I'm honestly not sure if it's 50% or not, but I suppose the idea is that not everyone withdraws at the same time. Ideally, you would only sell off assets that you need to raise capital to pay for benefits. Also, there's new money coming into the fund by employees paying in, and I'm not sure they can stop.
But in general, if everyone wanted to sell their assets at the same time, that's when the stock market "crashes", because there's no buyers. I suppose the pension fund managers can make these types of decisions, but in general they are governed by rules and best practices in terms of what investments they can make.
If these funds stopped investing their money, they'd be at greater risk of inflation, and where would they put it? What would be the next step?
But you're right there is a lot of retirement money in the market, and when people start to retire, some of that money will go out of the market, but also a lot of people are trying to live only off the interest/dividends, and keep the principal because they are worried they will live longer than they were expecting.
In general not everyone withdraws at the same time, but there are generational demographic pressures. As more and more time progresses, the baby boomers will withdraw more and more of their savings - so one could characterize a set of outflow models of some sort there. The saved amount of discretionary pay going to younger generations is an inflow. I really don't know if the outflow will exceed the inflow, but I would note that younger generations live under many decades of squeezing of 'excess' margins in wages to labor. And that makes the question of wether the outflow will exceed the inflows much more of something to ponder.
This and the low birthrate in the west are fundamentally why interest rates are so low and why college and housing is so expensive.
When someone decides to forgo consumption now in exchange for consumption later, it has to net out into someone else consuming now in exchange for forgoing consumption later. The interest rate and price of financed goods adjusts until counter-parties meet on price and the market clears. Where are the sources of new debt in modern western economies? Mortgages for the most part (70%), with student and auto loans taking up much of the rest (~10% each).
>> When someone decides to forgo consumption now in exchange for consumption later, it has to net out into someone else consuming now in exchange for forgoing consumption later
That's not true.
You are a farmer, there is no one near you for a thousand miles, you have an unplanted field. You have a bag of seeds and no food. You can decide how many seeds to eat now, and how many seeds to plant for consumption later. No matter what level of consumption & investment you choose, no one else has to change their consumption & investment habits.
It's amazing to me how many smart people don't understand this. The prices would bounce back to almost exactly what they were before the withdrawal.
Edit 1:
This is because the stock market is mostly (quasi) efficient. Every other answer in this thread is wrong. Random people buying and selling have nothing to do with what the correct price of assets are.
Edit 2:
The question makes this answer particularly easy because pension investors are by definition buy and hold investors (not day traders). If 50% of day traders did this the answer would be more complex. However, on average the answer would still be the same. If it was fundamental investors, this would be a much more interesting question. However using induction previous fundamental investors would have never invested in the first place...And the end game here is risk must always carries a premium...which leads us back to...prices bouncing back yet again.
Let's agree to disagree on the Efficient-market hypothesis, what cracks me out there is one of the pioneers Paul Samuelson, Nobel laureate economist - who ended up co founding one of the first quantitative trading company Commodities Corporation - I guess hi did hedge his bet... and let's finish with one of my favorite Warren Buffet quote:
“Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.”
No matter what kind of investment, you have to have a system with clear entry and especially an exit strategy, all part of your solid risk/money management.
In any event of a market down turn I'll be out long before the bottom and will be probably in some sort of alternative investment which will rise, because the money will seek to go into something else, maybe gold for example.
I strongly recommend to look into systematic stock trading systems like trend following for example and to have a plan in place when the stock market turns down from the Friday all time high... Also i makes the greatest life style business with no customers, no employees and no investors and will run on autopilot as long as the stock market exists...
Assuming you are not some kind of savant who can time the market, how exactly do you anticipate being able to reliably get out "before the bottom", without advance knowledge of where exactly the bottom will be?
How, exactly, do you know what other assets will be inversely affected? And why do you believe you'll get in on those alternative investments before other panicked investors with equal access to information as you dogpile into them as well, raising the price you need to pay to enter into a position?
What you're saying sounds suspiciously like a common yet mistaken belief that you can time the market.
I agree, but a well set trailing stop (% behind based on volatility) is probably the next best thing and lets you sleep at night and go on holidays without worrying.
Why bother with that when you can buy an index fund and hold onto it for twenty years? If the S&P 500 halved tomorrow, what I'd do is literally nothing.
Exactly. If you're worried about your portfolio halving, you're either too heavily invested in risky assets for the timeframe you wish to start drawing down, or you're not and you need to stop looking at the day to day performance of financial markets.
Your automatic order is just as likely to misfire and sell just before a recovery than it is to prevent you from losing everything. And worse, you need to realize that just because the markets have fluctuated, you haven't actually lost anything but paper value — you still own the same number of shares in the same number of companies. Selling those during a downturn is just cementing that loss in real dollars.
And so say you've sold. That's only half the problem. Now you still need to figure out when to buy into the market again, unless you're planning on just hoarding the cash under your mattress.
What if my risk appetite is to invest in speculative stocks?
