For more than a year now, people have anxiously waited for the economic recovery to take hold. Yet although the stock market's rally since March 2009 suggests that investors have expected strong growth to return sooner than later, Pimco bond guru Bill Gross still believes that a rapidly expanding U.S. economy is a thing of the past, at least for the foreseeable future. That's bad news for wannabe-retirees counting on a bull market to bail out their finances.

The "new normal"
Gross recently set out his case for why this time may in fact be different for economic growth. In the past, economies used ever-increasing levels of debt to create leverage-based growth. Now, though, Gross argues that we've hit the wall, where more debt can no longer produce the same amount of economic growth. As a result, lenders are starting to approach the point where they're increasingly reluctant to keep extending credit, which has forced some borrowers to deleverage their balance sheets and has the potential to push asset prices much lower.

With the ongoing deleveraging among businesses and consumers both here and abroad, Gross thinks the historical 10% return from the stock market isn't going to be there for future investors. Because the prospects for inflation and deflation are running neck and neck, he thinks investors need to plan for much lower returns from stocks -- around 5% annually.

Now, Gross dissing stocks may not surprise you, given that he is first and foremost a bond investor. Yet Gross also thinks that bonds can't continue to deliver the outpaced gains they've had over the past 20 years. Although he claims 10-year Treasuries are fairly valued at yields around 3%, he admits that individual investors can't comfortably commit to bonds for the long haul. He sees them benefiting from a safe-haven status that could disappear at any moment and sets expectations of about a 4% annual return going forward.

How to adapt
If you believe Gross' hypothesis, then the news that future growth may return to past levels has grave implications for investors. Most importantly, if you can't count on historical returns from stocks, then compounding won't work in your favor nearly as well as it did in the past. Back then, a simple long-term asset allocation strategy mixing the broad-market ETFs SPDR Trust (NYSE: SPY), iShares Russell 2000 (NYSE: IWM), and iShares MSCI EAFE (NYSE: EFA) worked very well. But with lower rates of return, that strategy could make you fall short of your financial goals.

Arguably, the best alternative is to save more, allowing you to rein in risk without overextending your portfolio in search of greater returns. But Gross argues that people aren't adapting to new conditions, instead counting on good times to return.

For those who can't afford to save any more, however, there's still hope. But you may not be able to use the passive approach that worked for previous generations. Instead, consider these options:

  • Find growth. Even if the broad economy grows at a slow pace, some companies will find ways to innovate and grow much more quickly than the average. Apple (Nasdaq: AAPL), for instance, has used innovative products to tap into heavy demand despite low levels of consumer confidence. More speculative companies may also be attractive. For example, if Cell Therapeutics (Nasdaq: CTIC) can overcome FDA concerns about its lymphoma drug, then it's poised to skyrocket.
  • Avoid dead weight. In contrast, some companies will clearly lose ground in a slow-growth environment. Homebuilder Hovnanian (NYSE: HOV) already expects to lose substantial amounts of money in 2011, and until confidence returns, the risk may outweigh potential reward. Similarly, Barnes & Noble (NYSE: BKS) may have staved off immediate disaster with its Nook reader, but going up against archcompetitor seems like a recipe for future strife that may never bring the bookseller the results it so badly needs.
  • Look for value. Whether you're investing in high-yield bonds or blue-chip stocks, the market still makes mistakes in calculating value. When you find temporary disparities between intrinsic value and market price, jumping on them will help you boost your returns.

Even if growth stays slow for years to come, it doesn't have to spell the end of your investing career. The best investors realize that successful investing methods change over time, and you have to change along with them. If you can do so, then you'll put yourself in the best position to prosper in the years to come.

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Fool contributor Dan Caplinger plans for the worst and hopes for the best. He doesn't own shares of the companies mentioned in this article. Apple and are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is rich with information.