The dumb or unlucky investor chose or was forced to sell everything in early 2009 at rock-bottom prices.
So, if stock market indexes have tripled since 2008 then why aren’t you rich?
That’s the question many investors are asking themselves as they watch the Dow, Nasdaq, and S&P 500 reach or approach all-time highs. For some answers, take a look at the City of Memphis Retirement System, better known as the pension fund, which is also much in the news these days.
Somewhat surprisingly, the pension fund is not at an all-time high. And it hasn’t made a killing since the market rebound began in 2009.
“The high was in 2007 when the fund was worth about $2.3 billion,” Sam Johnson, investment manager for the city, told me recently. The fund’s balance when we spoke (late February) was $2.18 billion — a lot healthier than the $1.8 billion mark in 2008, to be sure, but not a record.
The stock market rally has taken pressure off of fund managers and politicians inclined to do something to change it. The fund can meet its short-term obligations to pensioners and satisfy the 80 percent funded benchmark (assets to liabilities) used by some rating agencies. Pension skeptics say the ratio is bunk, and Johnson says the goal is 100 percent funding, but the 80 percent standard persists and Mayor A C Wharton, among others, has used it in the context of back-and-forth with the City Council.
The pension fund is murder for reporters. It is extremely interesting to vested city employees and a few City Council members and boring and confusing to everyone else, especially those of us with self-directed defined contribution 401(k) plans instead of defined benefit pensions. But it offers some instructive lessons for everyone about the conventional wisdom of investing.
Diversification is a pillar of Investing 101, but the only asset class to achieve outsized returns since 2009 is stocks. The pension fund is 57 percent in stocks, 37 percent in fixed income, 1 percent in cash, and 5 percent in real estate. Diversification evens out returns when one asset class (stocks) is up while another (fixed income) is down. In 2007, CD interest rates were 3.5-4.5 percent; now they are 1-2 percent. Money-market accounts pay a fraction of 1 percent.
Cash is a drag on returns. An index such as the Dow or S&P, by definition, is 100 percent stocks. But many mutual fund managers keep some cash to buy more of the companies they like when they believe they are trading at bargain prices. The Memphis-based Longleaf Partners fund, for example (I am an investor), held 20 percent of its assets in cash in 2014 when the S&P was up 13.7 percent. The city pension fund is the ultimate long-term investor and doesn’t hold much cash. An individual retiree who can’t afford to lose his modest 401(k) keeps a lot of it and his returns suffer.
“Buy on the dips” assumes there will be dips. Years ago I became a fan of investments writer James Stewart when he was at The Wall Street Journal. He advocated buying stocks when averages fell 10 percent. Sounded good to me. On March 6, 2009, the Dow bottomed at 6,627, after which it began a run of six positive years in a row that carried it to 18,000. Oh, to have been fully invested in 2009 and stayed that way.
Big gains follow big losses. The pension fund has a multitude of managers and monitors their performance, but its allocation stays pretty much the same. Unlike nervous individual investors, the fund didn’t bail out of stocks when the market tanked. The double-digit annual returns on stocks in the last six years were due to the 50 percent drop in 2008, and history suggests they won’t reoccur until there is another market catastrophe.
Timing is everything. The smart or lucky investor piled into the stock market in early 2009 and has tripled his money since then. The dumb or unlucky investor chose or was forced to sell everything in early 2009 at rock-bottom prices to avoid foreclosure or pay for long-term care or some emergency.
A pension fund is built to take the worry out of individual decision-making. That’s a luxury unavailable to those in 401(k) plans. But if your nest egg isn’t “even” with 2007, don’t beat yourself up. The pros aren’t either.