The comments below are an edited and abridged synopsis of an article by Ray Dalio
One of Dalio’s investment principles is: Identify the paradigm you’re in, examine if and how it is unsustainable, and visualize how the paradigm shift will transpire when that which is unsustainable stops.
Over 50 years of investing, Dalio has observed that there are relatively long of periods (+/-10 years) in which the markets and market relationships operate in paradigms that most people adapt to and eventually extrapolate so they become overdone, which leads to shifts to new paradigms in which the markets operate more opposite than similar to how they operated during the prior paradigm. Identifying and navigating these paradigm shifts well, and/or structuring one’s portfolio so that one is largely immune to them, is critical to successful investing.
Dalio discusses how paradigm shifts occur; paradigm shifts over the last 100 years; and the coming paradigm shift.
In conclusion: “Most people now believe the best ‘risky investments’ will continue to be equity and equity-like investments, such as leveraged private equity, leveraged real estate and venture capital, and this is especially true when central banks are reflating. As a result, the world is leveraged long, holding assets that have low real and nominal expected returns that are also providing historically low returns relative to cash returns (because of the enormous amount of money that has been pumped into the hands of investors by central banks and because of other economic forces that are making companies flush with cash). I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold… most investors are underweighted in such assets, meaning that if they just wanted to have a better balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”