Though the stock market is on the rebound of late as more and more states reopen, hedge fund billionaire Ray Dalio has made it clear that he expects the ongoing coronavirus pandemic to leave behind an economic downturn that could be the worst since the Great Depression.
“We’re not going to go back to normal” once the pandemic subsides, Dalio previously told CNBC Make It, arguing against the idea of a “v-shaped recovery” where the economy would rebound quickly once the country fully reopens.
With that in mind, Dalio has advice for you, if you are worrying about whether or not your savings will keep you afloat should the economy truly take a historic turn for the worse that lasts well beyond 2020.
1. Determine how far your savings will go
First, you need to take a hard look at your savings and calculate how much you need to be “safe and free,” Dalio says.
In other words, you should calculate your average, basic expenses — from rent or mortgage payments to food costs and other essential bills that cannot be trimmed or cut out completely — in order to figure out how much money you would need to survive losing a major source of income.
Dalio suggests saving enough to make sure “you’re okay for ‘X’ amount of time,” he says, whether that’s several months, or even a year.
“That’s No. 1. Do those calculations so that you know, if everything is bad, you and your family [are] still good,” Dalio says.
Once you have that amount of your portfolio set aside to feel safe, Dalio says you can start planning how to put the rest of your money to work for you by investing any money that is not part of what you’ve set aside from your expenses.
2. Diversify your investments
Which brings on Dalio’s second piece of money advice, which is to take the money that you feel comfortable building on and “diversify that portfolio well.” That means spreading your money across different asset classes that can typically be counted on to perform relatively well no matter the economic environment.
Dalio has also argued against holding onto cash or government bonds at the moment, due to fears that currency inflation could hurt their value over time. “Cash is not going to be a good investment,”.
Dalio does see gold as a more attractive asset, he says,many investors, including billionaire Warren Buffett, tend to look at gold as a relatively safe and steady investment in times of crisis.
3. Don’t try to time the market
Lastly, Dalio says never try to time the market.
That is “going to be really important.”
In the past, Dalio has said that the “biggest mistake that most people make is to judge what will be good by what has been good lately” in terms of looking at how the stock market has performed recently and when is the best time to buy.
Trying to perfectly time the market is something that even professionals can’t always manage, and the average person will find it extremely difficult to do successfully, Dalio says.
“To do that well you have to beat the pros, who themselves typically can’t do that well.”
Instead, it’s probably a better idea for non-professional investors to take long-term positions in a diversified portfolio that can pay off over time. Otherwise, all investors need to keep in mind the historical cycles and patterns of the economy and stock market.