The Holy Grail of Diversification
Find 15 good uncorrelated bets to reduce risk by 80% without reducing returns
The most important investment insight is understanding the power of uncorrelated bets. If you have 15 good bets that are 60% correlated, adding more only reduces risk by about 15%. But if you have 15 good UNCORRELATED bets with the same expected return, you reduce risk by over 80% without reducing average returns. This improves your return-to-risk ratio by a factor of 5. The key is finding bets that are intrinsically different—driven by fundamentally different factors—not just statistically uncorrelated in historical data.
- 15 good uncorrelated bets reduce risk by over 80% while maintaining average returns
- Correlated bets give only marginal risk reduction no matter how many you add
- Intrinsic difference matters more than historical statistical correlation
- The return-to-risk ratio is more important than the absolute return
- Distinguish between the risk of ruin (being knocked out of the game) and the risk of painful learning
- Distinguish ruin risk from learning riskSeparate the risk of being knocked out of the game entirely (ruin) from the risk of painful mistakes that teach you (learning). Never take the first kind. Actively seek the second.Pro tipLike skiing: if you are not falling a lot, you are probably not learning—but do not kill yourself
- Find intrinsically different betsRather than just checking historical correlation numbers, ask: are these bets driven by fundamentally different factors? A Silicon Valley startup and Colorado timber are intrinsically different regardless of what past data shows.Pro tipUnderstand what drives each bet's success or failure—if the drivers are different, the bets are likely uncorrelatedWarningHistorical correlation can be misleading because correlations change across environments
- Aim for 10-15 uncorrelated positionsThe magic number is 15 uncorrelated bets for maximum risk reduction. Even 5 good uncorrelated bets provide substantial improvement. Beyond 15, the marginal benefit diminishes.
- Test for timeless and universal patternsAny relationship you rely on should be tested across different time periods (timeless) and different geographies or contexts (universal). If stocks and bonds behave similarly in Spain, Brazil, and the US, the pattern is more reliable.
- Triangulate with quality expertsFor any major decision, find three excellent experts who will disagree with each other because they are committed to the right answer. Listen to both their conclusions and their reasoning. This quality triangulation significantly raises your probability of being right.Pro tipThe fear of being wrong combined with curiosity about why someone disagrees is the best motivator for seeking triangulation
Bridgewater manages $160 billion by applying the Holy Grail principle: finding 15+ uncorrelated investment streams that each have good expected returns. They analyze the intrinsic drivers of each investment's price movement to ensure genuine uncorrelation.
Rather than predicting whether an asset is 'good' or 'bad,' Dalio maps out who the buyers and sellers are, what motivates each group, how big they are, and what they are likely to do. This includes institutional rebalancers, distressed sellers, lockup expiration sellers, and speculative buyers.
Ray Dalio discovered this principle through decades of managing Bridgewater's portfolio. He realized that the power of diversification with uncorrelated bets is 'so much more valuable than trying to make any one bet much greater.' This insight—which he calls the Holy Grail of investing—applies far beyond financial markets to business strategy, career decisions, and any domain where you are making multiple bets on uncertain outcomes.