4 sages, 4 investing tips

(provided by Fortune magazine)

The coming 10 years won’t necessarily resemble the past 10. We’ve enlisted four investing sages who lay out the opportunities – and pitfalls.

Robert Arnott: Research Affiliates chief; plots strategies used to manage $43 billion

Advice: While the developed world has huge debt and demographic problems, many emerging markets have younger populations and foreign reserves. After the rally in 2009, this is not a “buy now” recommendation. Still, a case can be made to invest significantly more in emerging markets, especially during one of their periodic plunges. U.S. inflation and a declining dollar will add to their relative attractiveness.  Inflation protection will be priced at a premium. Give inflation-linked bonds and commodities more than token allocations. There are always interesting investment opportunities. Choose wisely.

Jeremy Grantham: Founder of GMO, which manages $102 billion for institutions

Going out a few years, China is potentially a severe disappointment. A group of people who were communists in every aspect a few years ago is trying to drive the largest country in the world at the fastest rates in economic history.
They are making unprecedentedly large and perhaps badly reviewed loans. They’ve been incredibly lucky. They are probably not as good as they seem to be.  I think there is a nascent bubble in emerging markets. Over the next three to five years, emerging markets are likely to sell at a handsome premium P/E because of the respect for their higher GDP growth.

Bill Gross: Founder of bond giant Pimco

Instead of a speculative Nasdaq stock at a 50 P/E, investors in the next 10 years should consider, say, an NYSE utilities stock that yields 5%. Focus on dividend income in terms of stocks, as opposed to growth and investment-grade income from bonds. You can generate a portfolio that yields 4% to 5% and that is in some fashion protected against inflation.  If you’re looking for growth, you should venture outside the U.S. Brazil and China and other Asia equities are the cherry on top of the melting sundae. It’s not only their internal economies; they’re in better shape from the standpoint of reserves and balances. Ten years ago Brazil was a basket case and beggar. Now it has hundreds of billions of dollar reserves.

Jeremy Siegel: Author and professor at the Wharton School of Business

With stocks coming off their worst decade, I believe the next 10 years will bring returns in equities at or above their long-term normal of 6% to 7%, after inflation. Returns on a diversified global portfolio of equities will be at least that much. I do mean global. Over half the world’s equity capital is now outside the U.S., and that fraction is growing. For the S&P 500, 40% to 50% of profits and revenues come from foreign sales, and that fraction will be rising. You have to be internationally diversified — in both emerging and developed markets. There’s no question emerging markets will grow faster than the developed.  That doesn’t mean go after the firms that are there. Some are overpriced. Go for the firms that recognize where the growth is going to be but are still reasonably priced. They could be in the U.S., Germany, or anywhere.

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