Billionaire investor Ray Dalio warns the US is in a period of 'great risk' — and says the most important thing investors can do is diversify

• Billionaire investor Ray Dalio told Bloomberg that the US is in a period of "great risk" because of rising deficits and the uncertainty around the upcoming US election.
• The most important thing investors can do to manage this risk is to diversify their portfolios by asset class, country, and currency, he said.
• "Diversification is a wonderful, mechanical, good way to reduce risk without reducing expected return," the founder of Bridgewater Associates added.

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Ray Dalio told Bloomberg on Tuesday that the US is currently in a period of "great risk" because of rising deficits and the upcoming election, and the most important thing for investors will be to know how to diversify well.

The founder of Bridgewater Associates said if there's no clear winner of the election and no agreed-upon way for concluding the winner, "you could start to see bad things happening."

A situation where "power politics" and different states get involved could become an "extreme risk," he added. "It exists as a possibility. I'm not saying what the probability is, but it's a major thing."

Dalio added that in either outcome of the election, there will be "very large deficits going forward."

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The most important thing investors can do to manage this risk is to diversify by asset class, country, and currency, Dalio said. He suggested gold and inflation-indexed bonds as good diversification tools, and suggested more global holdings for investors with all their assets in the US.

The investor who founded the world's largest hedge fund added that diversification can be achieved with no costs.

"Diversification doesn't cost you anything. Because when your asset classes are going to — if you balance them right — have approximately equal expected risk-adjusted returns, so you can balance them, because they all compete with each other, so not one is necessarily clearly better," he said.

He added: "Diversification is a wonderful, mechanical, good way to reduce risk without reducing expected return."

And investors shouldn't subscribe to the "dangerous bias" that the past is representative of the future, he said. "If you go through history, when you have some of these conflicts, you might have a different result."