5 Investing Tips from Ray Dalio to Help You Build Generational Wealth

Ray Dalio has been one of the most influential figures in the world of investing, over the past few decades.

Author of the bestseller, Principles, and with a net worth of over $15 billion, he has provided value to millions of people just like you, looking to build wealth and achieve financial freedom.

Not only this, but he provides a lifetime of wisdom on understanding core economic principles and concepts, to help you understand not only what might happen, but why.

Here are 5 timeless investment tips, by Ray Dalio, to help your wealth building ventures.

Don't Have Any Biases

More investors are wiped out by holding onto positions due to bias, than any other reason. That is a fact.

Bias is a real account killer. Most investors have a bullish or bearish bias when approaching the market.

These biases result in investors holding positions too long and making investments not based on reality. The best way to avoid biases is pay close attention to the final tip, and prioritise what you think will happen, over what you want to happen.

Learn What Moves Interest Rates

It all comes down to interest rates.

As an investor, all you're doing is putting up a lump-sum payment for a future cash flow.

The big question is, when will the term structure of interest rates change? That's the question to be worried about.

“He who lives by the crystal ball will eat shattered glass.” In other words, don't try to predict interest rates. Rather, understand their structure and why they move.

Understand Inflation Risk

Dalio's next primary investment rule is to balance your portfolio based on inflation risk.

Inflation has a considerable impact on financial markets. Knowing how to optimise your portfolio regardless of inflationary shifts is a key to consistent returns over time.

Once again, the principle of reality comes into play, as he does not try to predict deflation and inflation pressures. Rather, by viewing the data through a prism of knowing the current economic environment, a balanced portfolio can be designed.

Dalio says, “bonds will perform best during times of disinflationary recession, stocks will perform best during periods of growth, and cash will be the most attractive when money is tight.” 

All asset classes have environmental biases. They do well in certain environments and poorly in others.

As a result, owning the traditional, equity-heavy portfolio is akin to taking a huge bet on stocks and, at a more fundamental level, that growth will be above expectations.

Sell The Winners, Buy The Losers

Dalio teaches to take profits on fully priced stocks. This means not to continue to hold stocks after substantial gains, but instead sell them to reinvest the profits.

The gains should be reinvested into good companies whose share price has lagged the sector or market. Dalio calls this, "rotating the portfolio". 

Investors often make the mistake of holding on to large winners even after the winning streak ends. It’s much better to take profits and rotate into good companies whose prices have not rocketed higher.

Dalio firmly believes that the higher the price of an investment, the less likely the price will continue to climb.

Every investment has a value, and even the best stocks can still be overvalued by its investors.

Diversify

While diversifying your investments may sound obvious, Dalio's take on the subject is specific and unique.

His diversification strategy is based on the principle of reality. This principle teaches to always see the world for what it is, and not what you wish it to be.

In investing, the reality is that many of your investment choices are going to provide lacklustre returns and even lose money. Many investors do not see the truth when choosing investments and become delusional about the worth of particular investments.

Even with Dalio's massive research team, he still doesn’t know what the future holds.

This reality forces the diversification rule to be critical for long-term investment success. Specifically, Dalio believes that it takes 15 uncorrelated investments to reduce the risk factor by 80%.

Dalio says, "I think the important thing here if I'm an investor, is that the most important thing you can have is an excellent strategic asset allocation mix. Investors can diversify across and within asset classes, geography, currencies, markets, and even time.”

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