Hedge fund manager Ray Dalio has shown he’s pretty good at saving money with the $14 billion that he’s saved up so far. He has some tips for those who want to do better at this.
Ray Dalio stands as one of the most successful savers of all time. While there are people who have more money than he does, $14 billion is a nice nest egg for sure, and Dalio has made all of his from literally saving it up, rather than just starting a business that ended up having their shares run up so much.
If you’re looking to learn how to save, you’re better off looking at someone who has amassed such a fortune investing rather than someone who came up with the idea to sell books online or designed an app to allow people to communicate with each other. This is why people have looked more to Warren Buffet for saving and investing advice rather than Jeff Bezos or Mark Zuckerberg, or any of the other internet billionaires, because they have gotten rich from their business ideas, while we’re looking to do it by saving and investing.
They don’t come much better than Ray Dalio, who made his fortune by investing other people’s money so successfully and did the same with his own portfolio. Dalio didn’t start out wealthy, and built his massive business on a shoestring, promising to make others rich and eventually getting some people to trust him enough to allow him to try.
He ended up being wildly successful at this and now oversees the biggest hedge fund in the world, so big that they don’t even have to bother with individual investors and serve big institutional investors exclusively now.
Dalio also stands out both with the quality of his advice and his eagerness to share it with others to help them prosper. We’re far more difficult to impress than ordinary investors, as we inspire to the highest standards, where the trite and lazy are shown no mercy, and there’s a lot of triteness and laziness and a whole lot of what can only be described as ineptness out there in the investing world. We don’t agree with Ray Dalio on everything, but have always found him to be one of the brightest people in the industry overall, and his insights are certainly well worth considering.
It doesn’t take a whole lot of insight to perceive how poorly people do at saving and investing, but coming up with good advice, advice that hits home enough to actually change behavior enough to turn this around in people’s favor, is not so common. We’re told that we should save more, but without a cohesive plan and enough commitment, we are doomed to repeat the same mistakes that have us so wanting.
There are two main components to successful saving, being able to set aside more to get the ball rolling, and coming up with a strategy to grow our savings more. Of the two, the coming up with the money to save is the foundation, as you can be a brilliant investor but will never see the fruits of this unless you are able to set aside enough to grow well. If you are spending as much as you make or can only set aside a pittance, no one is that good, not even Ray Dalio.
Dalio sees the economic downturn that we’re in persisting for quite a while, in contrast to those who think that all we need to do is open things up again and get back to normal. There’s been a lot of collateral damage that we’ve only been able to speculate on so far, as the smoke is still too thick to see very far on the horizon, but at the very least, we may expect things to be more challenging now.
This means that our earning power overall will be diminished, and this is a time where we need to pay even closer attention to our personal finances. We’ve been in a pandemic of sorts full time, the one involving spending more of the money we make than it would be wise to, and when you compound the effects of this viral pandemic with the existing spending pandemic, this makes things all the more challenging.
Dalio compares the current financial crisis as a tsunami, where the waters come onshore and we’re underwater for a while, and when they recede, we get to see just how bad this high water has damaged things. The waters are still pretty high, and it will be some time yet before they recede and we see the residual devastation, and we know that there will be plenty. This needs to be seen as a wake-up call for many of us who have done a poor job looking after our own finances, and perhaps spur us to make some positive changes.
We tend to view the problem as not having enough money to spend rather than spending too much. This is because we actually are addicts, and like addicts, the tendency is to think that your problem is in acquiring more drugs rather than seeing that your problem is that you consume too many drugs already.
Like those with drug problems, the lure of getting high can be given a greater importance than your overall welfare, and we never want to focus on one thing to the point where our overall well-being takes a back seat, where we may be living in a cardboard box in an alley so that we can still afford to use.
With the addiction of spending, the present is our drug, where the cardboard box represents our future, where we will be less well-off later on in life, when our income becomes either temporarily reduced when we lose our job, or permanently reduced when we retire.
Achieving success financially comes down to seeking the proper balance between the present and the future, between consuming and building wealth, and we don’t want either to be out of balance. We don’t want to spend it all and be left broke all the time, nor do we want to live too cheaply all our life just so we can amass wealth either, as wealth is only valuable to the extent that we can enjoy it.
Enjoying wealth doesn’t necessarily mean spending the money, and building wealth is an enjoyable end in itself, where we build financial security as well as being able to enjoy the finer things in life. We need to earn the right to enjoy these things though and this is where the balancing comes in, where we pay ourselves enough both now and in the future. It’s the future part that the addiction of spending ignores and the part that we come to regret later.
