How to Make Good, Uncorrelated Bets

I’m reading Ray Dalio’s book “Principles” right now.

The first time I started hearing his name over and over was when he was mentioned by Tony Robbins in his book “Money: Master The Game”.

Dalio recommends making 20 good, uncorrelated bets as the “Holy Grail” of investing. The key words there are “good” and “uncorrelated”.

What Are Good, Uncorrelated Bets?

The meaning of “Good” is obvious. Don’t make dumb investments.

The meaning of “Uncorrelated” refers to a statistical relationship between assets as measured on a scale.

The degree to which assets are correlated or not is on a scale from +1 to -1.

A correlation of +1 means that two assets are moving together 100% of the time. If one goes up, the other goes up by the same amount.

A correlation of -1 means that the two assets move in opposite directions to one another. If one asset goes up by 50% the other asset will go down by 50%.

A correlation of 0 means that the movement of one asset has no effect on the other, either up or down. Presumably, if one asset goes up 50% the other asset may stay unchanged or just do its thing, whatever that is.

If you have 20 of the latter (i.e. 20 good bets with a correlation of 0), you should be in very good shape in terms of your investment performance, according to Dalio.

This is a very simple strategy in concept… But would require portfolio rebalancing from time to time to keep your 20 good, uncorrelated bets relatively evenly distributed.

The more difficult challenge is figuring out what are some uncorrelated bets to make in the first place.

Cryptocurrencies, such as Bitcoin, seem to be uncorrelated with other assets, such as stocks.

But what else?

If you have any suggestions or ideas for types of uncorrelated assets, I would love to read your thoughts and/or ideas in the comments below…