Thursday, May 15, 2014

The folly of market timing the pension fund

Almost a year ago, the NC Treasurer was pushing a bill to expand alternatives in the pension fund.   At the time, she, and the bill's sponsors argued that interest rates were likely to rise and the bond market would get crushed.   

Sen. Hise, the bill's sponsor said: "I firmly believe the riskiest thing we could be (invested) in right now is the bond market" in the N&O

And in september, Janet Cowell stated stated that "The North Carolina pension fund has always been a big investor in bonds, and that has served us really well, but we're at the end of that runway," on WRAL TV 

I'm not knocking Sen Hise, or Treasurer Cowell's ability to forecast interest rates - they had a 50/50 chance of being correct, and indeed, they may still end up being correct that rates will rise.  Or they may not.

The point here is that basing asset allocation decisions on forecasts of interest rates is a poor way to manage $85 billion.  Anyone who thinks that they can reliably forecast interest rates is either is misleading themselves, or the people that they are talking to.  It just cannot be done.  Interest rates will rise and fall, but a diversified portfolio of low cost investments, will, in the long run do OK.

HT:Ron for the heads up on interest rates.