# Pension is a safety anchor that affects risk taking



## james4beach (Nov 15, 2012)

I've been watching and observing this for a while. Many of the retirees or near retirees who seem to be very well off have a pension. Either a government pension, pseudo-government (like my colleagues at Hydro One, Manitoba Hydro, etc) or a good corporate pension from a generous corporation (like Suncor).

I saw a recent reminder of this in a money diary thread where a 50 year old gentleman, who is now very well off, has 40%-50% of his net worth in his pension.

I submit to you, dear CMF reader, that *pensions such as these provide a safety anchor to investors who are lucky enough to have them*. As a result, CMF participants who have this safety anchor will more comfortably dabble in stocks and create large stock portfolios with lots of equity risk. They also more readily recommend their stock-based strategy to others. And well they should ... these are the right choices to make in their situation.

But then another thing happens. Others who don't have pensions, or younger investors such as myself (who have a pension-less future) wander into CMF and _start taking advice from older investors who are emboldened by the safety anchor of their pensions_.

Therefore, I caution others who are in the same boat as myself (young investors and others who are pension-less) to invest more conservatively than what appears to be the dominant thinking on CMF. Remember that the advice, and strategies, you hear from other forum members is framed in their own world views which may include the safety net of a big pension.

For example ... as a 33 year old with no pension and no job security, I consider 50% fixed income to be very reasonable and perhaps not even enough (I actually have more). But to 50 year old with a secure job and a pension, this might seem insane -- and I've certain been told, around here, that I'm insane to have such low stock exposure.


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## OhGreatGuru (May 24, 2009)

I agree. And reminds us all to be careful about context when giving advice. 

Some people approach this by thinking of the equivalent asset value of one's pensions as a fixed income asset when trying to decide on an appropriate asset allocation. Most of the traditional "rules of thumb" out there ignore pension values.


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## GoldStone (Mar 6, 2011)

I disagree.

I don't have a DB pension, nor does my wife. Our equity allocation is the highest it's been in years. Bonds look just as expensive as equities, if not more expensive. Might as well take the risk on the equity side.


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## GoldStone (Mar 6, 2011)

Speaking of factors that affect risk taking, knowledge and experience are two important ones.

I've lived through two big market crashes in 2000/01 and 2008/09. I didn't panic and I didn't sell anything at the bottom. I know what I'm going to do if we have another crash: I will be buying more stocks.

Younger investors without such experience should probably be more cautious. You don't know your real risk tolerance until you experience your first market crash.


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## The_Tosser (Oct 20, 2015)

GoldStone said:


> I disagree.
> 
> I don't have a DB pension, nor does my wife.


It doesn't matter if you agree or disagree. The fact is you without a DB pension are functionally worse off that those with one all else held equal, which is James point.

I've known a ton of screw-ups. I mean real bad financially speaking. I kept saying to myself one thing,.....it's a damn good thing they have their pension. At least they couldn't bugger that. That alone saved their life.

Great thread James.


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## GoldStone (Mar 6, 2011)

The_Tosser said:


> It doesn't matter if you agree or disagree. The fact is you without a DB pension are functionally worse off that those with one all else held equal, which is James point.


No, that's not his main point.

This is his main point:



> But then another thing happens. Others who don't have pensions, or younger investors such as myself (who have a pension-less future) wander into CMF and start taking advice from older investors who are emboldened by the safety anchor of their pensions.
> 
> Therefore, I caution others who are in the same boat as myself (young investors and others who are pension-less) to invest more conservatively than what appears to be the dominant thinking on CMF. Remember that the advice, and strategies, you hear from other forum members is framed in their own world views which may include the safety net of a big pension.


I think he exaggerates the influence of the older posters with DB pensions. He also exaggerates the aggressiveness of what he calls "the dominant thinking on CMF". The dominant thinking, if it exists at all, is more aggressive than James wants it to be. That's not a mean feat, because James is possibly the most timid young investor I ever met on the interwebs.


