Real Returns, The Pension Fund Crisis, and Buy and Hold

One of the largest problems that seems to be getting little attention is that of the pension fund crisis.  While it has yet to hit in earnest it is definitely upon us.  The basic problem is that due to poor returns, both nominal and adjusted for inflation, pension funds are extremely underfunded.  While everyone in the investment world seems to know about the problem it does not seem as though anyone is talking about it.  So here are some charts that show the problem with the standard pension fund.

In the chart below we are looking at someone who started at the beginning of 1995 investing $1,000 a month, in a 70/30 stock bond mix, rebalanced monthly.  We are using real returns on the SP500 and on the Dow Jones Corporate Bond Index as our investment proxies.  Also in the chart is the same $1,000 a month invested solely in T-Bills.  As you can see T-Bills are actually slightly ahead and have had very little volatility and is at $184,120.  The 70/30 mix on the other hand has had a rocky path and is at $181,173.20.  Essentially the typical 70/30 stock bond mix in real terms has returned virtually nothing.  You could have saved the same $1,000 a month and put it in T-Bills and you would be ahead after nearly 15 years. (Click on chart twice to enlarge)

70/30 Stock Bond Real Return $1,000/Month Rebalanced Monthly


We could write about this topic for days and will in fact cover it more in future posts but the problem is obvious.  Pension funds are underfunded and there is no way in hell that without a major bailout from the government that they will be able to meet their liabilities.  So add this to the mix of current spending habits, unfunded liabilities of medicaid and social security, and the other retiree problem.

What is the “other” retiree problem?  The primary issue is that if you have a 401K, IRA, or other non-pension fund retirement plan you are likely under water.  Up until this year when investors, along with the Fed, have been flocking into bonds, most investors have been primarily invested in stocks.  How has that done?  Well in nominal terms it has been less than great.  If you were invested in an index fund over the last 10 years you would still be under water.  In real terms things get even worse.

In the two charts below you can see the SP500 from 1950 to now adjusted for inflation as well as the % drawdown.  As you can see we are still very much under water.  In fact as of the end of October the indexer is down -45.51% from the highs reached back in August of 2000. (Click chart twice to enlarge)

SP500 Real Returns and % DrawDown


Happy Trading,

Disclaimer-We wish there was a way to short Pension Funds.

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Title: Real Returns, The Pension Fund Crisis, and Buy and Hold

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