We usually think of money being more valuable in the present, because it’s the present that is at hand, where the enjoyment of it is close at hand. We either discount or completely ignore the future value of money, even though its future value can be much greater due to the multiplier effect of investing, provided that we do a good job at this.
If We Don’t Know How Much the Future May Bring, We Won’t Choose a Good One
The better we do with our investing, the greater the future value of our money ends up being, and this is not something that we want to put off mastering, even though we may not have managed to save very much already. Even though most people only achieve modest returns on their savings, if we can learn now to really stand out from the crowd and multiply our savings so much more than the crowd does, this can in itself really serve to motivate us.
This is the part that gets ignored so much when it comes to calculating future value and strategizing how we are to allocate our income. If we are considering whether to spend a few thousand dollars on something like a vacation, we may think that we can either take it now or take it at some future date, believing that these choices are similar other than their timing, and doing it now can then seem the better idea.
If we see ourselves multiplying this money by 10 times, where $3000 now becomes $30,000 in the future, by investing this money wisely, we can use this new rule of thumb to really provide the kind of perspective that we need to motivate us. If we are patient, we can take this vacation later plus get a whole lot more, but only if we understand the way that we can expand our money over time if we do it wisely enough.
There is only one way to save more money and that’s to spend less. There are no secrets here in this phase, you just gain a better understanding of how much more your money will increase in value over inflation, and then decide based upon that. Instead, we react like one of Pavlov’s dogs, where we hear the bell ring and consume, and they ring bells for this all day long through advertising.
People salivate about spending continually, even to the point where their dreams of having more money are confined to all the extra things that they could buy. They play the lottery, and those who actually win often spend the money in short order. We have a voracious appetite to spend, and getting this under control is a necessary first step to get pointed in a better direction.
Our employers may match our contributions in our 401(k)s, where we now take the multiplier effect that investing involves and double that, but even this isn’t enough to motivate us very much as we choose to spend too much of it, even with the rewards being made much higher. We even don’t care that this extra money is part of our compensation package, money that they want to pay us but we don’t claim, as it is too much about the now and the later part just gets neglected way too much.
We focus so much on retirement when we provide savings advice, even though most people do a terrible job of this, and really don’t pay all that much attention to providing ourselves much of a safety net. Back when we had the last government shutdown, we got to see just how bad off people are as so many were unable to keep things together for the little amount of time that this went on for.
Ray Dalio is pointing people in this important direction, where he tells us that the starting point is to calculate what your essential expenses are and then strive to have enough. The target here is to have enough to provide these basic essentials, although this doesn’t necessarily mean using savings for this, as many people cover these needs with credit.
While on the face of this, it may seem preferable to use your own money instead of borrowing, there are other considerations involved, such as what rate you would need to pay and how likely it would be that you would be out of work.
Paying 20% to borrow on credit cards would be considerably less desirable than using a secured line of credit for instance, but we do need to be aware of the opportunity cost of putting money in a savings account and earn next to nothing versus investing it and earning a lot more.
We also need to account for what sort of return we may expect, where someone who invests all of their money in strong stocks is going to have a much higher opportunity cost than someone who invests in bonds. If you are averaging higher returns than it costs to borrow for these things though, it really doesn’t make much sense to use your own money.
Whatever we use, we do need access to these funds, and this is not a small matter. People don’t think about these things anywhere near enough generally, which is why so many of them are only one or two paychecks away from having to do without the necessities of life. They aren’t called necessities for nothing.
Dalio deserves praise for focusing on what really matters here, the necessities, as we usually hear things like six months or a year of living expenses which includes a lot of optional spending. It’s not that this isn’t a good goal but it is not the minimum one, and this is what we need to make sure we have, where the gravy is more like a nice to have.
If we make this goal too far out there, like someone making $50,000 a year and telling them they need $25,000 or more as a safety net, and people can’t even manage more than two weeks, this may serve to discourage them and see them giving up.
We want to instead provide them more realistic goals, with several levels of protection, starting with the essentials. Anything beyond this can be seen as plenty worthwhile to strive for but if making it to the first checkpoint is hard enough, they need to be worrying about achieving this first before they look to become more ambitious.