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## james4beach (Nov 15, 2012)

GoldStone ... your experience is still a valuable data point here. It's good to know that even without a pension back-stop, you've decided to go with a high equity allocation. If you don't mind me asking, what are stocks as a % of your net worth?


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## GoldStone (Mar 6, 2011)

BTW, I agree with his point that folks who are lucky to have a safe DB pension (especially taxpayer-backed DB pension) can afford to take more risk in the market.


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## The_Tosser (Oct 20, 2015)

GoldStone said:


> No, that's not his main point.


His main point is the Title. "Pension is a safety anchor".

And again it matters not if you agree or not, the fact is it is a safety anchor. You don't see it then fine with the rest of us. It is just the same.

As i see in your latest post, you have now come around. Great.


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## james4beach (Nov 15, 2012)

Tosser, I think GoldStone agrees that those who have a DB pension have the safety that then allows them to afford more risk ... I think all 3 of us see the same thing here


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## james4beach (Nov 15, 2012)

What a happy, harmonious group we are here on a Sunday evening  group hug


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## GoldStone (Mar 6, 2011)

^ Right.

BTW, another school of thought says that those who won the game can stop playing.

Folks with rich, safe DB pensions won the game. They don't have to take any risks in the market.


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## GoldStone (Mar 6, 2011)

james4beach said:


> If you don't mind me asking, what are stocks as a % of your net worth?


Way too high for my age. 

Central bankers made me do it, James. each:


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## james4beach (Nov 15, 2012)

GoldStone said:


> Central bankers made me do it, James. each:


That tosser Mark Carney is in the UK now... you should send him a postcard!


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## humble_pie (Jun 7, 2009)

james i don't have a pension so i hope u don't think i'm leading you astray when i say that you should have bought five (5) shares of valeant instead of three (3)


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## Eclectic12 (Oct 20, 2010)

GoldStone said:


> ... BTW, another school of thought says that those who won the game can stop playing.
> 
> Folks with rich, safe DB pensions won the game. They don't have to take any risks in the market.


Question is ... would the folks who are acting on this be posting advice on CMF?


Cheers


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> I've been watching and observing this for a while. Many of the retirees or near retirees who seem to be very well off have a pension ...
> 
> I submit to you, dear CMF reader, that *pensions such as these provide a safety anchor to investors who are lucky enough to have them*. As a result, CMF participants who have this safety anchor will more comfortably dabble in stocks and create large stock portfolios with lots of equity risk ...
> 
> But then another thing happens. Others who don't have pensions, or younger investors such as myself (who have a pension-less future) wander into CMF and _start taking advice from older investors who are emboldened by the safety anchor of their pensions_ ...


I can see how it will influence advice (though I have seen posts that qualified the stock amount based on pension) but I'm not sure how broad the pension is as a driving influence.

Certainly my renter and I had no pensions beyond whatever pennies summer jobs were paying into CPP yet we both upped our stock exposure in the late 90's. What drove it? The low interest rates at the time.




james4beach said:


> Remember that the advice, and strategies, you hear from other forum members is framed in their own world views which may include the safety net of a big pension.


This is a good reminder - though I suspect it needs to be expanded to other factors than a pension.


Cheers


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## humble_pie (Jun 7, 2009)

james4 had the underlined sentence portion in italics but italics don't show up in quoted text. So i've taken the liberty of underlining his italicized text.




james4beach said:


> But then another thing happens. Others who don't have pensions, or younger investors such as myself (who have a pension-less future) wander into CMF and *start taking advice from older investors who are emboldened by the safety anchor of their pensions*.
> 
> Therefore, I caution others who are in the same boat as myself (young investors and others who are pension-less) to invest more conservatively than what appears to be the dominant thinking on CMF.




no, i can't agree here. I submit that it is the younger investors who keep wandering into cmf forum & corrupting the place with wild ideas about speculation.

day trading, obscure stocks, illiquid monsters with crazy high dividends, fraud stocks, you name it, the kids are in here posting havoc & trading up storms. 

when they lose, like in ACQ or COS or baytex, they chirp happily about averaging down.

there's even a millennial so rad that he rants about the bank of canada.

it's all the old phartz on here can do to resist their crackpot advice.


