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.
"Think of the virus as like a tsunami that comes in," Dalio said. "And if it goes away completely and we never see it again, it still will produce damage, the financial damage ... incomes that are lost, balance sheets that are hurt, restructurings that need to take place. So that will impede the recovery."
With that in mind, Dalio has advice for Americans worrying about whether or not their savings will keep them afloat should the economy truly take a historic turn for the worse that lasts well beyond 2020.
Though 21% of Americans do not save any of their annual income, according to a 2019 Bankrate survey, for those who do, Dalio offers up three pieces of advice on relatively safe investment strategies to carry you through.
First, you need to take a hard look at your savings and calculate how much you need to be "safe and free," Dalio says.
"[Determine] how many months or years can you get by" based on your current savings and what it would take to ensure you can still have the type of life you're comfortable leading, he 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.
Remember, "you don't have to have a world of luxury to cover the basics," he says.
And "when you've [calculated] that savings ... cut it in half, just to be conservative," Dalio says. "Because between taxes, inflation and possible losses in your portfolio, maybe they can add up to half."
"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.
"I want you to visualize your acceptable worst case scenario and secure that, because once you do, everything else changes and you can have peace of mind that you can take more risk," Dalio says. "But if you haven't secured that acceptable picture, you have to make doing that your top priority."
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.
"You need to diversify by holding assets that will do well in either a rising or a falling growth environment, or a rising or falling inflation environment, and [you] should diversify by holding international as well as domestic asset classes," Dalio says.
For instance, the billionaire has been adamant that investors should back "both horses in the race" in terms of the U.S.-China trade war and the two superpowers' increasing competition for economic growth in recent years.
"I believe Chinese businesses are competitors of American businesses or other business around the world, and that therefore you want to be, if you're diversified, having bets on both horses in the race," Dalio said in 2019.
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," he says, adding: "In relation to inflation, it'll probably lose 2% a year and maybe more."
Dalio does see gold as a more attractive asset, he says, echoing his sentiments from January, when he said: "I think you have to have a little bit of gold in your portfolio." Many investors, including billionaire Warren Buffett, tend to look at gold as a relatively safe and steady investment in times of crisis.
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.
From bubbles leading into busts, and vice versa, Dalio has always been adamant that those economic cycles tend to repeat themselves and that investors need to learn to avoid thinking along the lines of: "'That's a bad market, and I don't want any of it,'" Dalio previously told CNBC Make It. That's because a bear market might actually be the best time to get bargain prices on certain stocks.
After all, a company like Amazon once saw its stock price lost most of its value after the tech bubble burst in the early 2000s, but many of the company's long-term investors (those who held onto the stock through rough times, or bought it at a nadir) have seen huge gains because they ignored the most recent market trends at the time and took a long-term approach that's paid off as Amazon is now worth several times what it was even just a decade ago.
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