Should you stay or should you go? by Don Phillips
BlackRock's Larry Fink says be 100% in equities.
PIMCO's Bill Gross claims equities are dead.
Vanguard's Jack Bogle preaches stay the course with
a balanced portfolio. To read the headlines, it
seems that three of the best and most trusted names
in finance are decidedly at odds with one another.
In truth, their forecasts are not that different.
The shared message is that current conditions
warrant sober expectations for returns from both
stocks and bonds. None expects equity returns to rival
the 6.6% annualized real return seen over much of
the past century and immortalized in Jeremy Siegel's
Stocks for the Long Run. None expects bonds to
produce returns much in excess of their current
coupon, so a return of less than 2% on the Barclays
Aggregate Index is probable. All three expect
bonds to be significantly more volatile in the future
and to be particularly vulnerable to government
attempts to manage excess debt through inflation.
In short, all see tougher times for financial assets.
The easy days of the bull market of the 1980s and
1990s are gone. The markets won't do the heavy
lifting to grow investors' portfolios. Instead, investors
will need to work longer, save more, and invest
smarter (and more cost efficiently, Bogle would
hasten to add) in order to meet their goals. It's a
sobering and valuable message, one echoed by
Jeremy Grantham and many other astute investors.
It's also a message that's unlikely to spur investors
into action. With no carrot to reward investors
back into the markets, turning their backs on the
markets becomes an appealing option. Saving
is hard work and requires great discipline. The days
of instant rewards from the stock market are over.
Despite the headline that stocks are dead, Gross, like
the others, sees stocks offering better returns than
bonds. The facile take-away that the Bond King slams
stocks wasn't what Gross really said. Indeed, his
sharpest warnings were for holders of long bonds
in the higher inflationary environment he foresees. He
sees stocks as offering double the nominal return of
bonds over the next several years. Unfortunately, the
rising inflation he predicts would leave stocks with
zero real return (and bonds with negative real returns).
Bogle and Fink both have slightly rosier outlooks for
stocks, but neither sees double-digit annual returns
on the horizon. So, while the three differ in degree, all
rank stocks, bonds, and cash in the same order,
and all three think that each asset class offers moremuted
returns than investors expect. It's the "cult" of
equities, not equities themselves, that Gross declared
dead. He clearly sees merit in equities—he's co-CIO
of a shop launching equity funds—but he knows
that investor expectations must be reined in if they
are to deploy stock funds wisely.
Where the three differ most is in how they would
suggest building portfolios in this tougher environment.
Fink, given his be-fully-in-equities statement,
would skew much more heavily toward stocks, but
BlackRock also advocates more-venturesome fixedincome
funds and alternative strategies. Gross likely
wouldn't tilt as far to stocks and would feature highyield
bonds, emerging-markets securities, and assets
expected to be more inflation-resistant. Bogle would
pass on the alternative approaches and stick with a
regularly rebalanced portfolio of higher-quality bonds
and stock index funds, choosing to control the major
things an investor can—costs, taxes, and asset allocation.
In the lower-return, higher-tax world all three
foresee, those things will matter more than ever.
Investors should listen closely to each of these voices.
The exact combination of these approaches
one chooses to follow is a matter of preference, but
there's no denying that the road ahead will be
tougher than the one that baby boomers have traveled
for much of their investing lives. Investors
must be better disciplined, strategies must be
smarter, and cost and tax efficiencies must be more
central to the decision process than they've been
to date. It'll be a tougher path, but meaningful progress
can still be made. In the words of Bogle:
Press on, regardless.
