Why Traditional Assets Are No Longer Safe - Preparing for the New World Economy

Author: Ray Dalio, founder of Bridgewater Associates

Ray Dalio's Investment Philosophy Overview for 2025

If you want to achieve success in the coming years, especially in a rapidly changing world, the primary and most fundamental principle is: understand reality and base your actions on reality, not your wishes. The mistake most people make is viewing investments through recent experiences or personal biases. This is a dangerous way to approach the market, especially in the current phase of long-term debt and political cycles we are in. We are at a historic turning point economically, geopolitically, and technologically. Interest rates are no longer zero, inflation has not vanished, geopolitical tensions are escalating, and productivity growth is no longer guaranteed, while the US-led unipolar world order that many investors are familiar with is facing challenges. In such times, old formulas fail, and the environment demands that investors become students of history and systems.

Background We are at the late stage of a long-term debt cycle. Debt levels in developed economies are nearing or exceeding historical extremes. Monetary policy, which once effectively drove growth through interest rate cuts and liquidity stimulus, is now losing its potency. At this stage, governments are relying more on fiscal stimulus, financing spending through money printing, but this leads to currency devaluation and capital outflows. Therefore, you cannot simply hold cash, as it will silently lose value. You also cannot blindly hold long-term bonds, as they may not provide the same protection during economic downturns as they once did. This leads to the principle of diversification—not just diversification of assets, but also diversification of environments. Holding only 60% stocks and 40% bonds is no longer sufficient to cope with the current situation, as this combination assumes an economic environment that may no longer exist.

What you need is balance, assets that perform well in an inflationary environment (such as commodities or inflation-linked bonds) and in non-inflationary or recessionary environments (such as high-quality stocks and certain fixed income assets). You need to guard against currency devaluation, for example through gold, strategically allocated physical assets, or even exposure to other currency systems.

Correlation Often Overlooked by Investors Correlation can affect risk more than most people realize. When assets decline together, it indicates that your portfolio is not truly diversified. The real goal is not just returns, but risk-adjusted returns, resilience, and the ability to survive and compound in all market environments. Risk is on the rise: political polarization is increasing, institutional trust is declining, and the social contract is under pressure, making future tax policies, regulatory policies, and property rights more unpredictable. Therefore, you must consider not only the distribution of assets but also the jurisdictions, legal systems, and political environments in which they exist. A truly diversified portfolio must span regions and systems to reduce vulnerability.

Most investors are too focused on "getting it right," but the real advantage lies in being prepared to be wrong. This means constantly stress-testing your assumptions, building buffers, and creating asymmetric returns. The best investors are humble learners who are always exploring, adapting, and pursuing truth over self. Looking ahead, the advice is clear: don't bet on a single outcome, but bet on being well-prepared. Build your portfolio in a way that allows you to thrive in various futures without needing to predict the future. Anchor yourself with time-tested principles: understand cycles, manage risks, maintain balance, and use these principles to navigate the unique terrain ahead. The future belongs to those who stay clear-headed, flexible, and grounded in reality, not to those chasing yesterday's successes.

The Most Important Economic Risks

The biggest lesson I have learned from decades of studying economics, markets, and human behavior is that the most dangerous behavior for investors is detachment from reality. The world does not care about your opinions, preferences, or hopes; it operates according to objective forces that recur over hundreds or even thousands of years. The best decisions come from clearly seeing these forces and coexisting harmoniously with them. Most people fail to do this; they are driven by emotions, caught up in what has just happened or what they hope will happen, but the market rewards understanding, not hope.

Understanding begins with the willingness to face the harsh realities of the current environment, no matter how uncomfortable they may be. Investors who avoid the truth often repeat the same mistakes: buying high and selling low, chasing narratives, and ignoring risks, as they are driven more by impulse than by rational principles. Strip away the noise, and the essence of excellent investing is quite simple: understanding how the system works, knowing what phase of the cycle we are in, and recognizing what the market has priced in. If you operate based on incorrect or outdated assumptions, you cannot do these well.

