When the U.S. financial markets emerged from the Great Recession, conventional wisdom among many Wall Street savants, pension consultants and other members of the financial world’s illuminati contended that this current decade would be a prolonged period of slow growth and lower returns. They got the story half right.

In his August 2012 investment outlook, Bill Gross, then chief investment officer of Pimco, wrote the 6.6% real rate of return over the previous 100 years was a “historical freak, a mutation likely never to be seen again as far as we mortals are concerned.” Gross posited that going forward investors could expect nominal returns of 4% on equities and 2% on bonds.

The next year the S&P 500 climbed 33% for its best annual return since 1995. Even before then, Gross’s logic or lack thereof was brilliantly dissected by Nick Murray in these pages in our September 2012 issue.

While Gross had twice predicted that the Dow Jones Industrial Average would fall below 5,000 in the 2000-2002 and 2007-2009 bear markets, he proved to be far more accurate in addressing future returns for bonds, his own area of expertise. Mathematically, as Murray noted, it was impossible for fixed-income securities to replicate their post-1981 performance going forward.

That’s even more true today. Former Fed chairman Alan Greenspan warned investors last month that the real bubble was in bonds, not equities. That is quite a statement given that since July 2010, when equities had recouped the bulk of their financial crisis losses, the S&P 500 has appreciated 173%.

Let’s assume that the scenario outlined by Gross was wrong because it was just five years early and that we are now facing a period of 2% returns on bonds and 4% or 5% from equities. After all, sooner or later something like this will materialize. In a world of low-to-mid-single-digit returns, equities become more compelling.

But the challenge for advisors in this environment is elevated because the need for spending on other liabilities  increases, as does the potential for client mistakes that markets can’t paper over. That day is rapidly approaching.

Any advisor interested in exploring these issues in detail should consider attending our Inside Alternatives conference in Denver on October 23-24. The event will feature Dambisa Moyo, Anthony Scaramucci, Jeff Davis, Jerome Dodson, David Winters, Joel Greenblatt, Jim Paulsen, Bill Bacharach and many others.

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