Investing legend, Ray Dalio has come a long way since he started investing at the young age of 12. His first step into investing was when he bought 60 shares of Northeast Airlines for $300.
He was able to triple his money when the company merged with another. Now, he is a known billionaire hedge fund manager with a net worth of $18 billion. He founded his investment management firm, Bridgewater Associates, and has been the company’s co-chief investment officer since 1985.
The 70-year-old investing guru is a realist and is vocal about the challenges that amateur investors have to tackle.
For him, the markets being crowded, competitive, and full of uncertainty means that individual investors can be easily lured into making the wrong moves. However, that doesn’t mean that you should stay away from being in the market. Dalio says that cash is the worst investment.
Investing involves a lot of complexities and risks. However, it’s almost impossible for an individual to earn enough funds for a comfortable retirement without putting money in the stock market. So, what should an amateur investor do? Here’s what Dalio advises:
Diversify Your Investments
It’s not practical to put all of your eggs in one basket. Diversifying your investments spreads out the risks across multiple assets. If you only invest in a few stocks, you can be easily wiped out financially if a single stock or fund goes downhill.
However, if you have 20 or more stocks from different industries, asset classes, or currencies, a single failure wouldn’t have much of an impact on your overall wealth.
Diversification can also protect you from market volatility if you do it right. Maintain securities that have different dynamics under similar market conditions.
For example, a portfolio with both stocks and bonds blend growth and stability. The value of shares increases over time. Meanwhile, you can get a stable income from bonds. That balance is what you would want as an investor.
Great Past Performance Doesn’t Guarantee the Same in the Future
In an ideal world, the price of an investment should be on par with its ability to generate value in the future.
However, that’s not always the case in the stock market. The excitement from investors and the price increase that resulted because of it may or may not be accompanied by improved underlying fundamentals, just like it happened during the dot-com bubble that took place in the late ’90s. Investors jumped on the frenzy of purchasing internet stocks.
This trend drove up the prices, which then caused more craziness. That growth surge made it look like anyone could get rich by putting their money in technology. That is until the bubble burst in 2000. At that time, it came to light that a lot of those tech stocks were overpriced.
Stocks performing well in the past is not a guarantee that it will only go uphill in the future. A good performance may indicate that the stock is already overpriced and that you’ve already missed the bus.
Ignore Your Gut
Even experienced investors still struggle with this concept. When we hear of trends, our instinct is to follow them. When the market is in free fall, the urge to sell is quite overwhelming. However, you might end up selling at or near the market bottom price if you get lured in.
And since you got spooked from the risky situation, you might decide to hold on to your assets and wait for signs of recovery before going back into the market. However, when the time comes, it might be too late for you to benefit from recovery gains.
Investors have two options for timing the market. One approach is to hold your positions and ignore all market volatility.
Another option is to buy stocks at low prices when everyone is selling and then sell high when everyone is buying. One thing you shouldn’t do is to follow the trend. Because if you do, you’ll end up buying at a high price and then selling low.