Wednesday, October 28, 2009

How to Play It: The New Normal

By Jonathan Tse

Every decade or so, investors are told to heed a new megatrend, whose chief appeal is, well, its newness. In the ’90s, investors were sold on the notion of a New Economy that wasn’t subject to the old laws of gravity and, among other things, could support higher stock valuations. And one of the best-selling investing books of the past decade was The New Investment Superstars, a tome that canonized a new breed of fund wizards, some of whom later proved to be mortal. Now comes the latest investment fad, the “new normal,” the idea championed by Pimco bond guru Bill Gross that the U.S. has entered a period of diminished expectations that requires investors to rethink their long love affair with stocks.

There’s a certain Biblical undertone to the new normal orthodoxy: After decades during which consumers lived beyond their means, the nation must now endure a long stretch of lean years during which consumers pay down debt. In the minds of Gross and Pimco colleague Mohamed El-Erian, the prospect of a period of no growth means investors should hold as little as 30% in stocks, vs. the 60% long deemed the proper mix. They also recommend holding more fixed-income assets like bonds and bank loans, as well as commodities.

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