How Hard Our Savings Work for Us Also Matters a Great Deal
Dalio does make the separation between savings and investing, and this part could use a little work from an economic perspective. As long as the funds are liquid, it doesn’t make that much sense to stick up to a year of essential expenses that we may never need in a savings account earning virtually nothing versus investing it. It can take a few days to access this money if we need it and we do need to have enough to cover us for this amount of time but we need to think about keeping much more than that on hand.
We don’t want to be cashing in investments for every little thing, but we are discussing big events here, major losses of income, and even though people don’t like cashing in investments, it’s better to have this money earning a lot more while on the bench waiting for fairly rare events.
Dalio also preaches portfolio diversity, where he counsels us to look to achieve a portfolio that can do well in all conditions. Once again, we need to invoke the concept of opportunity cost here, where such a strategy may yield a far lesser return overall. This idea may have served him well to some degree managing funds packed with billions of dollars, where you need a whole lot more hedging than dealing with just a few hundred thousand or a few million, but even then, we may rightly wonder whether less hedging would not be much more optimal.
You can’t run away anywhere near as fast with billions worth of investments, but you can still run, and choosing to never run and being willing to pay a big price for this privilege isn’t necessarily the best way. The major problem with this though isn’t even how fast we run, as this can be a bad idea even if we never choose to.
We only need to look at how stocks perform over time to see this, where you can do a lot better completely unhedged than using an excessive amount of hedging. Hedging during the good times involves paying a big price, and if you can stick to the good stocks and just hang on to them and make a lot more money than the sort of diversity that just about everyone recommends, which involves choosing a worse outcome from not thinking about this too much.
You could just put all your money in the Nasdaq and keep it there until you need it and beat the daylights out of these diversified approaches, and if you see the value of your portfolio go down for a while but don’t need to worry about cashing in, and you are investing in the first place since this thing goes up in the long run, sticking to the long run and doing nothing to “help” yourself by diluting your returns so much can be a much better plan.
We should only really be hedging against the real risks, not the ones that are born out of misunderstanding. We butcher our portfolios with too much diversification, but we’ll never be aware of this if we don’t bother to take a look and actually think about what the best way to proceed may be.
Dalio is at least against going with cash or treasuries to hedge, and appreciates the currency risk that we are under. This is much bigger deal than just about everyone realizes, but we can count Dalio among those who have a good appreciation of the risk.
Investing in Chinese stocks alongside U.S. stocks because you are worried about what may come out of a U.S./China trade war is another matter though. Aside from the potential to give up return choosing the weaker horse, what we wonder about the most here is how the stocks from either country would not be harmed by such a war. Trade restrictions hurt everyone, especially since both sides are being shot at.
Dalio does like gold though, although we don’t really like blanket hedges, and prefer to be in gold when it makes sense to be, and only then. Gold takes a beating at other times and we certainly do not want to be in something based upon speculation of how the future may unravel, as this involves paying a price that does not need to be paid now. If and when inflation starts taking off and gold outperforms stocks, that’s the right time, and prior to that would have us placing burdens upon us that simply aren’t required now.
This does involve timing of a sort, and the word timing turns off and even scares many people. Dalio himself advises against timing investments, because if the pros can’t time investments all that well, what chance do you think you have?
This remark is disappointing. Some pros do time investments quite well, even though it is far more difficult to do that with big money. Dalio missed timing this latest crash, although he did time the one before quite well, having enough time to prepare. He didn’t have time to prepare for this one since it struck so quickly.
Both were easy to time, and the only real variable here is how much lead time you have. You can’t move out of $20 billion worth of investments at the drop of a hat, but these non-pros certainly can, and in a matter of a few minutes can move everything they own out of stocks and into something else.
The coronavirus panic should actually put an end once and for all to the argument that we cannot call moves like this, where doubters really need to reflect back to when things started to break down. Those who thought this was a crap shoot, where we really didn’t know enough about where the market was headed to make the call that it was more likely to go down than up at that point should not be investing at all, or use a Ouija board to decide whether we go or stay when these big events happen,. This would at least tell us to sell some of the time, as the spirits may prefer.
Ray Dalio is certainly in the upper echelon of those who invest, but no matter how much money someone has made or how much sense they may make most of the time, we still always need to question everything, no matter who says it. Not doing this is the crux of what is wrong with mainstream ideas about investing, where none of their practitioners have thought much about them and they just get transmitted from investor to investor like a virus would.
Dalio sure has some good advice about saving that so many people would be well served to consider, especially when we’re talking about things such as seeking to avoid your situation deteriorate into squalor and look to prevent the worst of the pain that a loss of income can inflict upon us. That’s a good start to be sure.