The New Normal

Bill Gross manages more money than anyone on the planet, with the exception of a few (but not many) central banks. He is the co-chief investment officer of PIMCO which is located in Newport Beach, CA. Gross and his team manage over $1 trillion. PIMCO is known for its bond funds. But it has recently begun to develop equity funds.

Gross is one of the most respected voices in the investment community. He is frequently interviewed by major newspapers, network television and cable news programs. If you search for him on the web, you will receive thousands of pages.

CNN Money recently asked Gross about the “New Normal.” While I have heard and seen this term frequently since the recession began, Bill Gross was may have coined the term. He uses it to describe a prolonged period of deleveraging, reregulation and de-globalization. The New Normal will result in slower economic growth and lower inflation in developing countries.

The implications of Gross’ New Normal for investors are rather sobering. He anticipates equity returns will be around 5% instead of the historical 10%. For bonds returns will be around 4%.

Think about this. If Gross is right and if you have a portfolio that is comprised of 50% equities and 50% bonds, your weighted expected return will be 4.5%. If you pay taxes at the rate of 30% on this return, your after-tax return will be 3.15%. If inflation runs at say 3% (below the historical rate of 4%), then your inflation adjusted, after tax return will be just about zero! (Actually, it’s 0.15%)

Now, what can investors do to improve their returns? They can practice low-cost passive investment strategies. Investors who have actively managed portfolios can cut 0.50%-1.00% of expenses out of their portfolios by shifting to funds (mutual funds and exchange traded funds) that have lower internal expenses than actively managed mutual funds. They can save more by working with an investment advisor who charges less than the going rate of 1%.

Cascade Wealth charges 0.75%. Our portfolios have internal expenses of around 0.25%. So, all in, most of our clients pay about 1%. Investors with firms that actively manage their portfolios routinely pay 1.00% in advisory fees and another 0.75%-1.00% in internal fund expenses. In total these investor are often paying 1.75%-2.00%.

Do the math. If you have a $1 million portfolio, you can save $7,500-$10,000 by working with an advisor who practices low-cost passive investment management. You take no additional risk. You simply pick up another 0.75%-1.00% in net return by being an intelligent investor.