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Bill Gross: Get used to stunted returns

September 5, 2012: 2:07 PM ET

Bond king Bill Gross is offering up some advice for individual investors, but warns that returns for both stocks and bonds will be lower than what they're used to.

Bond king Bill Gross says it's time for individual investors to get used to a new (and slower) dance.

In his monthly investment outlook letter, the founder of Pimco and manager of the world's largest bond fund, Pimco Total Return Fund (PTTRX), wrote that the age of credit expansion that led to double-digit portfolio returns is over, and the age of inflation has begun.

And that means investment returns from both stocks and bonds will be "stunted," Gross said, highlighting that even investment grade bonds are yielding just 1.75%.

The shift comes as both financial institutions and households continue to go through a deleveraging process after having taken on too much debt. That's resulted in slow economic growth, and in some countries, even recession or depression.

Gross also called out the Federal Reserve and other central banks "for the current shipwreck" that's led to record low interest rates without the economic bounce they were supposed to provide.

Related: Why Bernanke has become irrelevant

"A lender will not easily lend money to an obese over-indebted borrower -- that much is clear -- but she will also not extend a check when the yield, carry and return on investment is so low that it cannot compensate for historic business model overheads," he wrote. "When yields are too low, and acceptable risk spreads are so narrow that top line interest revenue is increasingly marginalized, then lending is at risk."

In response to low yields, Gross notes that banks have slowed lending activity and in the process, they end up laying off workers, closing bank branches, and ultimately "reduce the rate of lending or credit growth which propelled the global economy so effortlessly over the past century."

Related: Wall Street prepares for more layoffs

In this "New Normal economy," Gross says lenders are dancing to the Blue Danube instead of the Lindy, and investors have to adjust their expectations to match the new tempo.

Against that backdrop, he urges individual investors to diversify their portfolios based on their age. "Own more stocks if you are young, but more bonds if you are in your 60s, like myself," he wrote.

He also warns investors to be cautious of investing fees charged by investment advisors, mutual funds and exchange traded funds (ETFs). If overall returns are between just 3% and 4%, investors cannot afford to give back 100 basis points, especially since inflation "typically provides a headwind, not a tailwind, to securities prices -- both stocks and bonds."

Related: Bill Gross says Paul Ryan not good for bond market

It also doesn't help that investors are likely to remain disenchanted with investing for years, with stock market trading taken over by machines.

Still, Gross encourages investors to "keep on dancin'," but just to watch their step.

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Hibah Yousuf
Hibah Yousuf
Reporter, CNNMoney

Hibah Yousuf is a reporter at CNNMoney, where she covers stocks, bonds, commodities and currencies trading across the globe, as well as corporate earnings and other markets-related news. Prior to joining the site in 2009, she interned at Money Magazine.

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