Ray Dalio’s Surprising Advice for Surviving Market Crashes

Billionaire investor Ray Dalio has survived more market crashes than most people have experienced bull markets. The founder of Bridgewater Associates, considered among the world’s most successful asset managers, is now warning about “shocking developments” in the U.S. economy in the mid-2020s, comparing today’s market environment to the dot-com tech bubble.

Rather than advocating panic selling or attempting to time the market, Dalio offered surprising advice in an Investopedia Express interview for investors looking to protect themselves when market troubles arrive.

Dalio’s “Holy Grail” for Surviving Market Crashes

Many investors fearing a coming crash flee for safety, often selling their stocks and buying bonds, gold, and other “safe havens.” Dalio told Investopedia he takes a very different approach.

“My mantra of investing is 15 good uncorrelated return streams, risk-balanced,” Dalio said. This strategy, which he calls the “holy grail of investing,” allows investors to “maintain the same return as any one of those investments with [an] 80% reduction in risk.”

This approach, he said, works whether markets are crashing or soaring.

Understanding Correlation: The Key to Dalio’s Strategy

In investing, correlation measures how much investments move in relation to each other. It’s measured on a scale from -1 to +1:

• +1: Perfect positive correlation (investments go up or down in lockstep)
• 0: No correlation (movements are absolutely independent)
• -1: Perfect negative correlation (investments move in opposite directions)

Traditional diversification can fail during market crashes because most assets in the same class tend to move in the same direction. As such, even if you think you’re diversified—for example, you think you’ve done enough since you’ve diversified among different types of stocks or different types of bonds—you might not be.

For example, during the 2008 financial crisis, many “diversified” portfolios suffered because stocks across different sectors and regions all plummeted at once. This led financial professionals to darkly note that “in a crash, all correlations go to 1,” meaning there was no safe haven.

Of course, this was meant to be overblown, dark humor in a very dark time. Still, given that it’s not wholly wrong—many assets do go down all at once in a crash—Dalio counsels finding truly uncorrelated holdings for your portfolio.

For example, when inflation is headed upward, stocks may struggle, while commodities like gold, oil, and agricultural products often do better since they tend to do well with rising prices. Alternatively, as interest rates rise, bank stocks might benefit while real estate investments suffer since fewer people can afford home loans.

Dalio’s “All-Weather” System For Surviving Market Storms

Dalio says he breaks down economic conditions into four fundamental scenarios:

1. Rising economic growth
2. Falling economic growth
3. Rising inflation
4. Falling inflation

To come up with what he calls his “all-weather” system, Dalio accounts for the following:

• Stocks typically excel when growth is rising.
• Long-term government bonds typically perform best during periods of falling growth.
• Inflation-linked bonds like TIPS shine when inflation rises unexpectedly.
• Commodities often thrive in inflationary environments.

Instead of attempting the impossible and trying to predict which market environment you’re in, Dalio says he builds portfolios that can do well across all four scenarios.

“The risk of being wrong is the problem, and the world is filled with surprises,” Dalio said. “Portfolio construction is more important even than the picking of the best thing you like.”

While Dalio’s approach at Bridgewater may involve having 15 uncorrelated return streams, he offers a simplified version that most individual investors can do. For that approach, you would choose exchange-traded funds (ETFs) that are themselves diversified within an asset class. You would then allocate them as follows:

The Bottom Line

Dalio’s approach to market crashes centers on preparation rather than prediction. By building a diversified portfolio of uncorrelated assets before trouble strikes, he says, you can cut your risks without missing out on higher returns when the markets are rising.

Dalio, who has seen significant losses in his long and storied career, told Investopedia that this background taught him a key insight that “pain plus reflection equals progress.” “Learning comes from the pain” of major losses “and how you would change things,” he said. Applying his system might be one way to avoid learning important investing lessons the hard way.