Follow these steps to apply Ray Dalio’s recommendations to your personal finances

When it comes to personal finance, there are a lot of different schools of thought out there. But if you’re looking for some sage advice, you can’t go wrong with Ray Dalio.

Dalio is the founder of Bridgewater Associates, one of the world’s largest hedge funds. He’s also a best-selling author, and his book “Principles” has become a bible of sorts for many in the business world.

About 2 years ago, I wrote the piece “How to apply Ray Dalio’s sharings to your personal finance?” Given how much has changed, I want to review what I wrote and see how my thinking has evolved (or not).

1. The macroeconomic situation in the US, China, and the developed nations

If you closely follow the financial markets, then feel free to skip point #1.

In the US

  • Inflation continues to run hot, at 8.3% year on year in Aug 2022.
  • The Fed continues hiking interest rates and starts to wind down its balance sheet. The current 10-year Treasury bond yield is at 3.455%, the 2 year yield is at 3.87%.
  • The mortgage rate for 30-year fixed-rate is climbing to 6%+ on average so money is no longer “free” to borrow. It was at a historic low of less than 3% just less than 1 year ago.
  • The saving account interest rate is still very low, less than 1%.
  • Given the above number, if you hold money in cash, you are losing purchasing power by about 7+% per year.
  • The US equity market is just above the bear territory. The S&P 500 is about -20% from its recent peak. Nasdaq index is – 30%+ from its peak.

In China

  • Zero covid policy (ZCP) is wreaking havoc on China’s economy in 2022. Shanghai was locked down for more than 2 months earlier this year 2022.
  • China’s GDP growth rate in 2022 is likely to land below 3% or thereabout, nowhere near the initial target of 5.5% at the end of last year.
  • Zero covid policy is likely to be vigorously enforced in China until after the China communist party (CCP) congress in Oct 2022.

In Europe and the UK

  • The tragic war in Ukraine continues after 7 months. And there haven’t been any signs of truce or peace between Russia and Ukraine.
  • Europe is facing both cost of living crisis (with inflation in many countries is at 8%+) and also an energy crisis. Many European companies need to reduce their operation or shut down completely due to the lack of energy.
  • Many advanced European stock market indexes are in bear territory like Germany (-19%), France (-20%). The UK stock market index is surprisingly only down by less than 10% from the recent peak.


  • 2022 GDP growth rate is estimated down to about 2.1%.
  • Inflation is still low vs the central bank target.
  • Japan’s real interest rate is still below 0% i.e. negative.
  • The Japanese Yen has been falling against the dollar to 142+ JPY / 1 USD. This is the lowest level for more than 20 years.

Ok enough of the macro numbers puking; what does this mean for personal finance? To answer this question, I will take the perspective of someone who lives in the US.

2. Save money well (make more money than you spend)

Ray Dalio articulated this point in an interview with Yahoo Finance “Ray Dalio gives 3 financial recommendations for millennials“. What this means to me:

Avoid monthly negative cash flow i.e. your monthly expense is more than your monthly income.

This is easier said than done. 

If you are in this situation, try to get out of it as soon as possible by either (i) increase your income or (ii) reduce your expense. This may require a lot of sacrifice in the short term but will pay off handsomely in the long term. 

The earlier you start to save, the better. Time is your best friend when it comes to compounding money. 

There’s no need for an app or complex excel file. Being approximately right is much better than being precisely wrong. I create a spreadsheet with the major monthly expenses I anticipate and reconcile it when spending deviates too much from expectations. As another option, you can look at your bank account balance at the beginning of the month, pay all credit card balances, auto loan, mortgage, etc., and then compare it to your ending statement balance.

Prepare for the unexpected

By definition, you don’t know what those unexpected events are but given the volatile environment, I think it’s better to prepare for it. For example, you may unexpectedly lose your job, incur a massive medical bill, or whatever.

