"The Bucket Is Leaking"

"The graying of the American worker is a math problem for Farouki Majeed. It is his job to invest his way out. Mr. Majeed is the investment chief for an $18 billion state school pension that provides retirement benefits to more than 80,000 retired librarians, bus drivers, cafeteria workers and other former employees. The problem is that this fund pays out more in pension checks every year than its current workers and employers contribute. That gap helps explain why it is billions short of what it needs to cover its future retirement promises. "The bucket is leaking," he said.

The solution for Mr. Majeed - as well as other pension managers across the country, is to take on more investment risk. His fund and many other retirement systems are loading up on illiquid assets such as private equity, private loans to companies and real estate." 

Pensions and individual investors differ for a number of reasons. But we're all working with similar market dynamics. As a result of low interest rates, it's increasingly difficult to earn a return from bonds or cash.

What does this mean for most people? What, if any, action should be taken? First, it's important to determine if a portfolio needs to earn a certain rate of return over a period of time to support future obligations. If the decision is to move forward with a more "risk on" portfolio in an effort to support higher returns, go in fully aware of what that entails.

Tesla is up over 2100% over the last five years. In that same period of time, it has seen separate drawdowns of 32%, 50%, 60% and 35%. And each one of those drawdowns always feels like the first leg of more to come.

"The only mistake you can make in the current environment is believing you can get something for nothing. Safety is about to get more expensive, and every investor must weigh the trade-offs with clear eyes."

In summary, what could a "leaky bucket" mean for you?

Step 1: Does this environment even impact you? I.e. do some financial planning above and beyond a portfolio.

Step 2: If it does impact you, consider options and execute accordingly 

a.) Increase portfolio risk (more stocks, alternatives etc.) in hopes of earning higher returns to meet future spending needs. Loading up on risk assets will bring about more significant portfolio drawdowns.

b.) Do nothing significant. maintain existing portfolio allocation and accept the (likely) lower future returns (and thus potentially future spending ability) that it will provide.

c.) Consider non-portfolio interventions such as more savings or less spending to offset lower returns.

Everyone's situation is different. Spending most of your time in step 1 above should lead you to an appropriate solution.

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^Sources:

^{The 60/40 Portfolio Isn't Dead, Just More Expensive (Allison Schrager)}

^{An Ohio Pension Manager Risks Running Out of Retirement Money. His Answer: Take More Risks. (Heather Gillers)}

^{The content in this article was prepared by the article’s author. Voya Financial Advisors, Inc. does not endorse its content, and the views expressed may not necessarily reflect those held by Voya Financial Advisors, Inc.}