Sunday, October 24, 2010

Pension Funds Reducing Stock Market Exposure

It seems everybody is looking for the safety non-equity investments, including institutional pension managers. Pension Funds Flee Stocks in Search of Less-Risky Bets (subscription my be required) from The Wall Street Journal reports how many pension managers are reducing their stock exposure from 60-70% to 30 to 45% of their pension funds.

Here's what I think this phenomenon means:

  • Total stock market returns will be lower. There will be less demand for stocks, meaning lower total price for the stock market. We definitely won't be seeing the double digit returns of the nineties in the near term.

  • Stock picking will become more important. While the total market returns may be down, there will still be individual stocks which significantly beat the market. Finding companies which maintain a competitive advantage through innovation, business model or scale will be even more important.

  • Pension plans will reduce benefits or be eliminated. With lower returns, companies won't be able to guarantee current benefits without significantly increasing contributions. The alternative is to reduce benefits or move to a defined contribution plan. I believe many public sector pension plans will need to be modified, especially since tax increases will not be a popular solution.
  • Being a bit of a contrarian leads me to think that this may also be a good time to invest more in equities:-)

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    This is not financial or investment advice. Please consult a professional advisor.

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