In 2025, this is more important than ever. We are in a period of fundamental changes in the economy, politics, and society. The conditions that drove stock returns, low inflation, and zero interest rates over the past decade are no longer in place, yet many investors continue to operate under the old rules. This is the problem. You must be grounded in reality, constantly pressure test your views, objectively look at the data, and challenge your beliefs. You need to ask: "What is really happening here? What forces are at work? What am I missing?" If you don't do this, you are likely to encounter surprises, and in the market, surprises often mean losses.

This is not only an intellectual honesty but also a necessity for survival. The market is merciless to those living in fantasy. The more honest you are with yourself, the more likely you are to adapt early, take effective action, and avoid the traps that many fall into. Successful investing is not about being smart, but about being real. Ignore the headlines, focus on the fundamentals, historical patterns, and the eternal principles governing currency, debt, productivity, and human interaction. Reality is the ultimate teacher; embrace it rather than resist it, and you will gain a significant advantage that most investors have never tapped into.

How Inflation and Debt Shape the Market

Understanding which stage we are in the long-term debt cycle is one of the most important things investors can do right now. The reason is simple: different stages of the debt cycle create distinctly different environments. If you are not aligned with the current stage, your decisions are likely to severely harm you. People often focus only on the short term—quarter to quarter, or year to year—but the economy runs on a long arc, driven by credit, productivity, demographics, and human nature.

The debt cycle typically lasts 50 to 75 years, and we are now in the late stage. This has significant implications. In the early stages of the cycle, debt growth drives productivity, investment, and expansion. However, ultimately, debt grows faster than income, the interest burden increases, credit becomes difficult to sustain, and central banks are forced to intervene more aggressively. Global debt is nearing historical highs, and central banks are trying to combat inflation by raising interest rates, but now they find themselves in a dilemma: tightening too much will damage the economy, while excessively loosening will reignite inflation.

It is important to note that we have entered a stage where traditional monetary policy (adjusting interest rates) is insufficient to cope. Therefore, fiscal policy intervenes, with the government borrowing and spending to try to maintain growth. However, when the government borrows while the central bank simultaneously prints money, it leads to debt monetization. This is not an academic concept, but has real consequences: it devalues the currency, drives up inflation, forces people away from cash and bonds, increases volatility, and may even lead to a loss of confidence in the system itself.

Therefore, we cannot expect to repeat the patterns of the past decade in 2025. The rules are changing, and bonds no longer offset stock risks as they used to; long-term bonds may be one of the most dangerous places when inflation persists or accelerates. Cash seems safe, but when actual returns are negative, it is quietly losing value. Investors need to understand the mechanisms of money creation, debt repayment, and government responses to pressure. This is not just theoretical, but practical: it tells you why inflation hedging is important, why geographic and asset class diversification is no longer optional, and why resilience is more important than chasing returns. If you can't see the stages of the debt cycle, you will be caught off guard. But if you see it and adjust accordingly, you will be ahead of others. This is how to gain an edge by aligning with the deep structural forces shaping the economy rather than relying solely on headlines.

The Shift in Global Order and Its Investment Impact

The biggest mistake investors make is thinking that diversification means holding many different assets. They buy stocks, some bonds, and a small amount of international stocks, believing they are diversified. But upon deeper analysis, it becomes clear that these assets are highly correlated during times of stress. This is not diversification; it is disguised concentration. In today's world of increased volatility and systemic changes, this kind of allocation is dangerous.

True diversification is not about holding different assets, but about holding assets that perform well in different economic environments. The global economy operates in cycles, driven by two main forces: growth and inflation. This creates four basic environments:

1. Growth Rising + Inflation Rising
2. Growth Rising + Inflation Falling
3. Declining Growth + Rising Inflation
4. Declining Growth + Declining Inflation

Different asset classes perform differently in these environments. An ideal portfolio maintains balance across all four environments: holding assets that perform well during prosperity (such as stocks), assets that perform well in inflationary environments (such as commodities, inflation hedges, or certain real estate), assets that perform well during growth slowdowns (such as high-quality government bonds), and assets that provide protection against tail risks (such as gold or safe-haven currencies).

