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Pimco Guru: Time to Buy More Foreign Stocks

Tuesday, 05 Aug 2008 12:13 PM

It's time for investors to add more global reach to their portfolios, says Mohamed El-Erian, the former Harvard University endowment fund manager who today is co-CEO of bond giant Pimco.

He suggests investing up to two-thirds of your money abroad. Historically, Americans have been told to have no more than 10 percent in foreign stocks.

Before, consumer spending has backstopped the U.S. economy, even during times of war and recession, El-Erian says.

Those days are over, he warns.

"There are very few shock absorbers left for U.S. consumers," El-Erian tells CNNMoney.

"They are facing a credit crunch, a sharp slowdown in the economy that has triggered higher unemployment, and price shocks in energy and in food. On top of that, they can no longer use their houses as ATMs."

Meanwhile, the wealth of the emerging middle-class in countries like Brazil, India, and China is becoming a force in itself, he says.

Years ago, before the advent of the global economy, if the U.S. economy contracted, the rest of the world would do even worse, says El-Erian.

"But today, if the U.S. contracts, the rest of the world might contract by only half. That's a fundamental change," says El-Erian.

Yet the typical U.S. investor still tends to have 80 percent of his or her equities holdings in U.S. companies, says El-Erian.

To adjust to the new, global economy, he recommends investors should consider holding a third of their equities in the United States, a third in industrial countries outside the United States, and a third in emerging markets.

El-Erian concedes that the emerging economies of China, India, and Latin America pose a risk because low-cost products exported from these countries have helped hold down prices in the rest of the world.

"But, as wages in those countries rise, they'll cease to be a helpful force for disinflation and start to drive inflation higher," he says.

El-Erian says that this is the classic argument for holding more commodities, real estate, and inflation-protected bonds.

In the long run, he says, investors should consider keeping about a fifth of their total portfolio in these assets.

El-Erian says investors can also put their money in inflation-protected bonds issued by other countries, even though they're expensive now.

"There will be entry points to buy real assets at lower prices in the future," he says.

"Commodity prices, for example, are volatile and likely to get more so. Arriving at that 20 percent should be a long-term rather than a short-term goal."

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It's time for investors to add more global reach to their portfolios, says Mohamed El-Erian, the former Harvard University endowment fund manager who today is co-CEO of bond giant Pimco.He suggests investing up to two-thirds of your money abroad. Historically, Americans...
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2008-13-05
Tuesday, 05 Aug 2008 12:13 PM
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