Investors can still lose a lot of money in the stock market, but US government bonds aren't the solution either for those seeking safe havens, Pimco's co-CEO and co-chief investment officer Mohammed El-Erian told CNBC.
"Certain bonds aren't worth owning, like government bonds for instance," El-Erian said, adding that gaping deficits will force governments issue more debt.
"I am very underweight equities," he said, adding that he has cut his exposure to stocks to 30 percent compared with around 60 percent in normal market conditions. Pimco is the world's biggest bond fund.
"Fundamentally we are in a volatile journey to what we call the new normal, the new destination. The world is changing," El-Erian said.
People have to adjust to the fact that wealth has been destroyed, and the fact that there are more than 5 million unemployed in the US shows how serious the situation is, he added.
"The American consumer will return but will be a saner consumer… worried about their savings, worried about their retirement. That is a good adjustment. The problem is that it doesn't happen overnight," El-Erian said.
Asked whether he believed the stock market can re-test the March lows, he said: "The intellectually honest answer is we don't know."
"I have a fear right now that people are sucked into the equities market … go in as long as you can afford to lose that money," he added.
More videos of El-Erian: part two here >>>and part three here >>>
Two out of four conditions need to be met for an economic recovery to begin, according to El-Erian: house prices need to stabilize, banks must start lending again, the consumer must start spending again and the rest of the world must pick up.
For the moment, only the fourth condition is partly fulfilled, with timid signs of recovery in China emerging, he said.
Asked about attractive areas of investment, El-Erian listed mortgages, municipal bonds and corporate bonds, especially instead of stocks.