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Asset Allocation

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If there’s anything in the economy about which to be optimistic Gary Shilling, the Springfield, New Jersey-based economist and advisor, thinks it’s the de-leveraging of the housing and financial sectors. “But the process of de-leveraging is a painful one and I think it means that we are going to have slow economic growth for a number of years,” he says. Shilling’s suggested allocation (see above right) calls for 70% bonds and his “long-term favorite” is Treasury bonds. “Of course I’ve never bought them for yield, I’m buying them for appreciation because I think rates are going to go down. You’ve got a 4.7% yield on the 30-year Treasury now and if I’m right that we’ve got a weak economy and absolutely no threat of inflation in the foreseeable future, I think it will go to 3%. That doesn’t sound like a big decline, but that would net about 30% appreciation on a 30-year coupon bond and about a 60% appreciation on a 30-year zero-coupon bond.”–Robert F. Keane