What you are designing is balance, not betting on a single environment, but preparing for all environments. This reduces volatility, protects against downside risk, and allows you to compound continuously throughout the cycles. Most investors do not do this because they are overly focused on recent performance, chasing newly effective strategies. This is a mistake. Markets are constantly changing; what was effective yesterday may become ineffective tomorrow. True diversification is like a well-functioning machine, where each part has a different purpose, but they work together harmoniously. When one part underperforms, another part compensates. This is the magic of true diversification – it not only reduces risk but also enhances returns by allowing you to maintain investments and stability amidst uncertainty.

In 2025, inflation may rise again, central banks are experimenting, and geopolitical tensions may trigger sudden volatility. You need a portfolio that does not rely on a single outcome. The reality is, no one knows exactly what the future holds. But we can build a portfolio that won't be destroyed no matter which path the world takes. This is the way to shift from speculation to strategy, the way to stay in the game for the long term. In an uncertain world, this is not just a good idea, but essential.

Bridgewater's Strategy for the Upcoming Market Cycle

When people assess their portfolios, they often focus on returns, but over the long term, the interactions between the components of the portfolio are more important. What matters is not how much you earn in good times, but how much you lose in bad times. This is the role of correlation. Correlation is one of the most underestimated yet crucial concepts in investing. The correlation among many assets is higher than investors realize, especially during times of stress. When the system is under pressure, you will find that positions you thought were independent actually move together. This is why so-called diversified investors can experience significant drawdowns—they equate diversification with holding uncorrelated assets.

Correlation determines your actual risk exposure, not the amount held. If two assets move in sync, holding both does not reduce risk. On the contrary, if one asset rises while the other falls, they offset each other, making the portfolio more stable. This is your goal—not just simple returns, but consistency, a smoother journey, smaller drawdowns, and better compounding.

In the current environment, this is particularly important. In the face of rising uncertainty, you must assume that unexpected events will occur, and that traditional assets may perform similarly. Therefore, simply holding stocks and bonds or diversifying across different industries is not sufficient. You need to deliberately choose truly uncorrelated assets, which requires a deep understanding of the assets and the driving factors behind them – what causes them to rise and fall? What environments lead to their good or bad performance? You also need to build not just a diversified portfolio, but a carefully designed investment portfolio that has balance and resilience.

This includes calculating correlations, stress testing portfolios under different scenarios, and continuously reassessing as the world changes. Correlation is not static; assets that seem uncorrelated in normal times may be highly correlated during a crisis. Therefore, you must continuously monitor and adjust accordingly. Ultimately, the best investors are not those who chase the highest returns, but those who build the most balanced portfolios. They understand that the path to wealth is not only upward but also survival downward, which requires understanding how assets interact and constructing a system that operates under various conditions.

Why Traditional Assets Are No Longer Safe

In today's environment, a neglected but crucial aspect of investing is the role of geography and governance in protecting or threatening capital. Most investors focus on what they hold—stocks, bonds, real estate, or businesses—but it is equally important where you hold them. It is a dangerous assumption to think that capital is safe in developed countries or blue-chip markets. History repeatedly shows that political systems, tax regimes, regulatory environments, and social contracts can change rapidly, especially during times of economic stress.

We are entering a period characterized by escalating geopolitical tensions, economic inequality fueling populism, and a collapse of institutional trust. These forces not only shape the news cycle but also redefine the rules of the game. If governments become desperate due to high debt, inflation, or unrest, they will take all necessary measures to protect themselves. This may mean raising wealth taxes, increasing capital controls, changing the treatment of certain investments, or even restricting the flow of funds. If you do not take these risks into account, you expose yourself to danger.

