Why the founder of the world's largest hedge fund isn't worriedSeptember 12, 2012: 2:03 PM ET
The possibility of a worldwide depression or a market crash doesn't keep Ray Dalio, founder of the world's largest hedge fund, up at night.
The world, especially southern Europe, may be standing on the edge of an abyss, says Bridgewater Associates' Dalio, but he has faith in the power of central bankers around the globe to essentially print money as needed.
"The world has a lot of liquidity," Dalio said Wednesday morning, during a talk at the Council on Foreign Relations in New York.
In other words, he believes central bankers won't allow the global economy to fall off that cliff.
Many are banking on Bernanke & Co. to announce another round of quantitative easing after their two-day meeting wraps up Thursday. And ECB president Mario Draghi's recent announcement of another round of euro area bond-buying has soothed investors as well.
"This could go on for quite a long time," said Dalio, whose fund manages $120 billion.
Eventually, inflation risks will force central bankers' hands, but he doesn't see that as a major risk over the next five years. Deflation is the bigger worry, but even that could be combated by central banks' bond buying.
Dalio said investors have been fueling this year's stock market rally because they know that central bankers can and will continue to loosen monetary policy. Throughout history, he said, stock market rallies have been precipitated by central bankers simply letting the world know they're willing to buy up debt during times of financial crisis.
Dalio pointed to a sharp six-month stock market rally that President Franklin D. Roosevelt kicked off in March 1933 when expanded the powers of the Federal Reserve. Of course, that rally was eventually followed by a prolonged bear market as the Great Depression lasted for nearly another decade.
This time around, Dalio said it seems that policymakers and central bankers will work together to avoid another Depression, but striking the right balance is critical. While politicians should be able to manage deficits through budget cuts, it's more important to avoid a downturn. "We need a certain amount of austerity but not too much," he said.
Whatever happens, Dalio said investors, as a general rule, should assume one asset class will crash. "Every generation has a ruinous asset class," he said.
And because it's impossible to predict which one, diversification is key, Dalio said, advising retail investors to focus on an "all-weather portfolio" that includes a mix of stocks and bonds, along with a little gold for good measure.
But Dalio's most important investing tenet: don't try to be Ray Dalio.
"I play the game of betting against others," he told the audience, which included hedge fund investor John Paulson and former Barclays CEO Bob Diamond. "I know how difficult that game is. The average investors and most people should not be playing that game. They're going to lose at the poker table."