As the meltdown in the economy gains steam, investors in 2009 will need to return to the basics of investing such as diversification and risk management, said Pimco co-CEO Mohamed El-Erian.
Even though those same principles did not serve investors well in 2008, the coming year will present a different set of obstacles that will require a different strategy, he said.
"2008 was the year of the crisis of the financial system. 2009, unfortunately, will be the crisis of the economic system," El-Erian said on CNBC. "So the news is going to be full of unemployment, defaults, companies defaulting, etc. For investors, it's going to be going back to the three things that work well and that haven't worked well in 2008."
Those three things are diversified asset allocation, good implementation vehicles, and solid risk management.
"For 2009, every investor should to back to the basics and recognize that there will be a lot of government initiatives," El-Erian said. "We're going to see fiscal stimulus packages going into the trillions of dollars. We're going to see support for various sectors, and despite that the economy will be bumpy."
As far as specific bond investment vehicles, he identified mortgages, banks, municipal bonds, and high-quality investment grade corporate debt as well as the top emerging markets. Pimco is the largest bond-fund manager in the world.
- Video: El-Erian Talks About the Economy for 2009
Investment in stocks will lag, he said, until there's an increase in confidence that equities will provide solid rewards without all the risk, and the economy shows signs of stability.
"What 2008 has told you and what 2009 is telling you is that for the average investor conditions have changed and therefore the game plan has got to change, which means don't go and chase what are very attractive valuations from a historical standpoint," El-Erian said.
With the exception of Treasurys, which are offering historically low yields, a multitude of other investment vehicles are likely to be attractive--and possibly a trap for investors.
"But don't fall into that trap," El-Erian said. "Rather, go for those assets that are not only dislocated but where there's a catalyst for normalization, where you can actually identify what it is that's going to bring valuations back to somewhat more reasonable (levels). If you do that you will get both the upside and protection against the downside. That's going to be the key issue in 2009."
Video: El-Erian says "change the game plan."