Irresponsible investors

These investors think that they are backstopped by the American people.  Having found themselves in a bad position, these investors are shifting their assets into riskier assets knowing that if they screw up someone else will pick up the bill. Nope, I'm not talking about wall street banks, but public pension funds. As the New York Times states:

But states and other bodies of government are seeking higher returns for their pension funds, to make up for ground lost in the last couple of years and to pay all the benefits promised to present and future retirees. Higher returns come with more risk.

Meanwhile, more and more corporations have been moving their assets into safer assets.  On top of that, these pension plans have very optimistic return expectations.

Most have been assuming their investments will pay 8 percent a year on average, over the long term. This is based on an assumption that stocks will pay 9.5 percent on average, and bonds will pay about 5.75 percent, in roughly a 60-40 mix.

Considering the current valuation of the market and the outlook for GDP growth, 9.5% equity return expectations are quite unrealistic. They'll be lucky to get 5%. But it's okay, the people living in these municipality will pay for the rest.
3 responses
:-/

I know the traditional approach is to blame the retarded consumer for their retarded purchases, but yeah, that sounds pretty bad.

I know companies like BrightScope are trying to fix the other side of this problem (corrupt management and mismanagement), but they probably also contribute to the unrealistic expectations and wishful greed that lead to these kinds of explosions.

There seems to be a parallel between this and the road to serfdom, but it doesn't seem like it'll occur to me until the morning :p

Night,
David

Contrarian signal re: risk assets
Re Wicked: It could very well be a contrarian signal with the stupid money piling in, but if the stupid money wave moving into riskier assets is large enough they can stay solven for a longer time than an investor using this as a signal.

Re David: The sitatuation is actually worse than I described, where government accounting standards let pension funds discount their liabilities by the amount they expect to make (Private pension funds discount their liablities by investment grade interest rates). This means that there is an incentive against public pension funds ever switching to a saner policy because then they will look even less solvent than they do now. (Lower discount rate means that their account will show them to have a higher amount of future liabilities.)