[lesuorac]

Why does it matter if volatility is lower than the market?

Future payments in the short term are covered by inflows.

You might as well maximize the returns now so that in the future when it's not covered by inflows you've acrewed a larger return.

[vkou]

> Why does it matter if volatility is lower than the market?

Because I can trivially beat the market by ~100% by going long on 3:1 margin.

The volatility is why that's a bad idea. One time out of five, the consequence of that investment strategy is 'The market had a crash and I lose everything'.

'Lol, YOLO' is not a great investment strategy for a well-ran country.

[AnthonyMouse]

> One time out of five, the consequence of that investment strategy is 'The market had a crash and I lose everything'.

Which is why that strategy doesn't actually beat the market. Keep using it for 30 years and you're bankrupt.

Whereas if you put your money in a major index 30 years ago and left it there, or even 50 or more years ago, what result? Are you even in a bad place if you put all your money into the market in 1926 and left it there for 100 years?

[akamaka]

Yes, if a retirement fund had put all their money into a stock index in 1926, it wouldn’t have been able to pay out pensions throughout the 1930s and 1940s and would have been bankrupt before the market eventually recovered.

Going full index is a great strategy for an individual person aged 20-50, but not a strategy for a pension fund which needs to continuously pay out.

[caminante]

> Going full index is a great strategy for an individual person aged 20-50, but not a strategy for a pension fund which needs to continuously pay out.

It's OK for a person in their 70s that has a few million in the bank.

This person (CPPIB) has 780 billion and has a sustainability rating for 75 years.

[akamaka]

$780 billion divided by 6 million current recipients is a little over $100,000, which is hardly comparable to your wealth retiree example.

[caminante]

Did you realize that CPP's support isn't full income replacement? It's only 10-20k/year per person.

While your metric is common to compare pensions, it's not relevant for debunking ability to survive a recession.

6 million x $100k is 600 billion.

Whereas the annual benefits paid is ONLY 1/10th that at 60 billion/year.

Turn off 80 billion/year in contributions and the investment income (50-60 billion/year) can sustain.

[akamaka]

> Future payments in the short term are covered by inflows.

That wouldn’t work in a major depression when there is high unemployment and inflows drop.

[caminante]

Well, it could absorb it because its horizon is past the depression.

Let's not forget, CPPIB underperformed a passive benchmark during the Great Financial Crisis and lost 18.8% in FY09.

[jjtheblunt]

> Future payments in the short term are covered by inflows.

is that similar to the Ponzi scheme pattern, though?

[AnthonyMouse]

Ponzi schemes always make current payments out of current inflows. The first 10 people get paid from the inflows from the next 100 people who get paid from the next 1000 people and so on, until you run out of people to sign up and the last group is left holding the bag. This is how Social Security works in the US because it started out by making payments to people who never paid in and was premised on the early 20th century fertility rate of >3.5 instead of the current ~1.6 to keep the system from collapsing, which is why the "trust fund" is running out of money -- it never had enough to cover future payments to begin with.

Whereas having individual years when the fund pays out more than it collected in interest is not a problem as long as that's not what happens on average.

[jjtheblunt]

kudos for a thoughtful and clear explanation: useful indeed as my question was genuine, not snarky.