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Start saving those pennies now, Robert Shiller warns investors

Robert Shiller's unconventional investment advice
Robert Shiller's unconventional investment advice

Nobel Prize-winning economist Robert Shiller has a grim message for investors: Save up, because in the years ahead, assets aren't going to give you the type of returns that you've become accustomed to.

In his third edition of "Irrational Exuberance," which will drop later this month, the Yale professor of economics warns about high prices for stocks and bonds alike.

"Don't use your usual assumptions about returns going forward." Shiller recommended to investors in a Thursday interview on CNBC's "Futures Now."

He says that stock valuations look rich. In fact, Shiller's favorite valuation measure, the cyclically adjusted price-earnings ratio (which compares current prices to the prior 10 years' worth of earnings) is "higher than ever before except for the times around 1929, 2000, and 2008, all major market peaks," he writes in his new preface to the third edition.

"It's very hard to predict turning points in markets," Shiller said on Thursday. His CAPE measure of the S&P 500 "could keep going up. ... But it's definitely high. By historical standards, it's up there."

Meanwhile, Shiller said that bond yields, which move inversely to prices, "can't keep trending down" and "could [reach] a major turning point in coming years."

It's no surprise, then, that Shiller expects little in the way of asset returns—meaning Americans will have to rely more heavily on the piggy bank.

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Robert Shiller, Yale University Professor of Economics, co-founder of Case-Shiller Index
Adam Jeffery | CNBC

Given the current state of the stock and bond markets, "you might want to save more. A lot of people aren't saving enough. And incidentally, people are living longer now and health care is improving, you might end up retired for 30 years—people are not really preparing for that," he said.

The other pillar of his advice is a classic tenant of responsible investing, with a global twist.

"Diversify, because that helps reduce risk," Shiller said. "And you can diversify outside the United States. Some people would never invest in Europe—I think that's a mistake."

Shiller adds that emerging markets can also provide attractive values.

And indeed, valuations in much of the world are far lower than in the United States, given that investors are more optimistic about economic prospects in America than in nearly any other country.

But perhaps people shouldn't base their investing decisions quite so heavily on predictions.

"The future is always coming up with surprises for us, and the best way to insulate yourself from these surprises is to diversify," Shiller said.

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