Fifteen Independent Bets Can Cut Investing Risk by 80%
Ray Dalio says the trick is finding good return streams that do not move together, lifting return relative to risk by about five times.
My First Million · Ray Dalio: The one thing I do differently before investing a single dollarRay Dalio built Bridgewater after borrowing $4,000 from his father. Dalio says it became "the largest hedge fund, most successful hedge fund in the world." Dalio says his investing mantra is "Find 15 good uncorrelated return streams." He calls that idea the "holy grail of investing."
Uncorrelated means the streams tend to move independently of one another. In general, when returns do not move together, a loss in one does not have to mean a loss in all of them at the same time.
Each stream still has to be good, meaning it is expected to earn a return over time. Dalio says he arrived at 15 by looking at the math of how much added safety spreading bets brings depending on how closely they move together. He keeps a chart that reminds him of the result: reaching about 15 lets you lower risk by about four-fifths while keeping the expected return the same.
That change improves return compared with risk by roughly five times, Dalio says. He sums up that result this way: "you can get the upside without having the downside."
He pairs the math with humility. Dalio says he wanted people to challenge whatever he thought. Dalio credits humility and spreading bets, saying "that change in that approach was the basis" of Bridgewater going from borrowing $4,000 from his father to becoming "the largest hedge fund, most successful hedge fund in the world."
His game plan was to make a collection of uncorrelated decision rules and to have people challenge him.
Questions people ask
What makes two investments uncorrelated?
It means their prices do not reliably rise and fall at the same time. Stocks and bonds are often different, while two similar tech stocks usually move together. True independence is rare, so investors look at how assets behaved in past booms, busts, inflation scares, and recessions.
Can an ordinary saver with a 401(k) do this?
The principle applies, but most small savers cannot easily buy 15 truly different engines of return. A broad mix of stocks, bonds, inflation protected assets, gold, and foreign assets can capture much of the idea. The key is owning assets that react differently to growth and inflation, then rebalancing.
If 15 cuts 80% of risk, why not own 100 and cut 100%?
Because some risk hits everything at once, like a deep recession, a war, or a credit freeze. Diversification mainly removes the risk tied to any single bet. It cannot remove the risk that the whole economy or market system has a bad year.
How do you know a return stream is actually good?
Good means it has a durable reason to pay you for owning it, such as earnings, interest, rent, or a risk premium, and not just a recent hot price. Dalio tests rules against long histories and keeps only those that look timeless and universal. For most people, low cost funds with long track records are a simpler stand in for that homework.