|PIMCO's Bill Gross on the Death of Equities
Implications of Bill Gross article and what it means going forward
|Bill Gross calls for another "death of
equities" by writing in his monthly "Investment Outlook" that "The Cult
of Equity is Dying."
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|August 1, 2012: In this month's "Investment Outlook"
article, Bill Gross, the founder and co-chief investment officer of the
world's largest bond fund wrote "The cult of equity is dying." In
the article Gross explain why he thinks stocks are not really for the
long run, a play on the book by Jeremy Siegel, Stocks for the Long Run.
Note that Gross still expects equities to provide a return before
inflation going forward that is double bonds so be careful jumping to
In the article where Gross writes why he thinks pension funds are still too optimistic with 4.75% and higher appreciation targets, Gross gives his "new Normal" target for a diversified portfolio of 50% stocks and 50% bonds:
Implications of lower returns: What it means is all the "Monte Carlo" simulations that try to predict what a "safe withdrawal rate" is for a PASSIVE portfolio use old data that cannot be repeated going forward. It also means that all the under funded pension obligations we read about are in far worse shape than they say because the pension funds, such as CalPERS in California, are still using 7% or more for their expected total portfolio returns. (See CalSTRS Teachers Pension Fund Asset Allocation and CalPERS Asset Allocation Ratio and Target Annual Return.)
On June 23, 2011, Joe Dear told CNBC the Target annual return for the CalPERS fund is 7.75%. Joe says they probably can not meet this using US equities and fixed income but he thinks they can do it if they invest globally.To get an annual return greater than zero going forward, investors will have to employ many tactics to scratch and scrape for each and every bit of extra 0.5% to 1.0% of return. These tactics include:
Of course, this is a
lot more work than having a balanced retirement portfolio that used to
allow 3% to 5% annual take-outs that many financial advisers and pension
funds still hope to get. If Gross is right, taking 5% a
year out of a portfolio that is only generating 3% a year annual return
will have you out of money sooner than you think using the old data.
Note 1. Source: http://www.pimco.com/EN/Insights/Pages/Cult-Figures.aspx
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