Why Ray Dalio says cash isn't as safe as investors think

Published Wed, Oct 7 20201:03 AM EDTUpdated Wed, Oct 7 20201:42 AM EDT

(This story is for CNBC Pro subscribers only.) SINGAPORE — Investors have the impression that cash is the least risky asset, but it's actually "not a safe investment," says Ray Dalio, founder of investment firm Bridgewater Associates. This isn't the first time he has warned investors about holding cash. Earlier this year, he said "cash is trash." "I think that there's an instinct to think that cash is the lowest risk asset, because it has less volatility, and also because we look at everything through the lens of cash – what is everything in dollars worth," he told CNBC's "Street Signs Asia" on Wednesday. "But you don't realize that when there's so much production of debt, and so much production of cash, that it does poorly relative to other asset classes," Dalio warned. Dalio, whose company manages about $160 billion, argued that holding cash will "tax" you around 2% a year, due to inflation. "Cash is a poor asset class, it is not a safe investment," he said. "It's a quietly bad asset class. Diversification is much better than cash." How to play the U.S. election When it comes to how to invest around the U.S. election in November, Dalio said the "most important thing … is to diversify well." "Because this is now going to be a particularly risky period and there's a lot of unknowns, and that means diversification, not just in asset classes, but diversification in countries and currencies – to have a more broad perspective," he said. Investors should think about the various policies and the economic implications for companies, Dalio said. For example, under Democratic nominee Joe Biden's green infrastructure plan , green technology would be in focus. Dalio added that there was "probably a one in three chance" in not getting an orderly transfer of power after the elections. "There's a situation where there's less respect for the commonality, the need to reach what is best for the United States, there is right now the notion of a lot to argue about," he said. "So when the rules are not crystal clear, and you have the parties involved making moves about power, and it becomes political, that is a dangerous set of circumstances." No stimulus relief will lead to 'greater tension … anger' U.S. President Donald Trump halting stimulus talks is going to be a "significant negative" on the economy, Dalio says. "That's a lot of money … and it's going to be a political issue. Those who are not going to get the money are going to be (under) a lot of stress. It's certainly not a good thing," he told CNBC. Shortly after the Trump tweeted his decision to stop those negotiations until after the election, investors pulled out of stocks. The Dow Jones Industrial Average closed more than 300 points, or 1.3%, lower after the announcement. Congress has failed to deliver new relief money to Americans for months as millions of people left jobless by the pandemic struggle to pay for food and housing. Lifelines that sustained the economy throughout the early stages of the pandemic, including the $600 per week unemployment benefit and the window to apply for Paycheck Protection Program small business loans, lapsed weeks ago. Dalio stressed that stimulus spending by the government is needed in addition to the Fed's monetary policy support. "If the Federal Reserve just went in and bought securities, and you didn't have the spending by government in terms of the various programs to provide financial aid … and that has an economic impact. It also has a social impact, it produces also greater tension … anger," he said. When the Fed buys more bonds, that produces more liquidity and helps markets, Dalio said. But, "it doesn't do the trick in terms of providing the income, the spending and the targeted money getting into the hands of those who need it most."

Ray Dalio of Bridgewater Associates speaking at the World Economic Forum in Davos, Switzerland, January 21, 2020.

Adam | CNBC

(This story is for CNBC Pro subscribers only.)

SINGAPORE — Investors have the impression that cash is the least risky asset, but it's actually "not a safe investment," says Ray Dalio, founder of investment firm Bridgewater Associates.

This isn't the first time he has warned investors about holding cash. Earlier this year, he said "cash is trash."

"I think that there's an instinct to think that cash is the lowest risk asset, because it has less volatility, and also because we look at everything through the lens of cash – what is everything in dollars worth," he told CNBC's "Street Signs Asia" on Wednesday.