Ray Dalio (Trades, Portfolio), the founder of Bridgewater Associates, has become a more frequent contributor to the financial media in recent years. He appears often for interviews, usually to opine on the economy, markets and investment strategy. Having led Bridgewater to become the world’s largest hedge fund firm, Dalio has certainly earned the right to comment and advise whenever he pleases. And investors are wise to pay attention to what he has to say.
While Dalio has been focused in recent months on big economic issues, he took the time in December to offer some investment advice to the millennial generation. As ever, his insights are worth taking to heart.
“The next experience will be very different”
Our experiences in youth can shape the way we view the world for life. Traumatic experiences stick with us, informing our decisions both consciously and subconsciously. The financial crisis and Great Recession hit millennials while they were first coming of age. The shock and dislocation created by one of the worst downturns in a century has scarred many of those who experienced it. Dalio cautions millennials to avoid submitting to fear:
“One of the problems is that the experience that you had as the last experience is the one that’s going to stick in your mind and probably will not be the one to be that’s gonna get you. So the next experience will be very different. My parents went through the Great Depression and then they missed out on the boom because they were always thinking about it.”
Many of the people who lived through the Great Depression never trusted financial markets -- or even banks -- ever again. This meant they missed out on a massive economic expansion and a number of heady bull markets in the subsequent decades. Millennials should not allow themselves to be anchored by that one experience.
Furthermore, millennials should not expect the next crisis to look just like the last one. Dalio is right to say that the next one will almost certainly look very different. Markets are cyclical, but the causes, extent and magnitude of downturns varies extensively. The long post-recession bull market has given millennials few data-points of real world experience to prepare themselves for the next crisis. Flexibility, caution and readiness are key.
“Cash is the worst investment”
While the safety of cash may be alluring to some, it is a costly asset to hold. Dalio makes this point quite succinctly:
“When thinking about what you should put your savings in, realize that the least risky investment from volatility...which is cash, is the worst investment over a period of time. And you can judge that by judging the rate of inflation in relationship to the after-tax income you’re gonna earn.”
Cash is a bad investment because it does not simply fail to appreciate in value like other asset classes, it actually loses value over time thanks to inflation. Inflation is almost always greater than the risk-free return of a bank account. That has certainly been the case for the most part, even in this extended era of ultra-low rates. Thus, Dalio’s advice here is important, if somewhat obvious to anyone informed about finance.
“Diversify well”
When it comes to actual investing advice, Dalio is all about diversification:
“You have to move into other assets that are going to do better over a period of time. And when you do that, the most important thing I can convey to you is to diversify well. Because I can guarantee you that one of those assets, and you won’t be able to pick the right one, will be disastrous in your lifetime. That you will lose half of that savings if you’re in the wrong one. And you won’t know what the right one is. So pick different countries. Pick different asset classes.”
Again, this is very sensible advice that anyone can benefit from. Millennials need to hear it in particular, since few have experienced real volatility, let alone a downturn, in their professional lives. They remember the recession, and many still bear psychological scars from it, but that does not mean they are any less prone to overconcentration of assets.
In general, diversification is your friend. Millennials should take that to heart.
Disclosure: No positions.
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