Investing - the New Normal (Bloomberg Opinion)

Gross, Grantham, Bogle Lift Lid on ‘New Normal’: John F. Wasik



Commentary by John F. Wasik

June 1 (Bloomberg) -- If this past year has taught investors anything, it is that conventional wisdom has suffered a thousand cuts.

Stocks don’t always beat bonds. It may not make sense to always have 60 percent or more in stocks and 40 percent in bonds. Stock markets may actually reward politicians.

Three pallbearers of the established canon are Bill Gross, the co-chief investment officer of Pacific Investment Management Co.; Jeremy Grantham, chairman of GMO LLC; and John Bogle, founder of Vanguard Group.

All are beacons in a troubled industry. When I caught their talks at the Morningstar Inc. investment conference in Chicago on May 28, I expected to hear dour forecasts. Yet I didn’t expect notes on the revolution that is undermining the beliefs that investors held during growth eras.

Gross, the world’s most successful bond-fund manager, described what his firm calls the “new normal” investing environment. While he sees “accelerating inflation” toward the latter part of a three- to five-year cycle, he says almost every accepted notion about investing should be examined.

Weak earnings growth translates into “getting used to a 301(k)” -- as opposed to a robust 401(k) -- retirement fund. Stocks won’t always outperform bonds and having dominant positions in equities may not make sense.
Changing Outlook

In Gross’s outlook, the dollar will lose its status as the reserve currency; Brazil, India and China (forget Russia) will offer the best growth; and the U.S. is “consumed out.”

“Everything in this new normal world should be questioned,” Gross said.

What is normal? Certainly not an environment that rewarded investors with 10 percent returns in stocks every year as Wall Street said it would before the dot-com, housing and credit crashes dashed that myth.

That means the accepted wisdom of having 60 percent to 80 percent in stocks may be obsolete and unprofitable. The only guarantees are that the U.S. government will be selling trillions in Treasuries; Americans may start seriously saving again; and the consumer economy may be shrinking long term due to the aging of the population.

Grantham, whose bearish views can often be amusing in the way he presents them, sees some reasonable values in the stock market now, although he’s not sure that a robust rally is in the offing. He also warns that “you can bet on” a bubble forming in emerging-markets stocks.
Grantham’s Optimism

Like many observers, Grantham also sees Americans saving more and consuming less.

“We forgot to save in the last decade because of home prices,” he said. “Now we’ll have to work longer and be more frugal in order to retire.”

Grantham’s only palpable stock-market optimism -- always in short supply in his forecasts -- is the third year of a U.S. presidential cycle.

“Historically, year three has outperformed years one and two by about 22 percent,” he noted. “And there’s never been a major bear market in year three of a presidential cycle.”

For most of us stung by the wretched returns of last year, though, 2011 is too long to wait. That’s why I prefer Bogle’s fundamental approach to portfolios. It doesn’t involve any charts and almost no forecasts.

Bogle says his formula is based on one’s age. The older you are, the more you should have in bonds, approximately matching a percentage of fixed-income investments to your age.

Sage Advice

As one who mostly takes his own advice, Bogle said his allocation produced only an 11 percent loss in his portfolio last year when others with higher percentages in stocks lost from 30 percent to 50 percent.
Of those who got scorched last year, “98 percent of all investors would be willing to swap places with me,” Bogle said.

In keeping with his bedrock views that passive investing through low-cost index funds prevails over time, Bogle eschews absolute return and commodity funds.

What each sage investor neglected to mention was an ever- greater need to customize portfolios not only to hedge market risks but personal labor-market risks as well.

Are you in a profession or industry that’s wobbly right now? Do you have the resources to retrain or re-educate yourself? At the very least, your savings and investments should support some vocational flexibility in these dynamic times.
That’s perhaps the only piece of conventional wisdom that hasn’t changed.

(John F. Wasik, author of “The Cul-de-Sac Syndrome,” is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John F. Wasik in Chicago at jwasik@bloomberg.net.

Last Updated: June 1, 2009 00:00 EDT