Ray Dalio: Immunize Your Finances and The Complete Diversification Strategy

During this interview with WSJ, Ray Dalio emphasizes the importance of financial security and diversification. He advises first establishing financial immunity to unexpected job loss by securing essential funds.

Next, focus on achieving real returns and diversifying investments. Dalio highlights the significance of finding 15 good, uncorrelated return streams to reduce risks by 80% without sacrificing expected returns.

This approach improves the risk-return ratio fivefold. Understanding and applying proper diversification, alongside immunizing liabilities, is crucial for achieving financial stability and optimizing investment strategies.

Here’s an excerpt from the interview:

Dalio: I said to myself, how many weeks, months or years could I live without our money coming in if I should be, if I should be dropped and you know, I lose my job or something.

How do I establish that security to basically immunize those types of things? So I think that starting out with thinking about the purpose of the money and how you immunize yourself against those things is very, very important.

Then when you go to higher levels, then you decide how you’re going to take risks relative to that. So I would say, but I, I, I’d say if I was to say one headline, it would be first immunize yourself against those things. And secondly, think about your returns in real returns.

And most importantly, how you diversify. Well, the power of diversification, the holy grail of investing that I, when I discovered it, it meant everything to me, was, can I find optimally 15 good uncorrelated return streams?

Because the power of diversification, good diversification means that you can reduce your risks by 80% without reducing your expected returns. And by able… that means you improve your risk return ratio by a factor of five.

And if you can understand how to diversify, well, immunize your liabilities that you, I think that that’s the approach that I would take.

You can watch the entire interview here: