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Neil Hokanson of Solana Beach’s Hokanson Associates likes the predictability of high-quality bonds. However, quality stocks are paying good dividends now; he wouldn’t argue with a portfolio that is 50 percent in equities. He likes commodities. “If a committee is concerned about inflation, commodities would be one tool in its quiver,” says Hokanson. He has a problem with venture capital, hedge funds, private equity funds, and the like. “The trouble is opacity. If you don’t know what is going on and don’t understand it, you are gambling with investors’ money.”

Welsh thinks a pension fund should constantly re-evaluate its portfolio — not set targets once a year or so. “We will probably be in a volatile environment for the next five to ten years. It will be so unpredictable, the only constant will be staying on your toes and being flexible — not being married to one scenario,” he says. “So the fiduciary of a pension fund should look at asset allocation on a regular basis.”

Listen to Don Bauder discuss this further on Reader Radio.

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shizzyfinn June 25, 2009 @ 11:53 a.m.

I don't buy the inflation-protection justification for tilting towards stocks. Stocks are not guaranteed to do well in an inflationary environment, particularly if the inflation comes not from a hot economy but from a devaluation in the dollar.

If inflation is such a concern for the City fund, why not go for TIPS, Treasury Inflation Protected Securities? Payouts for TIPS go up directly with the Consumer Price Index, so it seems like TIPS would be a better match for the inflation-indexed benefits the fund owes retirees.

Of course, TIPS don't offer the theoretical "risk premium" that is generally incorporated into projections of returns for stocks. So the big allocation to stocks probably allows the City to forecast long-term fund returns of, say, inflation plus 5%. TIPS-type returns would be closer to inflation plus 2%.

So maybe one reason for betting big on stocks is stocks help the fund project larger long-term returns - and therefore the fund seems less cash-strapped in the short term.


Don Bauder June 25, 2009 @ 5:06 p.m.

Response to post #1: Sometimes stocks go up with inflation, but other times they don't. Remember 1973-1975? Inflation soared; the economy went into an inflation-induced recession; stocks tanked. There are other examples. Bonds (other than TIPS) do poorly in inflation, but as is pointed out in the column, if you buy quality bonds and ladder them so that they are maturing as employees are retiring, their interim performance shouldn't be a problem. Since the 1980s, the federal government has put a gun to your head and told you to buy stocks; then it has done everything in its power to manipulate them. But even the Feds can't stop a tsunami, particularly now that the big banks that used to help in the manipulation are now on the ropes. Quality stocks should be in a pension portfolio -- but they shouldn't be 50% or more, as is common these days. Best, Don Bauder


JakeSD June 26, 2009 @ 11:47 a.m.

I am definitely weighting towards foreign stocks and commodity stocks, especially gas/oil. With inflation looming, most domestic stocks will continue to struggle. China has had a boom but is far from a bubble. I think that economy will be strong for several years to come.

The "clean energy" stocks will be the next dot.com bubble. Everyone plowing money into them but few will be able to make it profitable on a long-term basis.


Don Bauder June 26, 2009 @ 9:45 p.m.

Response to post #3: I don't think you will see that inflation for some time -- more than a couple of years. Yes, the federal government and Fed have thrown $12 trillion at this deep recession. Yes, the monstrous deficits will be monetized. But the economy is so weak that inflation won't come for awhile. Some people say this is a blessing; really, it's a case of pick your poison. You get an extremely weak economy or inflation. The biofuel stocks were a bubble that broke. Yes, clean energy stocks will also be a bubble that breaks. Best, Don Bauder


SurfPuppy619 June 27, 2009 @ 7:43 a.m.

I don't think you will see that inflation for some time -- more than a couple of years.

I think sky high inflation is just around the corner-2 years? Who knows. Maybe less.

But when inflation comes it is going to hit like a brick wall.

What goes up must come down. And printing money like it is toilet paper that is backed by nothing except the gov's word (which 25 years ago meant something) is laughable.

CA used to have a solid, strong goverment, and look where it is at today. The federal gov is even more irresponsible than CA is.


Don Bauder June 27, 2009 @ 10:35 p.m.

Response to post #5: The monetarists (Friedmanites) believe inflation is near because of the money creation. Keynesians and Adam Smith followers think it won't come for awhile. Best, Don Bauder


JakeSD July 1, 2009 @ 11:14 a.m.

Happy to be a Milt fan! I think we'll see rates creeping up by end of this year and by end of 2010 the world's demand for U.S. debt will be subsiding. 2010 will be a very interesting year for rates and inflation. I think Prime will be above 5% and climbing towards 6% by end of 2010.


Don Bauder July 1, 2009 @ 9:23 p.m.

Response to post #7: I think the economy will be too weak for inflation to erupt, but you may well be right. Best, Don Bauder


Twister July 13, 2009 @ 7:35 p.m.

A "weak" economy may not be immune to inflation, based solely on the amount of outstanding debt. The days of faux luxury for the masses may be over, but the mega-parasites will go on concentrating wealth, and impoverishment of a larger and larger fraction of the middle and bottom are inevitable. The big boys just don't get the idea of value as being related to money, and they never will. Yes, they will suffer a penalty, but they will still be on top. Their "customers" haven't sufficient buying power, so will have to deal through an underground economy and steal from each other.


Don Bauder July 14, 2009 @ 6:21 a.m.

Response to post #9: The underground economy is an interesting phenomenon both in deflationary and inflationary times. Best, Don Bauder


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