As we get ready for 2020 and a whole new decade, there is reason to believe big changes are coming. The next 10 years of market activity could look wildly different from the last 10.

Many investors will find themselves unprepared for this — but you can be ready.

According to legendary hedge fund manager and macro investor Ray Dalio, it’s possible to “navigate and immunize” a portfolio. This means the prepared investor can navigate the twists and turns of new market conditions and immunize their nest egg against unpleasant surprises.

Dalio explains his thoughts on the subject in a new paper called Paradigm Shifts. He published it on LinkedIn, and you can read it here. (Note: It’s pretty long.)

We pay attention to Ray Dalio’s views because, with a net worth in the $18 billion to $20 billion range, he is the most successful hedge fund manager of all time. Bridgewater, the hedge fund firm he founded in 1975, has made more profit for clients than any other fund (in terms of total dollars extracted from markets).

When it comes to market history, Dalio’s views are especially worth considering because his entire money management strategy is rooted in awareness of market history. Whereas the typical quant study might go back 20 years in a single market, Dalio prefers to go back hundreds of years — or as far back as the data will go — across dozens or even hundreds of markets.

Dalio applies this exhaustive process in search of historical principles that are “timeless and universal,” to use one of his favorite phrases, and then seeks to build trading and investing strategies around those.

In his new paper, Paradigm Shifts, Dalio describes how, every so often, the whole market paradigm changes. A paradigm is a pattern, a model, or a set of concepts that represents a way of thinking about something or a way of looking at something.

On a collective basis, investors will adapt a paradigm that represents their big picture belief as to what is happening in markets and why. After the paradigm has lasted for a while — like in the neighborhood of five to 10 years or so — investors start behaving as if the paradigm is permanent and will last forever.

But just as the maximum number of investors get comfortable with the paradigm, or otherwise start to assume the paradigm is going to last forever, something important shifts, reverses, or breaks, and the old paradigm gets shattered. Then a new paradigm takes hold, and the process starts all over again.

In his 50 years of market experience, Dalio observes that these paradigm shifts tend to happen about once every 10 years or so. They also tend to overlap with a change in the actual decade — for example, from 1920 to 1930 or 1970 to 1980 — demonstrating how psychology is a factor.

Last but not least, Dalio observes that the new paradigm will often completely reverse certain assumptions of the last one. This is logical, too, given the way market conditions tend to go from one extreme to another over long periods of time, like a giant pendulum that swings back and forth. There is no such thing as equilibrium; the market is always heading toward someplace and away from someplace.

Below are the bullet point descriptions Dalio uses to describe the paradigms of the past century from 1920 onwards, with each decade roughly corresponding to a new paradigm. For fuller descriptions of each, you can read Dalio’s full piece:

  • 1920s = “Roaring”: From boom to bursting bubble.
  • 1930s = Depression.
  • 1940s = War and Post-War.
  • 1950s = Post-War Recovery.
  • 1960s = From Boom to Monetary Bust.
  • 1970s = Low Growth and High Inflation (i.e. Stagflation).
  • 1980s = High Growth and Falling Inflation (i.e. Disinflation).
  • 1990s = “Roaring”: From Bust to Bursting Bubble.
  • 2000-10 = “Roaring”: From Boom to Bursting Bubble.
  • 2010-Now = Reflation.

So, what will the decade of 2020 and beyond bring? We can’t know for sure. But there is a strong probability, based on the ebb and flow of market history, that the next 10 years won’t look at all like the last 10. And many of the conditions that feel “set in stone” as of today will go out the window.

Because paradigm shifts can be jarring — and sometimes even violent — it’s important to prepare for volatility and change. For example: In a note of warning, Dalio points out that every so often within a long-run market cycle, every asset class goes through a period of decline so painful that having too much exposure to that asset class could mean disaster.

One way to handle this is to “navigate” market changes with information and knowledge and risk management tools.

For example, it’s possible to keep tabs on how different asset classes are performing just by watching and comparing them. It’s also possible to rebalance a portfolio in the direction of sectors, industries, and asset classes that are behaving well (and away from the ones that aren’t). This is hard to do manually — that is to say, without any tools — but easy to do with software.

In addition to navigating changing market conditions, Dalio’s fund seeks to “immunize” portfolios through their All-Weather strategy, which is designed to handle market storms.

The idea here is to have a range of exposures in the portfolio so that, no matter which market conditions prevail, the portfolio can preserve capital and perform decently well.

As an example of this, one portion of a portfolio might be focused on inflation-themed investments, like Bitcoin and gold and precious metals stocks, to do well in a high inflation and deteriorating fiat currency environment. Another portion might be invested in tech stocks, to take advantage of disruptive technology trends; and yet another area might tilt bearish via long-dated put options on ETFs, to generate profits if the market declines.

To navigate and immunize with your own retirement nest egg, you can use our array of software tools like TradeStops, Ideas by TradeSmith, and Crypto by TradeSmith. Our world-class education and Customer Success teams can also help you get going.

If Dalio is correct — and our views happen to align with his — the 2020s are going to be a wild decade, and a whole new paradigm relative to what we’ve been used to since 2009. But you can prepare — and possibly not only survive, but thrive — with help from your friends at TradeSmith.


Founder, TradeSmith