Pimco's Bill Gross says to expect low returns


COMMENTARY In his December investment outlook, Bill Gross writes, "If you can get long-term returns of 5% from either stocks or bonds, you should consider yourself or your portfolio in the upper echelon of competitors."

Gross also notes:

Investors should recognize that Euroland's problems are global and secular in nature; it will be years before Euroland and developed nations in total can constructively escape from their straitjacket of debt.

Global growth will likely remain stunted, interest rates artificially low and investors continually disenchanted with returns that fail to match expectations.

Investors should consider risk assets in emerging economies, such as Brazil and Asia, and bonds in the strongest developed economies, where the steep yield curve may offer opportunities for capital gains and potentially higher total returns.

My take

Though Bill Gross is a skilled bond manager, even skilled bond managers can be dead wrong. For instance, Pimco's Total Return Bond fund (PTTRX) is trailing the Barclay's Aggregate bond fund by over four percentage points this year, demonstrating that Gross' big bet against U.S. Treasuries was wrong.

With his analysis and predictions, I think Gross makes the mistake of thinking he knows more than the rest of the market, when what he is actually doing is performance chasing and making self-serving statements.

As far as performance chasing goes, he recommends emerging markets as if he is somehow privy to the inside track of information on these economies growing faster that the rest of us aren't. He also recommends bonds in the strongest developed countries, of which the U.S. is still one.

On the self-serving side, he implies that bonds and stocks will likely earn the same going forward. As a bond fund manager, he benefits by investors having this belief. While this has so far been the century for bonds, not stocks, the likelihood of it continuing will be low. Bond yields would soon have to be negative for bonds to continue to have the principal appreciate.

My advice is to ignore the noise and stick to a low cost diversified strategy. A skilled investor knows they don't know returns for the next few years.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.