One year ago, the founder of the world's biggest hedge fund predicted that people holding cash would 'feel pretty stupid.' He was wrong.
- Bridgewater Associates founder Ray Dalio said one year ago Tuesday that investors holding cash would feel "pretty stupid," as he touted a strong market environment.
- Dalio's call did not pan out; cash was the best-performing asset in 2018, outperforming stocks, bonds, and commodities.
- He made those comments at the World Economic Forum in Davos, Switzerland. Dalio defended those comments on Tuesday at this year's forum.
Ray Dalio, founder of Bridgewater Associates, the world's largest hedge fund, made an investment call one year ago that turned out to be quite ill-timed, suggesting it would be unwise for investors to hold cash.
"There is a lot of cash on the sidelines. ... We're going to be inundated with cash," he said in a CNBC interview on January 23, 2018, at the World Economic Forum in Davos, Switzerland. "If you're holding cash, you're going to feel pretty stupid."Dalio made those comments at a time when the S&P 500 was up 25% in one year and companies received a boost from President Donald Trump's corporate tax cuts. Dalio himself touted a strong "Goldilocks" environment for investors - low inflation, high growth - though noted the current economic cycle was in a late stage.
In other words, he recommended that staying invested, rather than reallocating to cash or cash-equivalent investments, was prudent because a rally was on the way.
For a time, he was correct. The S&P 500 rose 3.6% between the market's close that day and its intraday peak on September 21.
Ultimately, at the end of a perilous year in the financial markets, cash turned out to be the best-performing asset, outperforming stocks, bonds, and commodities. Bank of America Merrill Lynch noted that cash was the only major asset that posted positive returns in 2018, gaining 1.9%. Meanwhile, stocks booked their worst year since the financial crisis.
Dalio appeared to defend his year-old comments on Tuesday, at this year's forum. He pointed to the impact of rising interest rates on the market."I think if you take what I said was, in the first half of the year, you're going to get that stimulation, and then you're going to have the Federal Reserve respond to that stimulation," he said in an interview with CNBC.
"And you're going to probably make it too tight. And if the interest rates rise faster than discounted, then that tightness - I don't believe they could tighten at the rate that they said they would tighten, including the balance sheet, without having a negative effect. And then in the second half of the year, I figured that was going to happen anyway."
Bridgewater Associates manages $160 billion, drawing the title of world's largest hedge fund as measured by assets under management. The firm performed remarkably well in 2018, posting a 14.6% return for its flagship fund at a difficult time for the hedge-fund industry. Last year, hedge funds on average lost 6.7%.
Bridgewater did not immediately respond to Business Insider's request for comment.
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