Page 68 - Ray Dalio - Principles

joined Bridgewater in 1990, to do a chart showing how the
volatility of a portfolio would decline and its quality
(measured by the amount of return relative to risk) would

improve if I incrementally added investments with different
correlations. I’ll explain it in more detail in my Economic and
Investment Principles.

That simple chart struck me with the same force I imagine
2
Einstein must have felt when he discovered E=mc : I saw that
with fifteen to twenty good, uncorrelated return streams, I
could dramatically reduce my risks without reducing my

expected returns. It was so simple but it would be such a
breakthrough if the theory worked as well in practice as it did
on paper. I called it the “Holy Grail of Investing” because it
showed the path to making a fortune. This was another key
moment in our education.

The principle we’d discovered applies equally well to all
ways of trying to make money. Whether you own a hotel, run
a technology company, or do anything else, your business
produces a return stream. Having a few good uncorrelated
return streams is better than having just one, and knowing how
to combine return streams is even more effective than being
able to choose good ones (though of course you have to do

both). At the time (and still today), most investment managers
did not take advantage of this. They managed investments in a
single asset class: equity managers managed equities, bond
managers managed bonds, and so on. Their clients gave them
money with the expectation that they would receive the overall

return of the asset class (e.g., the S&P 500 stock market index)
plus some added returns from the bets managers took by over-