Ray Dalio thinks cash is better than bonds, but there's a catch

The founder of the world’s largest hedge fund, Bridgewater Associates, thinks bonds are too risky in today’s economy and prefers to hold cash. Ray Dalio sees cash as a financial stopgap until central banks put the inflation genie back in the bottle.

In the investment world, holding cash is akin to being out of the market entirely—unless it’s part of some broader diversification strategy.

Dalio, whose net worth is over $15 billion, is famous for his emphasis on diversification. But his recent change of heart isn't about diversifying with cash; he outright prefers dollars over bonds.

“I don’t want to own debt, you know, bonds and those kinds of things,” Dalio told an audience at the Milken Institute Asia Summit in Singapore on Sept. 14. “Temporarily right now, cash, I think, is good.”

Bridgewater Associates has over $123 billion in assets under management. When its founder opts to forego interest on part of that cash, it’s worth paying attention.

A not-so-sudden change of heart

Dalio has long proclaimed that “cash is trash.” But when Dalio first uttered that phrase in 2019, interest rates were at rock bottom, and both stocks and bonds were in a generational bull market.

As such, investors holding cash, Dalio thought, would miss out on gains and gradually go broke because inflation chips away at the real value of money.

Inflation is still a problem today, but mounting government debt is an even bigger problem.

When debt becomes a large enough share of the economy, it’s not easy to unwind. The situation “tends to compound and accelerate” as interest payments grow, he said.

“We’re at that turning point of acceleration,” Dalio says.

While the U.S. government keeps borrowing to support programs that can’t be funded by federal revenues alone, it faces a daunting challenge: keep rates high enough to attract creditors but not too high to harm its finances.

This battle is already costing America an outrageous amount of money.

The Congressional Budget Office forecasts that interest payments alone will cost the U.S. government a staggering $663 billion this year. Next year, it's forecasted to climb to $745 and almost double to $1.4 trillion by 2033.

When bondholders choose to sell—pushing up yields in the process—the Fed will need to decide whether to print money or let federal finances deteriorate further. Dalio believes they’ll probably choose to print.

This is not a situation he wants any part of. “I personally believe that the bonds, longer term, are not a good investment,” he said.

Aren't bonds supposed to be "safe"?

The problem is that millions of Americans have exposure to the bond market through mutual funds and ETFs. That's because they’ve been told for years to load up on "safer" bonds the closer they get to retirement.

But even if Dalio is right, the average American has little choice.

Unlike Dalio, most individual investors—burdened with rising costs and lower earnings—don't have the luxury of sitting on the sidelines and waiting for the bond market to implode.

Many also don’t have much cash to spare to begin with.

According to the Federal Reserve’s Survey of Consumer Finances, the median savings account balance for families in 2019 was $5,300. The survey hasn’t been updated since, but it’s unlikely that the situation has improved post-Covid.

Outside of real estate, Americans rely on 401(k)s to preserve their wealth, and those aren't flush with cash either. The average 401(k) balance was just over $141,500 in 2021, according to investment firm Vanguard.

The good news is bond funds rarely hold bonds until maturity and instead buy and sell according to market conditions.