WSJ: In a new paper, you look at trends worldwide and you find more promising demographics in places such as Brazil, Russia, India and China. As a U.S. investor, can I get around this problem of anemic returns by investing heavily in those emerging markets?

Arnott: I think that's a crucial missing part of most investors' tool kits. Most investors think, "Emerging economies, my goodness, that's risky." Well they are cheaper than U.S. stocks, and the economies are ostensibly going to be the growth engine for the world economy in the coming 10 to 20 years. So doesn't that make them potentially less risky in terms of downside risk for the long-term investor?

And on the bond side, it is even more compelling. (While emerging nations have far less debt relative to the size of their economies than do the biggest developed nations), they pay 3% to 4% higher yields. It seems to me highly likely that that yield spread will collapse in the coming decade, giving you nice capital gains on top of fairly rich starting yields.

WSJ: How is your demographic research reflected in your stock exposure in the funds you manage?

Arnott: In Pimco All Asset and All Asset All Authority, we invest in stocks (in the U.S. and other developed markets) purely as a tactical asset. We don't view it as a core vehicle.

Today, U.S. stocks aren't cheap. The Shiller P/E ratio -- price relative to 10-year smoothed earnings -- is north of 20 times earnings. That's on the rich side. So in the two Pimco funds, as of Jan. 31, we had essentially nothing in U.S. stocks.

We had 35% of All Asset All Authority and 27% of All Asset in emerging markets, split roughly 70% bonds and 30% stocks. These economies offer higher yields and better debt coverage, paired with much richer growth opportunities than the U.S.

WSJ: How about a final encouraging word for beleaguered baby boomers?

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Arnott: It's really simple: Save more aggressively; invest in economies that aren't afflicted by the 3-D hurricane of deficit, debt and demography; and diversify into markets that can serve us well in a reflationary world.

WSJ: And we need to work until we are 80?

Arnott: No. I think most boomers, if they invest sensibly, can retire roughly when they originally planned to or a year or two later. If they invest conventionally, it is three or four years later. And If they don't invest at all and rely on entitlements to take care of them in their old age, then yes, they work until they're 80.

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Funds mentioned on the previous page: Pimco All Asset (PASAX)and Pimco All Asset All Authority (PAUAX)