Ray Dalio: Why Gold Should Be Part of Your Balanced Investment Portfolio

During his recent update on The Five Big Forces Shaping 2024, Ray Dalio explained why gold should be part of a balanced portfolio to mitigate risks across various market conditions. A balanced portfolio typically includes assets that provide protection against inflation and other economic uncertainties. Gold is highlighted as a crucial component of such a portfolio, valued not only for its historical acceptance as a reserve asset by central banks but also for its unique characteristic of not being someone else’s liability, unlike other assets that depend on the issuer’s ability to pay.

Gold’s significance is further underscored by its negative correlation with traditional equity and bond portfolios. This means that in times of major financial crises, when typical assets may lose value, gold often appreciates or retains its value, thereby stabilizing the portfolio. Incorporating gold into a portfolio, according to portfolio optimization models, can potentially decrease overall risk and enhance expected returns.

Here’s an excerpt from the update:

Dalio: No. Let me step back and say that the most important thing that everybody should start with is a balanced portfolio.

Up until now, we’ve been talking about what might happen. But if you put aside the uncertainties of the supply/demand and such things, and you think about what is a balanced portfolio?

What are my risks so that I have symmetrical risks so that I can go through any environment? One would have greater amounts of those assets—inflation-hedge assets—that are the type of money.

So let me just pause on that for, let’s say, gold—Bitcoin is another topic, but it’s a related topic. Money that I can go from one place to another with. And it’s accepted around the world; it’s accepted by central banks. Today, by the way, gold is the third-largest reserve after dollars and euros. And so it’s a money that’s accepted. And, as the saying goes, it’s an asset that is not somebody else’s liability. Other ones, you are depending on getting paid. This one, you’re not depending on—possession, you know, is the law, essentially.

And it has a negative correlation, significant negative correlation, with the typical portfolios, which have a lot of equity beta in them, equity or bond beta. If you take any of the major crises, you see that that movement out of money in that sort of way caused a spike in gold. And that, if you take a portfolio optimizer, and you were to say, what if I was to overlay gold in my portfolio, add it, it would reduce the risk and increase the expected return if you add that into a portfolio.

So the issue is: at this time, given all those sets of circumstances, why wouldn’t you move to a more balanced portfolio? Why wouldn’t you do those exercises in order to consider that?

You can listen to the entire discussion here: