Friday, 10 April 2015

Ray Dalio - Asset Allocation, Risk Parity, Diversification (CNBC)

Published on 29 May 2013

In this shorter segment of the full CNBC video Bridgewater's CEO Ray Dalio discusses his investment philosophy for achieving a balanced structured portfolio and thereby superior asset allocation. He explains how the macro environment of growth and inflation needs to be carefully matched against the portfolio's volatility of bonds, equities and other assets. 

[Achieving Strategic Asset Allocation with Risk Parity]

"There is the strategic allocation mix which we call 'All Weather'. It has to do with making all the assets the same risk parity. The problem is when people try to diversify and they own equities, and equities have volatility that's large, or they own assets that do well when the economy does well and do badly when the economy does badly, they have a concentration of risks in some assets. They need to do .... so that bonds and equities and pieces have comparable impacts. So that whatever happens in the economy has a balancing effect. That's the All weather piece. 

We have a lot of diversified bets. It's very important for most people to know when not to make a bet! If you come to the poker table you're going to have to beat me. The nature is a very small percentage of people take money in the poker game. They don't know if it's a good investment or a more expensive investment."

[On Bonds vs. Stocks and Diversification of Risk in all periods]

"The problem of a stock and a bond portfolio, if you put 50 per cent of your money in stocks and 50 per cent of your money in bonds, the problem is you have about 80 per cent of your risk in stocks and about 20 per cent of your risk in bonds. So you don't have diversification. Imagine if you had a bond portfolio with the same volatility as stocks and you went through the financial crisis. Most of the decline in your portfolio would have been protected because the stocks would have gone up in value by an amount that would have offset the other. You have to have comparable amounts of risk in that."

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