fbpx

A Gross Misconception

August 3, 2012

Bill Gross is someone we respect greatly and we have been following his career for years.  He co-founded Pacific Investment Management and runs the world’s largest bond mutual fund, PIMCO Total Return.  He recently released an Investment Outlook piece, titled Cult Figures, and we wanted to share our opinion on his thoughts in today’s show.

In this piece, Mr. Gross shares his opinion that stock investors should rethink their pattern of holding stocks for the long run, as the cult of equities seems to be a thing of the past.  He says, “Now in 2012, an investor can periodically compare the return of stocks for the past 10, 20 and 30 years, and find that long-term Treasury bonds have been the higher returning and obviously “safer” investment than a diversified portfolio of equities. In turn it would show that higher risk is usually, but not always, rewarded with excess return.”

Got Stocks?
Mr. Gross points to a 6.6% real return from stocks since 1912.  He wonders how a real return of 6.6% makes sense when real GDP was only being created at an annual rate of 3.5% over the same period of time.  He claims that the stock market has acted as a Ponzi scheme, somehow shaving off 3% each and every year and giving it to stockholders.  However, he is using flawed logic to reach this conclusion.  The relationship between stock market returns and GDP is not perfectly linear and correlated.  GDP is a measure of economic output; stock prices and returns are based on expectations of future cash flows.

He also states that “real wage gains for labor have been declining as a percentage of GDP since the early 1970s, a 40-year stretch which as yielded the majority of the past century’s real return advantage to stocks”.  However, this chart shows that standards of living have risen enormously over the last century, in great part due to increased production and advances in technology.  GDP growth has been faster than population growth, giving every human being more resources than ever before in history.  So, this isn’t necessarily an issue of exploiting laborers.  It is more an issue of exponential productivity gains, which is a good thing.

Got Bonds?
Mr. Gross states that it is a stretch to assume that long-term bonds will replicate the performance of past decades, with long Treasuries currently yielding 2.55%.  We agree.  While we have been in a declining interest rate market, it is inevitable that we will see the opposite in the future.  When we do go into a period of increasing interest rates, the value of currently held bonds will decrease.  Bond holders may have to sell at a discount. Given the number of “bubbles” we have seen in the market in the past, this should be a bit of a warning about the possibility of a bond bubble.

What’s the Alternative?
A portfolio consisting of purely equities or purely bonds will not help an investor reach his or her goals.  While we do not agree with everything Mr. Gross says in his commentary, he has provided us with some reflection on the problems with relying on any one asset class to consistently provide favorable returns.  Exclusively investing in stocks, bonds, or cash is never the answer.  You must diversify.  Put together an investment plan, save 15-20% of your gross wages, and find a risk tolerance and diversification that fits for you.

We would love to hear your thoughts on Mr. Gross’s Investment Outlook.  Please comment below or post on our Money-Guy Facebook page!

Most Recent Episodes

3 WORST Types of Financial Crooks (Don’t Get Scammed!)

In the financial world, there are a lot of crooks that try to get into your pockets. From metaphorical crooks selling a bad product to literal crooks stealing your money, we'll cover the different types of financial crooks to watch out for and how you can protect...

Financial Advisors React to NFL Players Spending Their First Million!

Not many Americans will ever make over one million dollars in a year, but professional athletes regularly make that and more. In this react video, we'll see how NFL players spent their first million dollars after making it into the league. As we review their mistakes...

Everything You Need to Know About Real Estate Investing!

Over the years, we have had some great conversations about real estate investing. In this episode, we put together the ultimate guide to show you everything you need to know about real estate investing! In this episode, you'll learn: How to get started in real estate...

The Truth About The FIRE Movement! (Is FIRE Still Possible?)

Since the advent of the FIRE movement several decades ago, we have never experienced a period of higher inflation until now. With the market down over 20% and inflation at 40-year highs, is FIRE still possible in 2022? If it is, what does it take to become financially...

Top 3 Most Controversial Money Issues! (Our Hot Takes)

We have some unpopular opinions about controversial money topics. In this episode, we'll discuss our three biggest controversial hot takes, including our thoughts on nice cars, wealthy people, and real estate. You won't want to miss this one! In this episode, you'll...

Why College in America is Broken [And What You Can Do About It]

College costs in America have skyrocketed over the last few decades, as has the total student loan debt in the country. In this episode, we'll talk about why college in America is broken, what went wrong, and how you can do college the right way. In this episode,...

Why This Recession is Going to Be VERY Different!

Every recession is different, and this one is no exception: we are currently experiencing once-in-a-lifetime inflation and started the recession with historically low interest rates. Will this recession be different from any other we've experienced? How will it end...

How to Protect Your Finances During a Recession! (By Age)

The S&P 500 recently crossed over into bear market territory, and many in the financial media believe we are in a recession. Bear markets and recessions affect everyone differently, and we think there are certain things you need to focus on (or forget about) by...

Avoid These Home Buying Mistakes! (Even During a Crazy Market)

Housing prices have gone up over 30% in the last two years, and over 70% when you account for rising interest rates. However, there are some glimmers of hope in the housing market for those looking to buy. Will the market cool off anytime soon? How can you buy a house...

Financial Advisors React to OUTRAGEOUS Money Advice on TikTok!

The most powerful time to get serious about building wealth is when you’re young. So, what is the younger generation learning? Financial Advice (good and bad) is being produced in massive rates across online platforms and Tik Tok is the new frontier. Is there good...

Financial strategies to your inbox!

Never miss a show again, get special offers and early access. Ready to build wealth and start owning your time? 

You have Successfully Subscribed!