Therefore, geographical diversification is more important than ever — not just the location of assets, but also the legal systems, governments, and currencies they are under. Portfolios concentrated in a single jurisdiction are vulnerable to policy changes in that jurisdiction. You might think capital is safe, but if the rules change overnight, you may not be able to access, transfer, or avoid punitive taxes. Investing is not just about investing in companies or markets, but also investing in systems. Some systems are more stable, transparent, and investor-friendly. You need to consider the soundness of the rule of law, the independence of institutions, the likelihood of political turmoil, and the trajectory of public debt. These are not academic questions, but practical factors that determine the safety of assets.

In 2025, as government debt increases and political division grows, the temptation for governments to shift the burden onto the private sector is rising. This could mean wealth taxes, transaction taxes, unrealized gains taxes, or restrictions on overseas holdings. If you are not prepared for this environment, your vulnerability is not due to poor investments, but rather because the environment has changed. The solution is not panic, but preparation—thinking globally, holding assets in different jurisdictions, diversifying currency exposure, understanding the pressure points of the economy and politics, and allocating accordingly. In a world where risks are not only economic but also systemic, the ability to protect and grow wealth depends not only on market choices but also on structural choices.

The Diversification Principle Advocated by Ray Dalio

The most successful investors I have studied or worked with are not because they always get it right, but because they are prepared to be wrong. This principle is difficult to accept, especially in a world that reveres conviction and confidence. But a belief without humility is the root of market disasters. The truth is, no one knows exactly how the future will unfold. The world is too complex, the variables too numerous, and the interactions too dynamic. Therefore, instead of trying to always get it right, it is better to build a system that can survive and even thrive, even when mistakes are made.

Most people start from the self, binding their identity to their opinions. When their opinions are challenged or proven wrong, they double down or deny it. This is weakness, not strength. The true power in investing lies in knowing that making mistakes is part of the game and designing methods accordingly. This means constantly stress-testing assumptions, asking yourself "What if I'm wrong?" every time you take action, and setting up safeguards for inevitable mistakes.

Here, the concept of asymmetry is crucial. You want to position yourself so that the upside potential far exceeds the downside risk—making a lot when you're right and losing little when you're wrong. This is not by chance, but a design result, a product of thoughtful positioning, risk control, and humility. The best investment portfolios are not based on predictions but on probabilities. You must continuously consider a range of scenarios, not just the one you think is most likely. The market does not reward certainty; it rewards adaptability, and adaptability begins with the recognition that the future is uncertain. The best way to respond is to be balanced, flexible, and open to new information.

In 2025 and beyond, this mindset is particularly important. We are in a world characterized by rising complexity, political instability, technological disruption, debt burdens, climate events, and social pressures. Any of these could trigger a shift in the entire landscape. Therefore, rather than trying to predict the next big move, it is better to prepare for multiple outcomes. Build a weatherproof portfolio that does not rely on a single environment, can withstand shocks, and continues to compound. Humility is not a weakness, but a strength rooted in reality, and it is the foundation of resilience.

Final Advice for Every Long-term Investor

The world will bring surprises, and mistakes are inevitable. The question is whether you are ready to learn and grow from them or let them push you out of the game. In investing, survival is underestimated. Those who remain in the game thoughtfully, cautiously, and strategically for the long term are the ultimate winners.

Conclusion: Preparing for the New World Economy

In a world filled with uncertainty, debt burdens, geopolitical shifts, and rapidly changing economic systems, the path forward for investors is not through prediction, but through preparation. Success belongs to those who are grounded in reality, smartly diversify across environments and jurisdictions, precisely manage correlations and risks, and always remain humble enough to acknowledge that things can go wrong. It is not about betting on what you hope will happen, but about building a resilient strategy that can withstand whatever occurs. In such times, survival is strength, and resilience is the true advantage.