Founder, Chairman and Co-Chief Investment Officer of Bridgewater Associates Ray Dalio talked to Julia La Roche last year of Yahoo Finance about the value of savings and investing for young people. Bridgewater Associates is an American investment management firm founded by Ray Dalio in 1975. The firm serves institutional clients including pension funds, endowments, foundations, foreign governments, and central banks. In the interview, Dalio suggested 3 simple guidelines for millennials to follow in order to get their finances in order.
The first recommendation is to be aware of your savings. He says it’s important to know how much money you spend each month and how much you have saved so you know how many months you can live on your savings if you lose your source of income. Savings, explains Dalio, is “freedom and security.” The freedom he speaks of can come in the form of opportunities. If you need to further your education, start a business, or get into a new investment that just went on sale, you will be able to take advantage of those situations if you have the money. And security can come in the form of health or financial well being. For example, if your boss hands you the pink slip, at least you’ve got money in the bank to pay for your expenses until you figure out something longer term. Or let’s say you got into an accident and need medical treatment and care. If you have savings then you don’t have to worry about how to pay for it.
The second recommendation Dalio has is to think about what to put your savings in. It’s important to realize that the least risky investment that you can make, which is cash, is also the worst investment you can make over time. You can judge that by comparing the rate of inflation to the rate of return you will earn after taxes. So if inflation is 2%, and you’re only making 1% on your cash investment over time then that will be a problem because you are actually losing purchasing power. “So you have to move into other assets that will do better over a longer period of time,” Dalio urges. And the best way to do that is to diversify well. Pick different countries and asset classes that are uncorrelated to each other. And be cautious of debt.
The last advice Dalio gives is to do the opposite of what your instinct tells you to do. This is emotionally difficult to do. The market reflects the crowd and your instincts will usually lead you to do the same thing the crowd is doing. But heard mentality won’t get you any further than the rest of the heard. So you want to buy when no one else wants to buy and you want to sell when no one else wants to sell. Famous investor Warren Buffett has a similar saying: “Be fearful when others are greedy and greedy when others are fearful.”
As one of the most successful hedge fund managers in the world, time and again Ray Dalio has shown that his methods work. He created a mini series explaining his principles for success. He believes that dreams, reality, and determination can all come together to create a successful life. And that pain plus reflection will give you progress. Dalio believes that radical open-mindedness and radical transparency are crucial for learning quickly in any field of work. His principles encompasses many lessons he had learned in life, and is a core set of guidelines that he implements at his company.