In recent weeks, the U.S. stock market has seen considerable volatility, with the Dow at one point declining more than 1,500 points during a single session. Today, the Dow rose over 200 points to trade near 25,070 Thursday afternoon.
For many, the roller coaster ride can be nerve-wracking and lead to the common trap of buying high on market confidence and selling low on market fears to prevent further losses.
That's a bad idea, according to Bridgewater Associates founder Ray Dalio.
"You've got to do the opposite," Dalio said. "It's when you're not scared you probably want to sell and when you are scared you probably want to buy.
"The greatest mistake of the individual investor is to think that a market that did well is a good market rather than a more expensive market. And that a market that did badly is a worse market ... rather than a cheaper market," he explained.
"A lot of times, like [recently], there is a lot of cash on the sidelines and the stock market has done very well," Dalio told CNBC Make It in January at the World Economic Forum in Davos, Switzerland. "It almost certainly will attract in a lot because everyone's going to say, 'Oh the stock market is a good investment,' and that makes it more expensive."
However, Dalio's best advice for the individual investor is not to try and anticipate or react to market moves at all, he said at Harvard.
"The best thing is, don't play the game, because it is pros against you," he explained. That's because big financial firms have an information advantage that is tough to compete with for regular investors, Dalio told CNBC Make It.
"We spend hundreds of millions of dollars a year to get an edge, and others do that too," Dalio said, referring to Bridgewater, which manages about $160 billion. "So it's very difficult for the individual investor to assume that he [or she] can pick something better."
Instead, create a diversified portfolio and hold steady, advised Dalio. "The best thing you can do is know how to have a balanced portfolio ... because you ain't going to win that game."
In response to Dalio's comments at Harvard, his fellow speaker Lawrence Summers, a former U.S. treasury secretary and current president emeritus of Harvard University, told the crowd that Dalio's strategy is worth heeding.
"That was very valuable advice that if you can discipline yourself and your relatives to follow over the next substantial number of years will be worth a lot of money to you," he said.
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