Not everyone is suited to an index fund and not everyone wants to only invest in index funds.
You would also want to consider one of the reasons a wide range of index funds have an attractive yield history is the demographics of the growing population associated with the baby boomers, which is now in decline.
I will be extremely surprised if the next 20 years is such a gimme, you will need to pick an appropriate index fund which is not that easy without a crystal ball, once again demographics are you best friend here.
PS: If the S&P halved tomorrow the smart thing to do would be to buy more.
Last 20 years we had 2 times when the market fell in half, and if you are retired to recover from 50% loss, you'll need a 100% gain... why lose money when you can make a killing on the way down? In Japan, the second strongest economy at the time they are still half way down from the top with no recovery in sight and a lot of retirees loosing their savings in the process of "buy and hope trading strategy"
Because any such strategy to make a killing when the market goes down by 50% either requires advance knowledge of this event, or runs the risk of misfiring when the market recovers earlier than expected, forcing you to double down and hope for another crash or buying back in at a loss.
Test for yourself, one strategy is called trend following, you follow the trend up and down with the market, it is not a secret... There a lot of strategies that are outperforming the market for years, the best example is probably Renaissance Technologies:
You, personally being able to beat the market on risk-adjusted returns with any sort of predictability is the part I find difficult to believe.
RenTech has a legion of Ph.Ds and billions of dollars at their disposal — advantages I suspect you are not likely to have. And they are only one of a very, very select few who've reliably demonstrated the ability to beat the market.
Absolutely, I am personally beating the market on a constant basis, it is actually easier when trading 5,6,7 digits account because of liquidity... but that is not important, the important part is that you can do it too, just test few simple trend following strategies against S&P 500 (symbol SPY) for example and you'll see it clearly...
Then start a hedge fund and become a billionaire. Seriously. If what you're saying is true, you essentially have a license to print money. So what's stopping you?
Although it's infinitely more like you've just a) been lucky and will revert to the mean, or b) have simply been at a more aggressive point on the risk/reward curve, and have seen returns commensurate with the level of assumed risk (and will likely see losses commensurate with it too).
Trend following is just a basic application of technical analysis, which is the farcical notion that you can predict where a stock will go based on what it did yesterday, last week, last month, and last year and looking for patterns. It's essentially numerology applied to the stock market. If it worked, the effect would be priced out of the market by people with orders of magnitude more money and access to the markets to you before you had a chance to make trades based on the information.
Just to clarify few points, trend following is not technical analysis in a sense of chart/pattern reading – maybe it can work for someone, but I have tested a lot of patterns and they do not work for me... the reality is we cannot predict what the weather is going to be tomorrow, let alone the stock market next week.
But if you agree that the market is not efficient and trend do emerge, then you can find a quantitative strategy that will let you to follow the rent in up and down markets and make money doing it, you’ll never catch the top or to bottom, but will catch the majority of the trend in the middle...
Why bother opening a hedge fund, look for investors and clients – just the regulatory paperwork would be nightmare, when I am leaving comfortable life, plan to travel the world and will leave a nice "lifestyle business" to my kids...
Let me tell you what, why not take and read one of the Ed Thorp books, maybe it will inspire you to look at the markets in t a different way – I think it is a great risk reward, your are risking few hours from your time and the potential reward can be life changing...
You continue your long-term strategy of buy and hold, and feel lucky to be able to buy these assets at a hefty discount.
If you're nearing a point in time where you expect to be withdrawing these assets, you should be gradually reducing your exposure to riskier investments and put greater percentages into lower-return but stable assets (classically, this would be bonds). In the event of a downturn, you would plan to have enough money in such stable assets to ride out anything shy of a total economic meltdown (in which case there probably wasn't much you could have done anyway).
Unfortunately with the interest rates close to 0%, bonds are not going to be a good investment at the moment, especially in retirement and when the avg life expectancy is growing past 80 years, the only "hope" is to save enough money or work until death... That's why I am advocating that everybody spent the time and test different investment strategies, so we don't have to "hope", but make decisions based on data and analysis...
_If_ (that's a very, very big if as in "won't happen") everybody withdraws, they presumably do so with reason. The most likely reason I can think of is that they want to buy goods or services. If so, the economy will boom. On the other hand, stock prices will fall, giving "everybody" less worth to withdraw.
Net effect likely would be transfer of wealth from the older to the younger and from those with capital to those who have to work to make a living.
But in general, if everyone wanted to sell their assets at the same time, that's when the stock market "crashes", because there's no buyers. I suppose the pension fund managers can make these types of decisions, but in general they are governed by rules and best practices in terms of what investments they can make.
If these funds stopped investing their money, they'd be at greater risk of inflation, and where would they put it? What would be the next step?
But you're right there is a lot of retirement money in the market, and when people start to retire, some of that money will go out of the market, but also a lot of people are trying to live only off the interest/dividends, and keep the principal because they are worried they will live longer than they were expecting.