With the stock market so far this year continuing the downward course it began last year and bringing escalating unease, some pension and other fund trustees might be tempted to change course in their funds, reduce equity exposure and increase cash. They should resist.
They would do well to remember the long-term nature of their missions, rather than be tempted to make hasty, short-term decisions in reaction to recent losses.
That duty to consider the long term couldn't be described better than by some of the pension fund executives and representatives who recently have faced tremendous relative losses to their investment portfolios in the wake of this short-term slide.
Among the executives quoted in Pensions & Investments, Steven E. Kornrumpf, director of the New Jersey Division of Investments, said, "We didn't make any drastic changes to the investment policy. ..." "We're in a position as long-term investors to take the risks you have with long-term investment policies."
At the New York State Teachers' Retirement System, Candice Ronesi, spokeswoman, said, "We are long-term investors, so we generally don't react to short-term fluctuations in the market."
At the California Public Employees' Retirement System, spokeswoman Pat Macht said, "We don't really worry when that (a short-term market fluctuation) happens. We don't look at the one-year returns. We're in it for the long haul and we're also well-diversified."
But what about changing asset allocation or employing other investment strategies in reaction to the capital markets' movements?
"Market timing is not a good way to add value over the long term," said Scott Henderson, executive director and general counsel of the Massachusetts Pension Reserves Investment Management Board.
The seemingly stand-pat strategy they emphasized might seem complaisant, but it isn't. For one thing, it would have served these funds well in the late 1990s, during the extraordinary high-tech boom that crashed in 2000. If they had jumped on the bandwagon after the boom was well under way, many fund sponsors would have climbed aboard too late and suffered the consequences of losing investments.
The best-run funds do adjust their investment strategies, but only after careful deliberations about the strategic outlook for the economy, the capital markets and the needs and risk tolerances of their funds. Then they sometimes make small adjustments to the strategic asset allocations of the funds. In fact, keeping the long-term in mind enables fund sponsors to take greater risks, and have more patience when an investment stumbles in the short term, than investors constantly judged by results produced only in a limited time frame.
Many analysts suggest market upheavals have been occurring with greater frequency. To react to each one would mean sponsors would have to scrap any semblance of a long-term policy and have only an asset-allocation-of-the-moment. Last fall, it appeared oil prices were heading through the roof, after a summer of rising prices followed by a blowup of tension in the Mideast, exacerbated by the bombing of the USS Cole in Yemen. But prices haven't escalated wildly. Precipitate action to adjust the portfolios for the prospect of ever-rising oil prices would have been costly.
The long-term perspective is appropriate not only for defined benefit plans. Participants in 401(k) and other participant-directed investment plans ought to heed the words of these pension executives before making hasty changes. These executives mention three wise strategies to keep in mind when investing to finance retirement income: Keep the focus on the long term, stay well diversified and avoid market timing.
On the latter, one can recall how stock prices declined after Alan Greenspan's now famous "irrational exuberance" speech in 1996 and the Asian crisis. But they rebounded and, despite the fall in recent months, are higher today than five years ago. A stock-market timer who got out then would have had to be lucky to know when to jump back into equities to participate in the subsequent gains. Investors have to keep their eyes on the horizon: the long-term objective and long-term strategic outlook.