PIMCO Predictions

Sunday night's investment post, where Mr. William H. Gross of Newport Beach, California -- and the commander of the TAG 401(k)'s PIMCO Total Return -- gives us his thinking.

* When interest rates cannot be dramatically lowered further or risk spreads significantly compressed, the momentum begins to shift, not necessarily suddenly, but gradually – yields moving mildly higher and spreads stabilizing or moving slightly wider.

* In such a mildly reflating world, unless you want to earn an inflation-adjusted return of minus 2%-3% as offered by Treasury bills, then you must take risk in some form.

* We favor high quality, shorter duration and inflation-protected bonds; dividend paying stocks with a preference for developing over developed markets; and inflation-sensitive, supply-constrained commodity products. ...

At the end of the piece, Mr. Gross gets down to brass tacks about what investors should focus on:

For bond markets: favor higher quality, shorter duration and inflation protected assets.

For stocks: favor developing vs. developed. Favor shorter durations here too, which means consistent dividend paying as opposed to growth stocks.

For commodities: favor inflation sensitive, supply constrained products.

And for all asset categories, be wary of levered hedge strategies that promise double-digit returns that are difficult in a delevering world.

... [S]econdly, be mindful of investment management expenses. Whoops, I’m not supposed to say that, but I will. Be sure you’re getting value for your expense dollars.

I encounter a number of 401(k) participants who say they know little to nothing about investing, and have little interest in learning. (Totally understandable, but a wee bit short-sighted, since it's their future to which they are giving short shrift.)

Happily, inside TAG's 401(k) Plan, there are some strategies that hit many of Bill Gross' points. And they don't take a lot of heavy research or work to implement.

1) If you use PIMCO total Return, you will get a successful, actively managed bond fund that has had good performance numbers for multiple years.

2) If you use any of the Vanguard Target Fund series, you will acquire intelligently-constructed "Funds of Funds" that have ultra low-cost asset allocations of less than 1/5 of a percent (PIMCO, despite its success, is considerably higher than that.)

My basic recommendation has stayed pretty much the same over time: If you're at a loss over where to stick your money, think about the Vanguard Target Retirement Income Fund. It gives you a 30% exposure to broadly diversified stocks, a chunk of Treasury Inflation Protected Securities (which Bill Gross recommends) and a big slice of the Total Bond Market Index*, which concentrates on high-quality bonds and doesn't have a super-long duration (Five years.)

But what kind of portfolio can you build from TAG 401(k) pieces that hits most of what Mr. G. is talking about? How about ...

50% -- Vanguard Target Retirement Fund -- (cost: .17%)

25% -- PIMCO Total Return -- (cost: .69%)

25% -- American Funds Euro Pacific Growth Fund -- (cost: .55%)

Like most 401(k) Plans, TAG doesn't offer a fund that is a pure developing market play. (Common wisdom deems this too risky.) But over-weighting foreign stocks will capture a slice of emerging markets.

As for investing in commodities, you'll have to do that outside a 401(k) Plan. Because all or most Defined Contribution plans stay away from them.

* PIMCO and Vanguard Total Bond Index are both intermediate bond funds. PIMCO is actively managed; Vanguard is passively managed, tracking a bond index. To lower costs for the above three-fund suite directly above, you could simply allocate 75% to Vanguard Target Income, and 25% to the Euro Pacific Growth Fund.