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Investors Must Lower Their Expectations for Returns: Arnott


Anyone familiar with rehab programs knows that the first step toward fixing a problem is admitting that there is one. Right now one of the biggest threats facing American investors — even bigger than our fiscal uncertainty and sluggish economy — is a combination of "debt-fueled consumption" and unrealistic expectations.

"The developed economies of the world are addicted to debt-financed consumption, and this is very dangerous," says Rob Arnott, the chairman and CEO of Research Affiliates and manager of the five-star rated PIMCO All Asset Fund (PAAIX) and the All Asset All Authority Fund (PAUIX) in the attached video.

As he sees it, even the way we measure growth (GDP) is flawed. He likens it to some sort of twisted household logic. "Imagine a family that measures its success by how much it spends," he says, unveiling the notion of GFP or Gross Family Product. "They buy a house they can't afford, a car they can't afford. It feels marvelous. It feels like prosperity, and yet we know it's not prosperity. We know it's a false prosperity — an illusion of prosperity."

Obviously, this rarely ends well. In the case of the collective U.S. economy, Arnott cites at least two structural headwinds that are going to make the path forward even more difficult: a workforce and a rate of productivity that will grow more slowly and cut perhaps as much as 1.5% from GDP.

To offset this drag, Arnott says politicians will take the easiest course, which is to "borrow money they don't have and spend it." This in turn "creates phony GDP."

So what should investors do? "Adapt and change," says Arnott. "The sensible thing to do is to lower your expectations, save more, spend less and plan to work a little longer. If you expect 8% to 10% and get 4%, you're setting yourself up for disaster. If you expect 4% and get 8% or 10%, your plans are golden."

The good news, he says, is that solutions are available if you acknowledge the problem. "We can build ourselves a shelter against that inflation and weather the storm just fine," Arnott concludes. Hope is not a strategy.