INTERVIEW


Shaking up the Investment Mix

By Fred W. Frailey, Contributing Editor

Mohamed El-Erian has a vision of the economic future that may both frighten and reassure you. He sees a tectonic shift occurring, as emerging economies in Asia and elsewhere join the established powerhouses, especially the U.S. No longer will the world simply march to our beat; the U.S. will have to share leadership with emerging giants, such as China and India.

The good news is that this change in the global power structure is not altogether bad for America. El-Erian predicts that the new economic giants and other developing nations will buy more U.S. goods, easing our trade deficit and stimulating growth and jobs over time.

Now, however, we're somewhere in the middle of the journey, and it's a rocky one. Because of all these changes, El-Erian suggests in his new book, When Markets Collide (McGraw-Hill, $27.95), that investors spread their money over a wider array of assets than was once thought necessary. That means shrinking U.S. stocks to just 15% of your total portfolio.

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Unless you watch CNBC regularly, the name may not ring a bell. But El-Erian (pronounced el-AIR-e-ann) has been active in global finance for the past three decades. Born in New York City to an Egyptian father and French mother, he grew up both in the U.S. and abroad. He worked for the International Monetary Fund for 15 years, then did stints with Salomon Smith Barney and Pimco before running Harvard's endowment fund. He returned to Pimco, the bond powerhouse, in 2008. El-Erian is chief executive of Pimco as well as its co-chief investment officer (a title he shares with bond guru Bill Gross).

We caught up with El-Erian at Pimco's offices in Newport Beach, Cal. Uppermost in our mind was how Joe and Jane Investor should react to the changes going on around us now.

KIPLINGER'S: If you were writing your book right now, what would you change?

EL-ERIAN: I would deal with the way the financial landscape is being re-defined without a master plan. This has become a crisis-management phenomenon that's very reactive and changes weekly.

What does that imply?

It's inevitable that financial regulation is going to increase -- not just increase, but change the whole industry. After what we've seen recently, society will not leave unchanged a system that privatizes huge gains and socializes huge losses. Banks are being slimmed down. Bankers can still make a good living, but not as good as in the past.

Do you trust the regulators to re-regulate wisely?

No. The pendulum will probably swing too far, and it may be costly in terms of lost efficiency. I don't like that, but unfortunately, it's likely.

Why are you telling investors they need to diversify differently these days?

The traditional approach to diversification, which served us very well, went like this: Adopt a diversified portfolio, be disciplined about rebalancing the asset mix, own very well-defined types of asset classes and favor the home team because the minute you invest outside the U.S., you take on additional risk. A typical mix would then be 60% stocks and 40% bonds, and most of the stocks would be part of Standard & Poor's 500-stock index.


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