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What Will Pensions Buy in 2018?

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Securities valuations are at the highest levels they’ve ever been. You can see on my price-to-sales ratio chart of the S&P 500 that valuations are higher today than they were during even the dotcom era.

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While stocks are valued at record levels, the situation in fixed income markets isn’t any better. With such high valuations for stocks and bonds, there is nowhere to go for pension funds looking for bargains. Despite the expensive markets, pension funds are still buying assets. Heather Gillers reports in The Wall Street Journal:

In the public pension world, the willingness to chase expensive assets is the product of the core challenge most funds face—how to fulfill their mounting obligations to workers and retirees.

Decades of low government contributions, overly optimistic assumptions, overpromises on benefits and two recessions have left them with deep funding holes at a time when retirees are accelerating cash outflows. Estimates of their current combined funding shortfall vary from $1.6 trillion to $4 trillion.

The goal of most pension funds is to pay for future benefits by earning 7% to 8% a year. After the 2008 financial crisis, many funds tried to hit those marks by lowering their holdings of bonds as interest rates dropped, and by turning to real estate, commodities, hedge funds and private-equity holdings.

Efforts to diversify holdings into riskier assets by pension funds is a symptom of the refusal to adjust return expectations for reality. Both corporations and governments prefer to spend their money on other priorities, so by estimating higher returns for pension funds, they allow themselves to under-fund their pension obligations. I have written many times in the past (here and here for starters) that this practice increases the risk to pensioners who rely on reasonable management of their funds to secure their retirements.

Whatever pension funds buy for their members in 2018, hopefully it will reflect reasonable return expectations.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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