If Everyone Knows Pensions Are Screwed, Why Are They Investing In The Exact Same Fashion?

Authored by Jesse Felder via TheFelderReport.com,

The brewing pension crisis has been well-documented by a number of platforms and pundits over the past few years. But there are two charts that put it into perspective for investors who find themselves in the same boat as pension managers looking for returns in a world nearly devoid of them.

The average pension fund assumes it can achieve a 7.6% rate of return on its assets in the future. As noted in Monday’s Wall Street Journal, the majority of these assets are invested in the stock market. The rest are invested in bonds, real estate and alternatives. An aggregate bond index fund yields 2.5% today. Real estate investment trusts, as a group, yield nearly 4%. Alternatives are a mixed bag but the point is that, in order for pensions to meet this 7.6% rate of return they require that stocks (and, to a much lesser degree, alternatives) do far better than even that optimistic assumption because the balance of the portfolio is nearly guaranteed to fall short of that mark.

The trouble is that for stocks to return anywhere near 8% they would need to fall more than 50% first. Warren Buffett famously said, “the price you pay determines your rate of return.” John Hussman puts an even finer point on it this week showing that if you want an 8% rate of return over the coming 12 years you should not be willing to pay more than 1,281 for the S&P 500 today.

Currently, the index trades at roughly 2,690 thus it would take a major stock market crash for investors to have the opportunity to invest at a level that would enable them to achieve anything close to what pensions now require. But if stocks were to crash again, as they did after the last two times valuations reached current extremes, that would obviously create other problems for pensions that are now fully invested in risk assets and already underfunded to the tune of several trillion dollars. Even if they don’t crash, however, it is now almost inevitable that pensions will face a massive crisis sometime over the next decade or so.



Still, it’s fascinating to note that even though this issue is common knowledge today, investors as a group have decided to ensure they will come to the very same fate. Passive investing, which has exploded in popularity in recent years, is essentially a way for individual investors to model pension investing, typically with an even greater exposure to equities. And it’s terribly ironic that this pension investing model has become more popular than ever only after prospective returns for the strategy have become the worst in history. (It’s also difficult to call passive investing effective diversification for those who already have exposure to a traditional pension fund.)

For investors looking for an adequate rate of return from owning stocks over the coming decade the lesson is this: Feeling entitled to historical rates of return won’t make them come true.

But having the patience and discipline to take advantage of opportunities (aka, crashes) that provide for greater rates of return than markets offer currently almost certainly will. Pensions, sadly, don’t have this ability but individual investors do (hint: it doesn’t involve passively owning financial assets at all times without any regard for their value).


The_Juggernaut remain calm Mon, 01/08/2018 - 12:47 Permalink

Why do these dopey articles talk about stocks as if everything is the SP500?  Pension funds have to be highly diversified, which required them to purchase shares in mediocre companies along with the good.  The individual investor if free to concentrate on the cream of the crop, and can exit a trade on a moment's notice without affecting price.

Please downvote if you tried this and failed.

In reply to by remain calm

Planet ZOG NoDebt Mon, 01/08/2018 - 12:35 Permalink

A fake rate of return on fake (((money))) is pointless anyway because if it is not real you can't measure it.  The amount of derivatives and absurdly leveraged debt dwarfs everything.  Ownership of real, sustainable, income producing assets is what is important, but goyim don't have much of that anymore.  Neither did the Germans after Weimar.

All the valuable intellectual property (patents, copyrights, etc) have been globalized with control firmly lodged in Jerusalem.  Large bundles of natural resources have likewise been globalized with control given over to international entities, and certainly not local entities.  This is what Bundy Ranch and Levoy Finnicum were about. 

All we are doing is waiting for the seed corn to run out and the long planned collapse to finally occur.  Certain groups of people will know precisely how and when the collapse will occur and will be in a position to profit.  The rest (goyim) will suffer.

In reply to by NoDebt

nuerocaster Planet ZOG Mon, 01/08/2018 - 12:57 Permalink

KISS. You're allowed to trade types of money, FRN, gold, bits. It can be used for consumption. You can trade various derivative forms of money, stocks, debt, futures etc.

