Ray Dalio, the billionaire investor and founder of Bridgewater Associates, the world's largest hedge fund, recommends that investors should come to terms with selling pricier stocks that have had a great run, and reallocate to cheaper equities. And of course, they should "party like crazy," said Dalio in a public Q&A session hosted by social platform Reddit on Thursday. As Dalio put it, "Think about how to rotate your portfolio to buy that which is cheap and sell that which is expensive," he said. (See also: Ray Dalio releases "Principles for Success" as an animated series.)
Cash In on Fully-Priced Performers and Rotate Portfolio
Dalio dispensed an array of investment advice to his audience as stocks face wild swings in 2018, the bull market's ninth year. First and foremost, the legendary investor highlighted the importance of maintaining a diversified portfolio, "so that you don't have any systematic bias toward bull or bear markets in anything." Second, investors must recognize when their stocks are fully valued. Dalio said investors should not make the mistake of thinking that investments that have been good over the past few years will continue.
While he cited no specific stocks, Investopedia looked at four expensive picks which have all had stellar runs over the past few years, including red hot tech companies Amazon.com Inc. (AMZN), Netflix Inc. (NFLX), Nvidia Corp. (NVDA) and GrubHub Inc. (GRUB).
For example, an investor who has owned Netflix for the past three years has seen the stock rise nearly four-fold, a handsome paper gain. But the PE ratio of 236 is roughly 10 times higher than the S&P 500, making it very pricey and more vulnerable to a steep decline, according to some metrics.
TIME TO SELL?
|Stock Gain - 3 Years||Trailing PE|
Data: YCharts, Wall Street Journal
Ray Dalio breaks down his "Holy Grail"
Party Like Crazy, Prioritize Experiences Over Grades and Relax When Market Moves
Deciding when to sell a stock is a serious decision for any investor. But Dalio also urged his Q&A audience not to forget to have fun along the way. For his part, Dalio built a career as an author, philanthropist and as an investor worth $17.4 billion by building an investment behemoth managing roughly $160 billion in assets out of a two-bedroom apartment in New York City. For university students in particular, Dalio told the younger generation to "prioritize friendships and experiences" over grades and to "party like crazy." The Harvard Business School graduate downplayed the importance of an MBA degree and encouraged taking the opportunity to "work yourself up from running a little store or other simple experiences."
While Dalio advised his audience to cash in expensive stocks, the Bridgewater founder earlier this year was among the bulls on Wall Street urging investors to take warnings of a forthcoming market correction with a grain of salt. In an interview with CNBC, he said, "If you're holding cash, you're going to feel pretty stupid."
Dalio's hedge fund is one of the few that did well during the 2008 financial crisis, with the firm's flagship fund, Pure Alpha, gaining 10% that year during the ugliest of the housing bubble meltdown, according to a feature in the FT. His firm has generated mostly double-digit average investment returns over the past two decades. The hedge fund manager has championed a new investment strategy known as "risky parity," a method of choosing securities largely through the volatility of prices. (See also: Holding Cash Will 'Feel Pretty Stupid’: Ray Dalio.)