Is There Relief Anywhere from Stock Market Pain? Ray Dalio Warns Maybe Not
When most people refer to "the market" they mean stocks. Stocks get all the headlines. Emotions run wild when prices head up (greed) or down (fear) with a vengeance. That's why fear prevails as we begin 2016; stock prices keep falling. Not only have they fallen since the year began, they've fallen more to begin this New Year than they have in any New Year.
But stocks aren't the only game in town. And - don't take this the wrong way - if you're always invested only in stocks, you're just getting what you deserve. Not that I'm wishing you any misfortune, of course. It's just that you should know that when all your eggs have yolks made of stocks only, what you're experiencing now is simply what you paid for. Be quiet and eat your omelet. Stocks do stuff like this.
But in fact, stocks aren't the only asset that bumps, and sometimes jumps, up and down. Bonds have had their day at times. Gold seems to have gone only down since it hit the heights in 2011. Both of these, though, typically don't have down days that shock the way stocks do. Commodities - well, what can you say about 'em. With oil as the poster child, commodities have managed to march steadily downward, and, at times, do so in a rather shocking fashion. Yesterday, for example, oil was down over 6% intra-day. And this came after a long sink, punctuated by a recent break below 30, a price that only weeks ago was seen as a sure base which would propel oil back the other way. Oh well.
And that's why many of us prefer not putting all our eggs into the stock basket or, for that matter, the bond, gold, commodities...whatever basket. Indeed, there's even a name for including assets that behave differently under the same conditions: risk parity. You pair different assets in some percentage scheme. The idea behind this approach would be that as one asset crashes and burns, another asset or assets will lift off the launching pad and skyrocket: not the most technically accurate description of risk parity, perhaps, by you get the point.
But now comes Ray Dalio, esteemed, even famous, founder of Bridgewater Associates. He's in Davos for the meeting of great minds that takes place once a year in that beautiful Swiss setting. There he was courted by some talking heads from CNBC, likewise inhaling the crisp, cold draft of power and prestige that one can breathe attending this annual gathering. Mr. Dalio, whose investment acumen helped build one of (if not the) largest and certainly most successful hedge funds in the world, opining about those correlations that in the past assured that a risk parity portfolio would not be dragged down, or at least dragged down as much, when one or more asset classes collapsed, now sends a warning: We may be witness to a fundamental and dramatic change in correlations between asset classes. It's possible that those assets formerly and reliably non-correlated now may indeed all be joined at the hip. And this, friends, may spell economic disaster for all of us:
If Dali's correct that asset classes that once produced balance no longer will, we're in for a heap of trouble, whether or not "they'll be a depression."
(You can read the whole article and view a video of the CNBC interview HERE.)
But stocks aren't the only game in town. And - don't take this the wrong way - if you're always invested only in stocks, you're just getting what you deserve. Not that I'm wishing you any misfortune, of course. It's just that you should know that when all your eggs have yolks made of stocks only, what you're experiencing now is simply what you paid for. Be quiet and eat your omelet. Stocks do stuff like this.
But in fact, stocks aren't the only asset that bumps, and sometimes jumps, up and down. Bonds have had their day at times. Gold seems to have gone only down since it hit the heights in 2011. Both of these, though, typically don't have down days that shock the way stocks do. Commodities - well, what can you say about 'em. With oil as the poster child, commodities have managed to march steadily downward, and, at times, do so in a rather shocking fashion. Yesterday, for example, oil was down over 6% intra-day. And this came after a long sink, punctuated by a recent break below 30, a price that only weeks ago was seen as a sure base which would propel oil back the other way. Oh well.
And that's why many of us prefer not putting all our eggs into the stock basket or, for that matter, the bond, gold, commodities...whatever basket. Indeed, there's even a name for including assets that behave differently under the same conditions: risk parity. You pair different assets in some percentage scheme. The idea behind this approach would be that as one asset crashes and burns, another asset or assets will lift off the launching pad and skyrocket: not the most technically accurate description of risk parity, perhaps, by you get the point.
But now comes Ray Dalio, esteemed, even famous, founder of Bridgewater Associates. He's in Davos for the meeting of great minds that takes place once a year in that beautiful Swiss setting. There he was courted by some talking heads from CNBC, likewise inhaling the crisp, cold draft of power and prestige that one can breathe attending this annual gathering. Mr. Dalio, whose investment acumen helped build one of (if not the) largest and certainly most successful hedge funds in the world, opining about those correlations that in the past assured that a risk parity portfolio would not be dragged down, or at least dragged down as much, when one or more asset classes collapsed, now sends a warning: We may be witness to a fundamental and dramatic change in correlations between asset classes. It's possible that those assets formerly and reliably non-correlated now may indeed all be joined at the hip. And this, friends, may spell economic disaster for all of us:
As for the fact that the historical relationships between asset classes (volatilities and correlations) that are used to construct optimal "risk-parity" funds in order that 'risk' is balanced and hedged across bonds and stocks have all broken down dramatically causing funds like Bridgewater’s vaunted "All Weather" portfolio to sink, Dalio warned that if assets remain correlated and things continue to move in the “wrong” direction, “they’ll be a depression.”(Excuse the "they'll" as the writer likely attended one of our fine Universities that charge an arm and a leg only to graduate students both who can't spell and don't understand grammar: The author must have meant "there'll.")
If Dali's correct that asset classes that once produced balance no longer will, we're in for a heap of trouble, whether or not "they'll be a depression."
(You can read the whole article and view a video of the CNBC interview HERE.)
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