Financial Advice from Ray Dalio

Earlier this year hedge fund manager Ray Dalio gave 3 financial recommendations for millennials in an interview.

His first recommendation is to focus on savings, and to think about how many months of living expenses your savings can get you through. Savings, explains Dalio, is “freedom and security.” Savings can also provide you with opportunities. If you need to further your education, start a new business, or invest in a discounted asset, it’s easier if you have extra money. If you can accumulate enough savings to last you for the next 300 months then you can be considered financially independent. 🙂

Dalio’s next advice is about what to do with your savings. He says “it’s important to realize that the least risky investment that you can make, which is cash, is also the worst investment you can make over time. You can judge that by comparing the rate of inflation to the after tax rate of return you will earn.” So if inflation is 2%, and you’re only making 1% on your cash investment then you are actually losing purchasing power and getting poorer. “So you have to move into other assets that will do better over a longer period of time.” This is why some people like myself don’t have a cash emergency fund.

The last advice Dalio gives is a bit of surprise to me. Instead of going with the mainstream and buying an index fund, he suggests that millennials should do the opposite of what their instinct tells them to do. This can be emotionally difficult to pull off. The market reflects the crowd and your instincts will usually lead you to do the same thing the crowd is doing. But herd mentality won’t get you any further than the rest of the herd. So you want to buy when no one else wants to buy. Famous investor Warren Buffett has a similar saying: “Be fearful when others are greedy and greedy when others are fearful.” The best way to approach this last advice for me is to apply original research and critical thinking to your investment strategies if you want to outperform the market. But then again, a lot of people are perfectly happy earning market returns and I think indexing is an acceptable way to invest as well.

Ray Dalio created a 30 min YouTube video about his famous work, Principles for Success. He believes that dreams, reality, and determination can all help to create a successful life. And that pain plus proper reflection will give us the tools to progress. It’s an interesting watch if you’re into mental models and self development.

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Random Useless Fact:

An actress posted a photo of a man’s rear because she was tired of being harassed online by people leaving lewd comments on her Instagram account.