Beware of the cycle
Ray Dalio thinks of the markets in the context of the economic machine, wherein cycles repeat themselves. As reported by CNBC, Dalio says, “People have to understand that bubbles occur and are followed by busts.” He also highlighted that to keep on buying when the market is going up and to keep on selling when the market is going down is the number one mistake investors make. Dalio suggests investors look for bargains when the market is bad and think of stocks in terms of how expensive they’ve become when the markets are going up.
The latest tech sell-off is a prime example of this sort of investor mentality. Despite repeated warnings and signals that the tech sector and particularly the so-called FAANG stocks are becoming expensive, investors kept on buying them.
According to the Bank of America Merrill Lynch Survey, as reported by CNBC, the FAANG and BAT stocks—the US stocks Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL), and China’s Baidu (BIDU), Alibaba (BABA), and Tencent (TCEHY)—were the most crowded trade for ten straight months. Over the past few months, tech stocks have disappointed markets. Apple, in particular, has driven the recent sell-off in tech stocks with mounting concerns over iPhone shipments, the US-China trade stand-off, and weak guidance.
Dalio says “go counter-cyclical”
Dalio, thus says, “understand the cycle and you have to go counter-cyclical.” He also recommends having a balanced portfolio of assets to weather financial crises. His all-weather asset allocation formula includes 30% stocks, 40% long-term US bonds (AGG), 15% intermediate US bonds, 7.5% gold (GLD), and 7.5% other commodities (XME). This portfolio, Dalio notes, needs to be re-balanced annually.
As we’ve discussed previously in this series, most of Bridgewater’s large bets are on ETFs. Apart from those, Celgene (CELG), AT&T (T), and Toll Brothers (TOL) were among his biggest stock bets, accounting for 0.39%, 0.33%, and 0.45% of its overall portfolio at the end of the third quarter of 2018.
You can also read Dalio’s Advice on How to Prepare for the Next Downturn for more on his strategies and advice to investors.