In the August 2012 Investment Outlook from Bill Gross, the mutual fund manager holding more assets than any other portfolio manager in world makes a compelling case that "the cult of equity is dying" and that the long-term outlook for stocks does not look attractive, to say the least.
The respected bond fund manager makes some good points, both from a quantitative/logical perspective and a qualitative/intuitive perspective:
- The long-term history of inflation adjusted returns from stocks shows a persistent but recently fading 6.6% real return since 1912.
- The legitimate question that market analysts, government forecasters and pension consultants should answer is how that return can be duplicated in the future.
- Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.
- The commonsensical conclusion is clear: If financial assets no longer work for you at a rate far and above the rate of true wealth creation, then you must work longer for your money, suffer a haircut on your existing holdings and entitlements, or both.
Gross essentially is saying that returns for both stocks and bonds cannot possibly repeat the same long-term performance in the coming years and decades as in the past, at least based on what is known today, and suggests that investors need to be more diligent and creative to make their money work harder.
As a bond fund manager, Bill Gross knows better than anyone that the last 30 years has been generally good for bond mutual funds and that the next 30 years may not be quite as good, or shall we use the phrase not quite as easy. He places this same macro-economic outlook on stocks.
For a few tips on investing ideas in the coming years, check out the articles, How to Choose and Buy Bonds and Best Bond Funds for Rising Interest Rates.
So what, exactly, does Mr. Gross recommend?
Good question, R.C. I believe Mr. Gross is simply using his notoriety as a means of displaying his knowledge (ego) and is attempting to deflect the fact that bond mutual funds (his bread and butter) are headed for a significant bear market, once interest rates begin rising (and prices begin falling).
For fixed income, I’ve suggested that investors consider individual bonds because the price risk is eliminated, as long as the investor holds the bond.
Which one do you prefer. Stock or Bonds? I have acquires a small amount of bond and planning to enter into stocks.
Ed: I don’t prefer stocks or bonds but I usually have some combination of both and recommend the same to most of my clients.
As you might guess, each individual’s circumstances and objectives are unique, which requires a unique asset allocation.
You may get some use out of my article, How to Build a Portfolio of Mutual Funds
Thanks for the comment….