When do you need your retirement income? Ten, 15, 20, or 30 years from now?
I read an article about how Canadian pension funds are switching their investment models. The major change is to a model centered around liability driven investments (LDI). Pension funds take money in, but don’t need to pay that money out until 20 or 30 years down the road, when the pensioner retires. Consequently, LDI investing seeks to buy longer duration investments that match the timing of cash disbursements to retirees.
Another interesting tidbit from the article is that Canadian pension funds are targeting long-term returns of 6% per year. This is in contrast to U.S. pension funds which average a target return of 8% annually and European funds which target 5% per year.
I think it is very interesting that the pension fund managers (arguably some of the smartest investors in the world) are moving away from traditional stocks and bonds.
One of the advantages of stocks and bonds is liquidity or the ability to quickly sell the investment and convert it to cash. Because of the liquidity of stocks and bonds, it is also more volatile and subject to pricing fluctuations.
Pension funds are investing for the long term 15-30 years down the road. They don’t need the liquidity that stocks and bonds provide. Consequently, they are also avoiding the volatility of the market while still able to generate their target returns.
If you need money in the near term, less than a year or two, the liquidity of stocks and bonds may make them advantageous.
However, your retirement funds are probably going to be used in 15-30 years just like the pension funds. Consequently, liquidity is not a primary concern. Longer term investments, like real estate, make sense for retirement accounts. Retirement investors can forego the volatility of stocks and bonds, and pursue longer term gains with a vehicle that matches their investment horizon.
What do you think? Is this a strategy you would put in place?