Ray Dalio recently had an interview on CNBC where the headline was “cash is trash”. In this video, we explore why Dalio dislikes cash and what investors can do to protect themselves from the risks he sees in the markets. Subscribe here for more content: ► Access my stock portfolio & financial spreadsheets here:
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Buffett on Gold:
Recently Ray Dalio had an interview on CNBC where the headline was “cash is trash”. However, that is just an excerpt of an even more important message Dalio was trying to get across to investors. He explained the importance of portfolio diversification in the context of where we are in our fiat monetary system, and expressed his concerns of the impact of continued money printing, especially on the bond markets.
Part of the reason that Dalio believes “cash is trash” is because he sees that governments around the world continue to run up budget deficits while central banks continue easy monetary policy (i.e. low/negative interest rates and printing money) to help fund those deficits. As more dollars are printed, the prices of other assets rise simply because the value of the currency is being diluted by central bank policies. We are seeing this manifest today with near record high valuations on stocks and record low interest rates on bonds.
Unfortunately, Dalio sees central banks as less prepared today than in the past for a potential economic recession or market crash. This is because with rates already so low, there is little room to cut rates in the event of an economic slowdown. Thus, during the next recession, we are more likely to see aggressive monetary easing in the form of more quantitative easing (money printing). With these conditions in place, Ray Dalio warns investors not to be overly allocated to cash in the long term and to consider an valuable diversifying asset: Gold.
While Buffett has famously derided gold for being a shiny, non-productive piece of metal. However, Dalio has a different perspective, one that is closely related to gold’s history in monetary systems. In Dalio’s view, gold is effectively a currency without counterparty risk to any individual government. This makes gold a good hedge or insurance for an investment portfolio, in the event of a central bank misstep that erodes the value of a fiat currency. Another valuable property of gold is as a diversifier due to its low correlation with traditional financial assets like stocks and bonds.
Ray Dalio’s “holy grail” of investing is explained in terms of the number of assets in a portfolio and their correlation to each other. For example, if all your assets are 60% correlated in price, you don’t reduce your risk by continuing to add assets to the portfolio in hopes of “diversifying” more. The key to a truly diversified portfolio that reduces the overall risk, is to accumulate low or zero correlated assets together in a single portfolio. This significantly improves the risk adjusted returns by lowering the overall portfolio volatility. Given gold’s low correlation to other assets and its role as insurance against excess money printing, it isn’t surprising Dalio recommends gold in an investment portfolio.
Ray Dalio always provides some interesting and valuable commentary, often with insights from his vast experience with global markets. Now while he will admit he has been wrong from time to time, I think he would agree that expanding your perspectives and knowledge will help make you a better investor.
DISCLAIMER: This video is a resource for educational and general informational purposes and does not constitute actual financial advice. No one should make any investment decision without first consulting his or her own financial advisor and/or conducting his or her own research and due diligence. There is no guarantee or other promise as to any results that may be obtained from using this content. Investing of any kind involves risk and your investments may lose value.
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