Holy grails are the stuff of myth and legend.
But imagine the most successful hedge fund
manager on the planet had an investing "grail"... and was willing
to share its secrets with you.
The manager is real. (And so is his grail.)
Ray Dalio started his fund, Bridgewater Associates, from his bedroom in
his Manhattan apartment in 1975 with just $3 million under management. Now,
Bridgewater manages more than $130 billion in assets.
More important, the firm has earned more than $50 billion in profits for
clients, with almost zero correlation to the stock market (meaning it doesn't
matter to Bridgewater whether stocks go up or down).
So what is Dalio's "holy grail"?
It's all about reducing the correlations -- how closely different
assets move together -- within your portfolio.
Most people think that by just owning lots of different stocks,
they are reducing their risk through diversification. But the problem is that
all stocks are strongly correlated to one another.
That means a long-only stock portfolio will always have some meaningful
degree of correlation... and carry the risk of everything going in the wrong
direction at once.
But by holding non-correlated assets in your portfolio, you
dramatically reduce this risk and help keep your investments safe.
Put another way, the lower correlations are among the assets in your
portfolio, the lower the risk you carry of a "ruinous loss" when
markets crash. That's because as one asset
falls in price, another is more likely to be rising or staying flat.
According to Dalio, by combining assets that have an average zero
correlation (meaning they move randomly in relation to one another), by the
time you get to more than 15 assets you can cut the overall volatility in
your portfolio by 80%. And you can boost your risk-reward ratio by a factor
of five.
I don't want you to get too hung up on the math... or the technical aspect
of correlations. By following the three recommendations below, you will
dramatically reduce your risk of a big portfolio wipeout... and therefore
also dramatically enhance your returns over the long run.
Diversify Across Direction
A long time ago (the 1980s and 1990s) in a galaxy far, far away stocks did
nothing but go up. But these days, stock markets go down as well as up. And
when they go down they can go down big time.
This means the "dark side" of investing, going short, has a lot
more going for it these days. By pursuing bearish ideas as well as bullish
ones, you greatly reduce the correlations within your portfolio.
Diversify Across Borders
Stock markets can behave differently from one country to the next. So, by
looking beyond America's borders... and investing in different countries
around the world... you further reduce the correlations in your portfolio.
This is also a great way of capturing strong returns. As the old saying
goes, "There's always a bull market somewhere." By investing
overseas, you are much more likely to benefit from one than by concentrating
all your investments at home.
As of Friday, here are some of the world's best and worst performing stock
markets. (Notice how wide the range is.)
Argentina: +17%
Vietnam: +13%
Nigeria: +12.5%
China: +1%
Brazil: +0.4%
South Korea: -2.5%
Diversify Across Asset Classes
I also recommend you take Dalio's advice and diversify your portfolio
across different asset classes. In addition to stocks, bonds, currencies,
commodities and precious metals are all worth considering.
The greater the number of truly independent investing ideas you can find,
the easier it will be for you to sleep at night. And because you will avoid
big portfolio drawdowns, the stronger your returns will be over time.
Carpe Divitiae,
Justice
High-Frequency Traders Are
Threatening Your Savings
On May 6, 2010, the stock market lost over $1 trillion in just five
minutes. This catastrophe was caused by computers programmed to make hundreds
of trades every minute to capture tiny fractions of profit over and over
again.
The SEC still hasn't figured out how to stop these so-called
"high-frequency traders." Three years later, the situation is even
worse. They're pushing the market to the brink at warp speed every day.
Heck, computers now make up one of every two trades.
This situation could blow up in investors' faces at anytime. You must act
now to protect yourself.
Read this report for more information.