But this will have little to do with how resources are actually deployed.

The wealth transfer flows dwarf other activities. Only tech receives special consideration.

In reply to by Planet ZOG

gmak gatorengineer Mon, 01/08/2018 - 12:49 Permalink

Oh. Say.... How about increasing minimum wages which starts to bring some wage inflation into the picture. If this is passed on as prices then you start to get the beginning of the snowball. Unfortunately, min wage places don't seem to have a lot of pricing power and the unintended consequence in this gambit is keep overall wages the same by i) cutting jobs and looking for efficiencies; and, ii) eating some of the increase through lower profits. This only works until it is better to give up and walk away than take any more reductions in profits.


That might get inflation going - but hyper-inflation is a loss of confidence in the currency by EVERYONE, so that no one wants to hold it if they can avoid it. Pretty hard to have happen to the USD while it is still a reserve currency. When it no longer is.....

In reply to by gatorengineer

aardvarkk NoDebt Mon, 01/08/2018 - 13:54 Permalink

My folks were both teachers, and have been drawing both pensions for about 15 years so far.  They hit the sweet time, as they are likely to get their pensions PLUS SS for at least most of their lives.  Even 10 years younger and they would probably have been screwed in their old age...but they system worked for them.  I am busy burying as many nuts as I can find and running spreadsheets that assume my SS will be about 1/4 to 1/2 of what it now says I should get...and I'm keeping one page that includes SS and one that doesn't.  And I'm trying to come up with retirement strategies that include either an RV and BLM land, or a sailboat and an anchor.

Time to get creative, because I will NOT be a tax donkey for the rest of my life.

In reply to by NoDebt

Giant Meteor Mon, 01/08/2018 - 12:36 Permalink

"The trouble is that for stocks to return anywhere near 8% they would need to fall more than 50% first."

Sounds reasonable, let's get this thing started !

wholy1 Mon, 01/08/2018 - 13:02 Permalink

Yup, getting that increasingly UNcomfortable feeling that the "Boomers", especially the financially complacent "comfortably numb" (Pink Floyd) gotta big "wake-up call" looming on the horizon.  Is a generational "war" in the works?  When the [remaining] "Boomers" and possibly "Gen Xers" are least able to any longer maintain/sustain themselves, how will the growing realization/animosity of the "Mills" and "Gen Z's" be manifest?  Especially for those "coasters/citYzens/Californicators".

As a FIRST-year “Boomer” (’46), when the carnage/violent mass blood-letting was replaced with ejaculate of mass “divine co-minglings” of [returning war vet] Man to [waiting] wo[mb]Man; now at 71+, after also being drafted and experiencing war myself “up close and personal” in ‘Nam (’69), followed by a couple of years of int’l careening - pretty-much ripped to the tits 24/7, culminating in 5 years at Bang-Kwang, Thailand’s notorious maximum security prison, I am now increasingly mollified daily by the thought of being “a little closer to Home”. Considering the “State” of absolutely blatant and pervasive “official” criminality, PRIVATELY-held [NOT]Federal[NO]Reserve on-going FIAT debt-enslavement, corp-owned media “DISinfo-tainment” DISTRACTION, BigPharma/al-CIA-da mass drug-trafficking/pushing, debilitating “MonSATAN” GM/chem saturation, forced adjuvant/chem-adulterated vaccines, corp/gov-subsidized lib-turd academic cry-bullies, AI killer drones/robots, cyber-war, space weapons, brain chips etc; I hope said  “almighty Author”[Lord] has already “checked me out” before – as Jim Morrison of the Doors was purported to once not-so-eloquently have stated, “. . . the whole sh*t-house goes up in flames”, and the radioactive ash begins to settle along with that of the on-going Fukushima catastrophe. Now, as a [daily] REPENTing and therefore REDEEMed reprobate, it is [continuously] incumbent upon me to both “give NOTICE” and humbly seek the forgiveness of each and every other very special and unique Man/wo[mb]Man, created in the image of said “Author” and manifested IN to this world, but . . . “NOT OF it”.