Tags: Arnott | Baby | Boomers | Invest

Robert Arnott: Baby Boomers Must Invest More Abroad

Wednesday, 07 March 2012 08:41 AM

The United States faces a demographic collapse in demand for stocks and bonds alike, much like Japan saw in the past decade, warns money manager Robert Arnott. As baby boomers retire en masse they must diversify away from U.S. equities and buy more foreign assets to compensate for a slowing market at home, he says.

Like happened in Japan before us, the country faces a rapid rise in seniors, a trend that is both fast and long-lasting, he tells The Wall Street Journal in an interview.

“Less than 10 years ago, when the baby boomers' kids were coming into the labor force and the very skimpy roster of Depression babies was retiring, we had 10 new additions to the working-age cadre for each one new senior citizen,” Arnott said.

Editor's Note: Use This Single Loophole to Pay Zero Taxes in 2012

“It goes to 10-to-1 in the opposite direction in 10 years. There will be 10 new senior citizens for each new working-age citizen. If that's not a political, economic and capital-markets game changer, I don't know what is.”

Founder and chairman of Research Affiliates in Newport Beach, Calif., Arnott runs two funds for bond giant Pimco. He says that U.S. stocks are likely to post returns on the order of 5 percent for the next decade or longer and bonds less, so a balanced U.S.-focused portfolio is converging on a “zero real after-tax return.”

“You still have a lot of people expecting 8 percent or 10 percent a year from stocks or even from balanced portfolios,” Arnott says. “That's naive.”

Arnott’s prescription: Learn to love foreign stocks and bonds, or pay the price.

Fund manager John Hussman is echoing Arnott’s pessimism, although in a more immediate timeframe.

“Last week, the estimated return/risk profile of the S&P 500 fell to the worst 2.5 percent of all observations in history on our measures,” Hussman writes in a note to investors. “This is not a runaway bull market. Rather, it is a market that again stands near the highs of an extended, but volatile, trading range,” he said.

He especially warned older investors against taking a big risk on stocks now, considering that they do not have as long a period to recover from a loss.

“Particularly for investors who do not have a large number of future cycles between now and the point they will need to draw significantly on their assets, a defensive stance is crucial here,” Hussman wrote.

Editor's Note: Use This Single Loophole to Pay Zero Taxes in 2012

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