Pimco or Vanguard--Who's Got The Right Idea?

Pimco or Vanguard--Who's Got The Right Idea?

The biggest bond management fund on Earth says don't look for big returns. Vanguard Funds says otherwise. Who's got the right idea?

Stocks and bond returns to be lowered for years, that's the word out of Pimco's own Bill Gross in an interview on CNBC. Gross serves as no less than Pimco's co-CIO, and Pimco itself is the largest bond management firm on Earth.

"We should expect less as opposed to more-new normal as opposed to old normal," he said. "We should expect that the private economy is delevering on a global basis. That means consumption and household income growth will be less than it has in prior years."

In fact, Pimco is going so far as to suggest that a "normal" rate of return for your investments is four to six percent for "risk assets".

But Jack Bogle of the Vanguard funds group is less pessimistic, saying that we should be able to net returns of six to eight percent, fully double Pimco's projections.

So what does that mean?

What it means, of course, is that someone's going to be wrong here. If Pimco's got the right of it then you can expect precious little out of your portfolio for years to come, and conservative strategies will be rewarded. If Vanguard's right, you've got a little better shot if you go aggressively because bigger gains are more likely than expected. I'm personally calling it for Pimco, especially against a backdrop of high unemployment and a commercial real estate problem in the making.

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  • Tom

    April 02, 2010

    Gross has been saying this since the start of the financial crisis. Meanwhile the S&P is up over 60%. His new normal is wrong normal.

  • Realcheck1

    April 02, 2010

    Tom, Unless you are only a 1 year old, things are much worse today than they have been in the last 25 years: the equity market is still Down a full 27% since October 2007. And unemployment is now over 9.7%, or in other words 15 million people in the U.S. are unemployed, most states are laying of public workers due to deficits (in other words, the business in the state can not pay for services), And no one is lending to small businesses still. And the U.S. government is now at a record deficit(in other words taxpayers don't earn enough to support the cost of federal government programs) , both current, and longterm. Wake Up !

  • rypatel

    April 02, 2010

    Well, given that the 10-year Treasury Note is yielding almost 4% currently, I doubt that "risk" assets will pay out only 4% since risk free (or almost as risk free as you can get) assets pay that out now.

    Unless Gross means that the risk premium (risk of market minus risk free rate) is 4-6%, which is not that bad. But again, I doubt there is any validity to the claim that risk assets will only give 4% returns when risk free assets already do that right now.

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