I prepare for the unexpected by keeping at least 3-6 months’ worth of expenses in a high-yield saving account at a reputable bank. Why do I prefer cash vs something else for this purpose? Because I want to be able to sleep at night. There are many other alternatives but I don’t like them enough. For example:

  • Some people talk about putting the money into stable coins and then lending them to reputable Defi companies to receive a yield of about 3% – 4%/year. This doesn’t suit me because, let’s say you have $50k as an emergency fund. At 4%/year, we are talking about $2k/year or $167/month extra earning before tax. Since your deposit is likely not FDIC protected (i.e. you can lose everything if the company goes under or something), I don’t think it’s worth the worry/headache.
  • Some people recommend buying “stable” stocks like Berkshire Hathaway stock with this emergency fund since you can always sell it and get the liquidity you need. Well, in less than 2 weeks in Jun 2022, Berkshire B share dropped from $313/share to $268/share or -14% so it is definitely not stable in this environment.
  • How about Treasury inflation protected securities (TIPS)? It sounds good in theory but the actual yield is still very low vs inflation. And with a small amount of total money, again I am not sure if it is worth the hassle. In Sep 2022, short-term TIPS (less than 5 years) can yield about 3%/year. While it is risk-free because it is backed by the US government, we are talking about 3% of $50k or $60k/year here or $1.5k – $2k/year before tax.
    • If you buy TIPS ETF like the iShares 0-5 Year TIPS Bond ETF (STIP), the price dropped by about 2.2% over the past 2 weeks so there goes your entire year yield.
  • Another good option is “Series I Savings Bonds“. The interest rate is actually not bad, at 9.62% as of Sep 2022. The caveat is that:
    • You can only buy maximum $10k/year
    • And you can only redeem after at least 1 year so if you buy it and within a year, have an urgent need for money, you are stuck.
    • So as long as you are sure that you won’t need the money within a year, then this is a good option.
    • This video is good in explaining the ins and outs of buying I bond.

This is where my thinking is different from Ray’s. He thinks cash is trash.

I know this emergency fund will lose about 8% of its purchasing power annually, given the sky-high inflation number, but I haven’t found good alternatives that enable me to sleep well at night. If you have ideas, let me know please!

Pay down your debt

This is where it is a bit nuanced.

If you have debt because of personal consumption (like credit card debt, etc…), then it makes sense to pay down your debt as fast as you can. The interest rate for credit card balance is close to 20% (or higher), which is crazy. For example, between buying TIPS with a yield of less than 4%/year and paying down credit card debt, definitely paying down credit card debt is much better for you.

If you have a LOW fixed-rate mortgage for the house/apartment that you are staying in, then it is fine not to try to pay it faster than schedule. The keyword here is low. Mortgage rate used to be below 3% but then in Sep 2022, it has risen to more than 6%.

The question is whether you think you can earn more than 6%/year with your investment. If the answer is yes, it may not make sense to try to pay your mortgage faster than schedule.

3. Invest well

Ray Dalio’s advice in this area is to diversify well because:

  • You will get things wrong
  • The future is going to be radically different from the past, given the empire cycle that he talks about in his book.

Ray talks about diversifying in geography (different countries), asset class (stock, commodity, emerging market bond/debt, emerging market corporate debt, no cash, no US treasury), and currency (beyond USD). You can read more about the “All weather strategy” here.

If you are like me, we are working with a tiny capital base (definitely not an accredited investor). The dividend yield doesn’t mean much to us. Our main objective is capital gain.

However, diversifying means that

  • I will have to make many decisions (both macro and micro-decisions) and hope that the majority of them are right. This is hard to do because every time I make a decision, that is a high chance that I will get it wrong i.e. losing money.
  • With macro decisions, I need to decide how much to allocate to stocks, bonds, commodities, real estate, or cash. Also within each category, there is a geographic component to it too. And then with micro-decisions, like with stock, you can decide whether to buy the entire market using ETF, or specific vertical or specific companies.
  • Each right decision needs to yield a very good outcome in order to move the needle on the overall capital base.

You can try to play with different scenarios using this simple spreadsheet. By entering the sample amount for each category and entering the odd of being right, you can see that it is not a great idea to diversify too much. You have to be right a lot of the times in order to have a decent gain at the portfolio level. Now this is different from venture capital where one bet can return 1,000X or 10,000X and basically provide return for the portfolio. If you just go with ETF or commodity, or public equity, the chance of having a 1,000X is very very small.

So Invest Well may sound like a good idea, but it is not simple or easy to execute.

As you can see, I am still thinking and have more questions than answers :). Your comments/suggestions are welcome.


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