A Sneak Peek Inside Ray Dalio's Portfolio

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Includes: AAPL, BBBY, EEM, MSFT, SPY, VWO
by: Manny Backus

Following the lead of top investors is a time proven way to earn wealth in the financial markets. The path to wealth in the markets is already well marked by the proven footsteps of great investors.

One of the most iconic leading names in today's financial market is a hedge fund manager named Ray Dalio. The average investor may not have even heard of Mr. Dalio but he is a well-known figure in the hedge fund world.

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He has earned a place as one of the top 100 wealthiest investors on earth by managing the $140 billion Bridgewater Associates hedge fund. Bridgewater is the largest hedge fund on earth.

What I like most about Mr. Dalio is that he is far from the typical hedge fund manager. He is a big game bow hunter, a meditation practitioner, and a firm believer in radical honesty. I learned a tremendous amount by studying his writings and firmly believe that all investors can learn important lessons from this one of a kind billionaire.

This article will serve as a brief introduction to Ray Dalio's background, philosophy, as well as providing a sneak peek into his top portfolio holdings.Ray was not born wealthy. The son of a jazz musician and stay at home mom, he knew he wanted money to spend. His first job was the typical employment of suburban youth, a newspaper route. When he turned 12 years old, he started working as a golf caddy. It was this job that would place him on the road to vast wealth. Carrying the golf clubs of businessmen from hole to hole, he overheard much talk about the stock market and investing.

This first exposure to the markets lit a fire in him that burns brightly to this day!

Acting on his curiosity, he purchased his initial shares of stock in Northeast Airlines. His investment thesis was a common one among undercapitalized stock traders. He just looked for a company trading for under $5.00 per share so he could afford more shares! Believe it or not, the airline was soon targeted with a buyout offer resulting in his shares tripling in value. As you might imagine, this early victory hooked him on the market for life.

He fed his passion by attending Harvard Business School. During the summers at Harvard, Ray traded commodities while being employed as an assistant to Merrill Lynch's Director of Commodities. He soon moved to Wall Street where he toiled for 2 years learning the ins and outs of the financial business from the trenches.

In 1975, launched Bridgewater Associates from his New York City brownstone apartment.

How Ray Dalio Picks Investments

Ray Dalio is best known as a macro investor who follows a stringent sense of ethical ideas that create the foundation for his investing and the way Bridgewater is operated.

Unlike most secretive hedge fund managers, Ray makes his ideas available to the public via a treatise called, Principles. This 123-page manifesto is required reading for all Bridgewater employees and he was kind enough to publish it for every investor. It is very unique for such a hyper-successful hedge fund manager to share his inner motivations and life rules so freely. Everyone should make it a point to read Dalio's Principles in its entirety at least one time.

As a brief overview, Principles teaches to always think for yourself and that "Truth, more precisely an accurate understanding of reality is the essential foundation for producing good results." In other words, understanding reality for what it is, not what you think or wish it is, is the fundamental core for living a successful life.

The Nitty Gritty

Ray's practical advice includes the following.

He stresses that every investment portfolio should consist of fifteen uncorrelated return stream. Dalio believes that at exactly fifteen uncorrelated investments, an investor's risk factor is reduced by 80%. In addition, he likes to balance his portfolio to inflation risk and growth. He doesn't just blindly follow the data but rather observes the data through the prism of knowing the economic environment. All potential environments are illustrated in this diagram from Bridgewater:

Dalio square

The ideal portfolio is one that does not rely on predicting deflationary shifts yet provides balance. He explains it this way.

Bonds will perform best during times of disinflationary recession, stocks will perform best during periods of growth, and cash will be the most attractive when money is tight. Translation: all asset classes have environmental biases. They do well in certain environments and poorly in others. As a result, owning the traditional, equity heavy portfolio is akin to taking a huge bet on stocks and, at a more fundamental level, that growth will be above expectations."

The Most Critical Thing

Ray firmly believes that diversification is the key to long-term success in the financial markets.

In his own words, "you're not going to win by trying to get what the next tip is - what's going to be good and what's going to be bad. You're definitely going to lose. So, what the investor needs to do is have a balanced, structured portfolio - a portfolio that does well in different environments."

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Most interesting is his belief that despite having all the researchers, market experts, and spending $100s of millions, Bridgewater still doesn't know what's going to win and what's going to lose. Spreading the risk is the key to success no matter what resources you can access.

Ray Dalio's Current Portfolio

Bridgewater is a macro-oriented fund. It holds over 90% of its assets in ETFs of emerging markets and the S&P 500 index.

This breaks down to 31% allocated to Vanguard International Equity Index Funds (NYSEARCA:VWO), 28% in the S&P 500 ETF Trust (NYSEARCA:SPY), and 17% in the iShares MSCI Emerging Markets Index Fund (NYSEARCA:EEM). The remainder of the 90% is allocated to a bond ETF and a Core S&P 500 ETF.

Bridgewater's largest single stock holding is Apple (NASDAQ:AAPL) with 0.47% of the portfolio. This equates to 327452 shares and the holdings have increased by 2% from last reporting period, a 19% increase. Ray first purchased Apple in the fourth quarter of 2010. Taking a closer look at the stock, shares are trading lower by 14.65% over the last 52 weeks, but are slightly higher by 0.07% in 2016.

The next biggest holdings is Bed, Bath & Beyond (NASDAQ:BBBY) taking up 0.41% of the portfolio with 647054 shares. Ray has been adding to this position with it jumping from just 0.25% of his holdings last reporting period to 0.41% today. A 96% increase in the holding size. He first purchases the shares in the second quarter of 2014. The share plunged 34.80% over the last 52 weeks, but are higher by 1.97% in 2016.

The mighty Microsoft (NASDAQ:MSFT) is Mr. Dalio's third largest single stock holding. His portfolio boasts 647054 shares representing 0.28% of the total and the 7th largest holding overall. MSFT has been a part of his portfolio since the fourth quarter of 2013. The holding has been increased by 14% since last reporting period. This stock has been a big winner for Ray's fund having climbed 30.68% over the last 52 weeks. However, it is important to note, shares are lower by about 3.5% this year.