It’s important to remember that corrections and bouts of inflation are a normal part of the stock market life cycle. The S&P 500 alone experienced 11 corrections since the turn of the century.
But what is surprising is that many investors are doing themselves and their retirement funds a disservice by not preparing properly for these inevitable corrections.
We are not talking about active stock management, cycling between growth and defensive stocks. These moments are difficult to time. Rather, the focus is on building a well-diversified portfolio that provides returns in all seasons.
“Diversifying well is the most important thing you need to do in order to invest well.” – Ray Dalio
Traditionally, the main method for diversification has been allocating funds across different asset classes. For instance, investors would mix in some gold, corporate bonds, government bonds, and cash into their portfolios, rebalancing when needed as they approached retirement. Such a strategy has become easier with the proliferation of commodity and bond ETFs.
But this strategy is not as sound as it once was. Correlations aren’t a guarantee, and certainly not forever, as they change over time. Since 1997, and until recently, bonds and stocks have been moving in opposite directions. But over the last year, the correlation has moved into positive territory.
Gold, government bonds, and cash remain the ultimate safe havens for risk-averse investors, with the trade-off of lower returns.
Some see Bitcoin as “digital gold,” which can hedge against movements in the stock market while also delivering large returns. However, in recent months, Bitcoin, too, seems to be moving with stocks, and its price is extremely volatile. Yet, as with gold, Bitcoin still retains its inflation-fighting properties.
Surely there must be a better way?
Enter Ray Dalio, CEO of Bridgewater, the largest hedge fund in the world, with USD billion in assets under its management. After nearly losing it all in the 1980s, Dalio rose from the ashes with a new mantra that he calls the “Holy Grail of investing”: find 15 to 20 good quality uncorrelated income streams. By doing this, Dalio has shown that you can make reliable returns while significantly reducing risk. His hedge fund is proof of this winning strategy in action.