Many investors have been wondering what combination of stocks and bonds in their portfolios will allow them to retire comfortably in this era of low interest rates. Bill Gross, who presides over the world's largest bond fund at Pimco investments, has some bad news for them: It isn't going to happen.
"A future of low investment returns, and a heap of trouble for those expecting more, is what lies ahead," Gross said in his monthly investment outlook commentary.
Gross says bond returns are likely to be in the 2.5% to 3% range in the near future. Returns on equities, historically around 12% over the last 30 years, are most unlikely to exceed single-digit returns in the current era of 2% to 3% GDP growth. Gross also predicts the Federal Reserve will try to return the country to something like 4% to 5% economic growth by the old "coin shaving trick" of fueling inflation at 2% to 3% a year.
The Fed will accomplish that by buying hundreds of billions of dollars of Treasury bonds, which will drive interest rates lower in a process called quantitative easing. That will force investors looking for decent returns to jump into the stock market, bidding up prices of higher-yielding stocks, he says.
But Gross doesn't think the situation is hopeless for investors.
Look for Opportunities Outside the U.S.
Speaking on CBNC, he urged investors to seek higher returns outside of the United States, putting their money in places like China and other Asian countries where the currencies are stronger than the dollar and the growth rates are higher than in the developed world.
"Bonds are only yielding 2.5% and the very slow growth for equities means that you can't produce those old 10% returns that many households are expecting for retirement," Gross said. "Investors should be looking outside the United States, especially if the dollar is declining and reducing your standard of living and purchasing power."
Gross says that many pension funds are still operating on the mistaken assumption that they will see 8% annual returns to pay the pensions coming due for new retirees. But with bonds returning only 2% to 3%, he says, stocks would have to return upwards of 12% a year to achieve this goal, and there are no stocks producing those levels.
"Pensioners need to start contributing more or retiring at a later date," Gross says.
He says that if the Fed is successful in reflating the economy, stocks will once again be the favored investment vehicles. But that depends on 2% to 3% GDP growth and 2% to 3% inflation, both of which seem far-fetched at this point in the economic cycle.
The Federal Reserve is expected to start buying bonds again following its next meeting in November.