What Is A Reasonable Return?

[tozz]

Buried within this article is the fact that the Massachusetts state pension fund returned 14.5% on investment last year, and 12% over the past ten years.  The returns I see mentioned here seem to be much, much lower. 

Is this just a fluke?  If not, what explains the difference.  Is it merely a lower toleration of risk for the folks--often retirees or almost retirees--that frequent this board?  If Massachusetts opens its pension fund to state residents for investment (a current proposal), what is the downside?

 

[brewer12345]

Past performance does not guarantee future returns.

Aside from that caveat, I also think that you have a financially conservative group here. The retirees typically only need a couple of points over inflation over time to make it, so they are more focussed on capital preservation than on return. The accumulators (like me) usually shoot for bigger returns (and higher volatility), but most of us don't assume that we will get outsized returns when we do our planning. I know that I could reitre in as little as 5 years, but if I only manage 3 or 4 points over CPI for the next 12 to 15 years I will still be able to retire in my mid to late 40s.

 

[Marshac]

Buried within this article is the fact that the Massachusetts state pension fund returned 14.5% on investment last year, and 12% over the past ten years. 

I think I did better than that last year, although as brewer the robber baron said.... I don't plan on doing as well as I did. It's nice when it happens though Plan for a reasonable scenario, and a reasonable RR (a real RR of 2% is what I use), and be happy if/when you do better than planned. I can't wait until next Jan when I get to see how my state plan did.... I chose the 'self managed' plan, and make a game out of trying to beat the State..... I think I'll win again this year.

 

[wabmester]

Here's an article that gives an idea of their asset allocation:

article

[In 2003] the board voted to slash its domestic stocks holdings from 42 percent to 26 percent of the portfolio, increase alternative investments, such as venture funds, to 10 percent, boost high-yield bonds to 6 percent, and introduce hedge funds, which would account for 5 percent. All of this would happen over about a three-year period.

 

[Marshac]

And lower down-

Right now, the state pension fund is only 62 percent funded, having taken a beating in the stock market. To generate sufficient return on investment to pay the retirement benefits of state workers, the fund needs to grow with a long-term plan, Mavromates said.

I think their allocation plan sucks quite honestly. Selling off 16% of their US equities seems a bit risky, esp since those paper losses then become actual losses (back in 2003 no less... did they miss out on 2004?)..... and then to plow that into junk, venture funds, and hedge funds..... their quest for yield could backfire big time, and they could be looking at an even larger shortfall. As a 'fund' with a very diverse risk profile (young people, and old), I think that they need to be more cautious than this.... they're playing the game as if everyone in their fund is 30.

I could be wrong on this... and that's probably why I don't do this for a living