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Stock picks for unsettled times

By Jennie L. Phipps · Bankrate.com
Wednesday, July 21, 2010
Posted: 2 pm ET

Several years ago, I used to do frequent work for the National Association of Investors Corp., an organization that manages investment clubs. Many of the members are people in retirement who have time to dabble in investment theory. One of their favorite mentors is Jeremy Grantham, chairman of the board of Grantham, Mayo, Van Otterloo, an asset management firm in Boston.

Grantham's quarterly reports to investors are must reading for this group -- and for lots of other investors. In the summer quarterly report Grantham just released, he predicts deflation and a resulting seven years of economic pain.

Even if you think he's unduly pessimistic, the report is worth a read if you can get your hands on it.

Here are some points he makes that are especially relevant for those doing retirement planning:

Stocks are still the answer. "It is possible to build a global equity portfolio with just over the normal imputed return of around 6 percent plus inflation ... by overweighting U.S. high-quality stocks and staying very light on other U.S. stocks."

He predicts these high-quality stocks will return 7.3 percent annually on a seven-year horizon. His next big favorite is emerging market stocks, which he thinks will return 6.6 percent annually.

Stocks from Europe, Australasia and the Far East, or EAFE, are likely to return 4.9 percent, and "make a good filler" for a global equity portfolio, he adds.

Recommendations. Grantham never offers specifics, but he devotes a whole section of his report to global warming and concludes: "Global warming will be the most important investment issue for the foreseeable future. But how to make money around this issue in the next few years is not yet clear to me. In a fast-moving field rife with treacherous politics, there will be many failures. Marketing a 'climate' fund would be much easier than outperforming with it."

Stay away from Treasuries. "Fixed income is desperately unappealing," Grantham writes.

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