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3 Investing Lessons From Ray Dalio

Have you heard of Ray Dalio? Some say that he's arguably the greatest hedge-fund manager of all time. His investment-management firm, Bridgewater Associates, manages nearly $150 billion, and has historically outpaced the market.

There are a many lessons to be learned from Dalio when it comes to investing. He's largely interested in the human bias side of the equation, as well as the fundamentals of modern portfolio theory. Here are three.

1. Don't get caught up in the moment

Dalio was quoted as saying: "I don't get caught up in the moment. I think so many people are reactive.... They see things in a short-term way when they're right up against it."

It's important to remember that investments and markets are influenced by a host of events over the long term. Making big decisions based on short-term shocks is a tough way to invest.

That mindset is shortsighted. It's better to keep a cool head. Investors like Ray Dalio, Carl Icahn, and Warren Buffett always seem pretty grounded when asked about sudden economic shocks or trends that rile the marketplace.

Businessman on surfboard riding a blue arrow pointing up.

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Say, for instance, that the market panic back in the spring led you sell all of your investments. You would have likely taken losses and missed out on the correction and eventual market highs that have been reached.

It can be equally damaging to try to chase a rally like we've seen this year. Stocks have done well, but a lot of equities are priced at very high premiums. Getting caught up in the here and now could be detrimental to making wise choices.

2. Not putting too much emphasis on the past

While the past establishes a track record, your stocks are dependent on how their underlying businesses will perform in the future. Dalio has said: "Don't make the mistake of thinking those things that have gone up are better, rather than more expensive."

Think of JCPenney. The retailer was worth over $80 a share at one point and now trades at a mere $0.26 post bankruptcy. Doing your own due diligence on what's happening within the industry and business that the company is involved in is far more important than what the company has managed to deliver in the past.

Retail shifted. The rise of e-commerce began its gradual cannibalization of brick and mortar. JCPenney failed to adapt to new trends. Much of its stores remained dated, and the company began to rack up debt. Thinking that the good times would last forever for JCPenney proved to be a terrible mistake.

3. Diversify

It's preached again and again, but that's because it's true. Not every investment decision you make is going to be correct.

Dalio constantly touts the importance of diversification. Hedging out the risk by investing your money into multiple assets will help ensure that the bad picks aren't overly detrimental. As Ray Dalio has said:

Diversification can improve your expected return-risk ratio by more than anything else you can do. That's because while you can't know which of the items you are betting on will provide better results, you do know that they will behave differently, and by mixing them appropriately you can reduce risk. Diversifying well is a matter of knowing how to reduce your expected risk by more than you reduce your expected return (i.e., improving your return-risk ratio).

His view on the matter is certainly analytical, but in the simplest terms, it's not that different than betting $100 at the racetrack. No, I'm not advocating you should look at investing as gambling, but if you're betting on a horse race, your odds of winning drastically improve if you spread your money out across the herd -- even if you only bet on the top five favored to win.

If you take one thing from Ray Dalio, it's to be mindful of how you approach an investment. His thesis is as much about managing risk and cognitive bias as it is about making good stock picks.

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