Monday, August 6, 2012

Bill Gross and CCI agree.

While CCI was enjoying the summer last week, the financial blogosphere seemed to all have an opinion on this monthly newsletter from Pimco's Bill Gross.  You might want to read the newsletter for itself, but the main point I took away from the article is that Mr. Gross  is questioning weather the equity markets 6.6% real (after inflation) average return for the last 100 years can be counted on to continue in the next decade or two. This is very consistent with Pimco's often stated "new normal"  view of the market.

Many pundits and bloggers seem to think the market will generate at least average returns over the next decade, and feel Mr. Gross gives recent history too much credence, is just being bearish, "taking his book", etc.  Reinhart and Rogoff's book that studies eight centuries of data, concludes that debt driven slow downs do adversely impact market performance for a longer period of time. In general, CCI agrees with the idea that the next few decades may not  generate the same performance as the last 10 decades in the markets.  Who knows?

 However it seems that nearly every retail investor in the world is 100% invested into the concept that the next two decades will be like the average of the last ten decades.  They are 100% conceptually invested in something like a 60/40 equity/bond allocation.  Doesn't common sense seem to dictate that an investor should diverse some of their portfolio away from this belief/theory? It seems prudent that perhaps 80% of their portfolio is invested with the belief that the markets will have average performance of the next few decades. ...but maybe 20% or their portfolio should be investing assuming returns will have to be generated via other mechanisms (options, long/short, leverage, hard assets, etc).

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