Why does it matter if volatility is lower than the market?
Future payments in the short term are covered by inflows.
You might as well maximize the returns now so that in the future when it's not covered by inflows you've acrewed a larger return.
Future payments in the short term are covered by inflows.
You might as well maximize the returns now so that in the future when it's not covered by inflows you've acrewed a larger return.
Because I can trivially beat the market by ~100% by going long on 3:1 margin.
The volatility is why that's a bad idea. One time out of five, the consequence of that investment strategy is 'The market had a crash and I lose everything'.
'Lol, YOLO' is not a great investment strategy for a well-ran country.
Which is why that strategy doesn't actually beat the market. Keep using it for 30 years and you're bankrupt.
Whereas if you put your money in a major index 30 years ago and left it there, or even 50 or more years ago, what result? Are you even in a bad place if you put all your money into the market in 1926 and left it there for 100 years?
Going full index is a great strategy for an individual person aged 20-50, but not a strategy for a pension fund which needs to continuously pay out.
It's OK for a person in their 70s that has a few million in the bank.
This person (CPPIB) has 780 billion and has a sustainability rating for 75 years.
While your metric is common to compare pensions, it's not relevant for debunking ability to survive a recession.
6 million x $100k is 600 billion.
Whereas the annual benefits paid is ONLY 1/10th that at 60 billion/year.
Turn off 80 billion/year in contributions and the investment income (50-60 billion/year) can sustain.
It's still going back to the same assumptions that you're not only timing a depression but also
(a) don't have pre-funding (i.e., millions for an individual at the start of the depression),
(b) don't have CPPIB guardrails and auto-adjustment mechanisms,
(c) and it's not a partial income replacement scheme.
> It will only last 5-10 years without inflows
Without inflows? That's not realistic because people would still be contributing. In fact, CPPIB has triannual resets of contributions and in a recession, they'd up the contribution rate. In a recent actuarial audit, they found that if real returns dropped to 2.5%, then they'd only need to boost contributions from 9% to 11% to keep their 75-year sustainability target.
The advice that you need to taper off your investment portfolio risk as you get older doesn't really apply to people that have a nest egg. I know a lot of people that aren't necessarily living frugally and are told by their financial advisors that they might as well upgrade their cars, travel more, etc. They can cover their costs and don't have net worth > ~$3 million.
Clearly, I am aware of the CPPIB's structure even citing the Office of Chief Actuary's report regarding downside scenarios and health scores. [0]
[0] https://www.osfi-bsif.gc.ca/en/oca/actuarial-reports/actuari...
edit:
> if a retirement fund had put all their money into a stock index in 1926, it wouldn’t have been able to pay out pensions throughout the 1930s and 1940s
Point was that this/your rationale doesn't apply to CPPIB's situation.
That wouldn’t work in a major depression when there is high unemployment and inflows drop.
Let's not forget, CPPIB underperformed a passive benchmark during the Great Financial Crisis and lost 18.8% in FY09.
is that similar to the Ponzi scheme pattern, though?
Whereas having individual years when the fund pays out more than it collected in interest is not a problem as long as that's not what happens on average.