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Playing It Like the Pros


The pros know how to do it best, so if you want to be the best, why not be like a pro.  People like to mimic the best.  Whether it’s trying to imitate Lebron James’ jump shot, Mike Holme’s construction prowess or Jimmie Johnson’s driving skills, we’re always striving to be just like the professionals.  So why is it, when it comes to personal financial management, we ignore the pros?  Is it fear? Lack of knowledge? Or complacency?

As I have mentioned in my previous post, the some of the best run investment portfolios are those of pension funds who have obligations to payout to their pensioners on an annual basis.  Despite the turmoil of the stock market and real estate market, the pension funds continue to meet their obligations.  So what prevents us, the individual, from mimicking these successful pension funds for our own personal investment portfolios?

One well known Canadian pension fund has continued to thrive by investing in a diversified portfolio, across not only different asset types but investing across the world as well.  Despite the doom and gloom stories that always appear in the news about Canada’s Pension Plan, they have done quite well by diversifying Canadians’ money and investing it for the future (Canada Pension Plan’s investments see ‘explosive growth’).   You will see that even through the turmoil of the global financial crisis that happened in 2008, the Canada Pension Plan was able to grow it’s portfolio from just over $70 billion to over $170 billion in just 9 years.  That’s an astounding 10.5% gain per year compounded.  If you can tell me that your savings account has swelled by that much over that period of time then I would say you’re an amazing investor.

If we look at the asset breakdown of what the CPP actually invests in we would see the following:

  • 34.4% in foreign equities
  • 33.5% in fixed income
  • 10.6% in real estate
  • 8.6% in Canadian equities
  • 6.7% in emerging markets
  • 6.2% in infrastructure

Those statistics show that even the pros don’t put all their money in one place.   They don’t go around putting all their money in real estate, nor do they put all their money in GIC’s and government bonds to protect their assets.  They create a solid foundation by investing in fixed income assets such as bonds and money market funds, but they also go after growth in emerging and foreign markets.  The CPP is protected from any kind of real estate crash because they only have a tenth of their money invested in that asset class.  If the Japanese market crashes, so be it, it’s only a small portion of the portfolio.  So what can we learn from this?  Review your own personal asset allocation.  Is all your money in fixed income assets like GICs and bonds?  Do you own nothing but you house?  Do you have a good mix of equities across the entire world?  If you don’t know the answer to these questions, then it’s time to learn, or perhaps seek assistance from a personal advisor to tell you what you have.

Another well known pension fund that has garnered a lot of attention is the Ontario Teacher’s Pension Plan.   Once an owner of the cash creating, Maple Leafs Sports and Entertainment, this pension fund has done extremely well since 2002 earning an average return of 9.7% compounded annually.  Again during that time span we had the stock market crash of 2008.  So how did the teacher’s do so well?  They also employ a well diversified portfolio:

  • 47% in equities
  • 48% in fixed income
  • 5% in commodities
  • 23% in real estate
  • -23% in financing activities (loans to finance other assets)

Both these pension plans have averaged almost 10% gains annually for the last ten years.  Does this mean they picked the right stocks all the time?  Certainly not.  If you were to look at the performance of the Teacher’s Pension Plan in fiscal year 2008, and the Canadian Pension Plan in fiscal year 2009, each of the funds lost 18% and 18.9% respectively.  This meant that the entire pension portfolio lost almost 20% of it’s value during the crash.  The pension managers didn’t panic, nor did they sell off all their equities and switch to fixed income or real estate.  They stuck with a balanced and diversified portfolio and held through the turbulent times.  The result was still an average gain of almost 10% over a decade.  Remember that for something that goes down, something else will go up to counter balance.  Having that diversity helps you get the best of both worlds.

If making ten percent was so simple why can’t we all do it?  Why don’t we mimic these diversified portfolios for our own personal financial plan.  If they are already saving for your retirement, why not follow the same strategy for your own.  Remember that one bad year doesn’t make or break your financial well-being.  Stick to a plan, build a diversified portfolio and let time do its thing.

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  1. […] that the best financial managers are not mutual fund managers, nor hedge fund managers, but pension fund managers.  If they are the best, why not have them manage our money?  Take our money please.  We are […]

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