work to improve my strategy. That’s how I’m able to find Apex stocks entering their most profitable seasons.
Ray Dalio is a brilliant investor. He’s told us the secret to his success. It makes sense we use a billionaire’s blueprint to improve our own returns.
Thanks to his insights, I’ve been able to perfect a market-beating strategy. You can see its incredible backtest results and learn how to start benefiting from it right here.
Michael Carr
Editor, Precision Profits
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