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The new normal: Did Bill Gross get it right?

(MoneyWatch) Each month I run a "lunch and learn" session with the advisors at our firm. At a recent session, the first question was: "How do you respond to someone worried about Bill Gross's 'new normal'?" So I decided to see how things have turned out since he made his famous prediction.

Before we get into the specifics of how the prediction has fared, it's important to note that you'd nearly always be better served by ignoring forecasters. Any information they reveal will already be known by the markets and thus incorporated into prices. Also, the evidence shows that there are no good consistent forecasters. And, as it turns out, Gross's new normal prediction provides a perfect example.

It was in May 2009 that Bill Gross forecasted the new normal at Morningstar's investment conference. Morningstar reported that "Gross effectively discredited the idea that this brutal bear market will give way to a new decade of prosperity for risky assets." Instead, Gross forecasted that "risk-taking is simply not going to be as rewarding, so investors may want to switch down to a more sedate asset allocation mix with more bonds and stable blue chip stocks." Another key piece of advice from Gross was to raise investments outside the U.S because the dollar is likely to lose its status as the world's reserve currency amid massive levels of government debt.

To be fair, his economic forecast was fairly accurate. We have experienced the slowest recovery in the postwar era, and economic growth has slowed around the world. Now you would think that getting the economic forecast right would be a good sign for getting the market forecast right. After all, most market forecasts are based upon economic forecasts. So how did Gross' forecast work out?

The following are the annualized returns of various asset classes for the period June 2009 through May 2013.

Note that the returns of all five major U.S. asset classes are well above their long-term averages. This still holds true if we consider the losses experienced by all of them in June. If this is the new normal, investors should be thrilled, not worried. Also note that Gross' recommendation to raise more investments outside the U.S. didn't work out well either, as U.S. stocks far outperformed international stocks.

His prediction about the status of the dollar as the world's reserve currency hasn't fared any better. While the trade-weighted value of the dollar did fall from 104.2 at the end of May 2009 to 102.8 on June 21, 2013, that's an annualized decline of less than 0.4 percent a year. That's hardly catastrophic and not what you would expect from a currency about to lose its status as the world's reserve currency.

Keep this tale in mind the next time you're tempted to alter your plan based on some guru's forecast. In fact, this isn't the first time we've seen a big prediction by Gross come up short. This demonstrates why you shouldn't focus on the latest predictions by well-known gurus. Instead, focus only on the things you can control: the amount of risk you take, the amount of diversification you have, the costs you incur and the tax efficiency of your portfolio.

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