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## Eclectic12 (Oct 20, 2010)

It is a good point ... there's quite the range of new investors posting where it is not clear how many are actually listening to the advice (good, bad or run of the mill).

I can recall the guy who was convinced he should liquidate his RRSP to avoid big taxes in retirement responding many times as to why this was best but never once reply to "what are your expected sources of income in retirement".


It's good advice by James to be careful ... I just wonder how many are open to thinking through the situation/advice versus looking for those what agree with their plan.


Cheers


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## lonewolf (Jun 12, 2012)

humble_pie said:


> james4 had the underlined sentence portion in italics but italics don't show up in quoted text. So i've taken the liberty of underlining his italicized text.
> 
> 
> 
> ...


 Years ago I read a book (forget name) where 2 experienced investors started a mutual fund around the 1982 bottom. Their work suggested there was going to be an historic long bull market. They also understood that after a long bear market from 1966 to 1982 that experienced investors would not have the guts to go full out long & ride the bull to its full potential. To over come this they actually went & hired young investors with no experience to run the fund. This was a short story in a book I read might have been one of the market Wizard books by Jack Swagger cant remember all the details of the story


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## mind_business (Sep 24, 2011)

For the first 10 to 15 years, the valuation of a DB is quite low due to the actuarial calculations where the # if years of service, and age of employee greatly affect valuations ... along with typically lower wages in the earlier part of your career. Therefore, I doubt that a DB impacts investing strategies early in one's career. And then later in life ... approaching retirement has a way of getting you to focus on protecting what you've built.

If you were to look at overall investor strategies, wealth, etc of Canadians as statistics, the majority of the posters on CMF would be considered outliers. Most of us, and I consider myself amongst normal/median investors, have made a bunch of risky mistakes early in our investment careers only to realize that we don't have enough time in the day to properly research individual investments and therefore have no business investing in them. I would have been much further ahead if I would have taken a much more conservative approach to investing early on. Nothing wrong with doing so as long as you are implementing a high rate of savings to go along with that.


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## humble_pie (Jun 7, 2009)

mind_business said:


> Most of us, and I consider myself amongst normal/median investors, have made a bunch of risky mistakes early in our investment careers only to realize that we don't have enough time in the day to properly research individual investments and therefore have no business investing in them.



that's what i was saying. It's the younger investors who tend to gamble too much.

to rescue every generation, they have now invented the couch potato. How is it that you never heard of this early in your investment career, mind_business?


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## peterk (May 16, 2010)

Obviously you are a cautious fellow James but I don't think you're too off the mark. You've expressed multiple concerns about your industry's volatility and job instability. You are pessimistic about the stock market with rational justifications, and you have no pension. Whether your strategy turns out to be correct or not is another matter of course, but you've at least the got guts to looks at some data/information, make an assessment and follow through with your actions in-line with _your_ assessment.

Most people just go with the crowd, and don't put any thought into any financial decision they make, just "hoping for the best". If they end up winning, they claim wisdom and skill proudly, if they lose they sulk in poverty, bemoaning bad luck or some external power that "screwed them".

I appreciate your post and reminder. Optimism must be very high among Canadian seniors who have had their houses inflate in value beyond anyone's expectations, their stock portfolios rebound and grow despite global instability, talks about how the CPP has a dynamite investment team that will keep us flush with cash for 100 years, etc. 

Personally I am around 50% cash (down from 75% cash not long ago) and I also have a pension (though small so far since I just started working). I am not going all-in until I see a correction in the US markets.

But I agree with HP that a lot of the other way around is happening too. Seniors being led astray by an unprecedented amount of information on the internet and listening to "advice" from young people that are talking out their ***. I admit to doing that quite a bit in my younger years here on CMF, and can only blame youthful exuberance and excitement to contribute new knowledge I acquired. These days I tend not to try and offer too much financial advice unless it's something I'm dead sure about, and still hope that no one takes me too seriously


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## naysmitj (Sep 16, 2014)

The information garnered on the internet should never be used as a foundation for developing and managing any type of investment planning. At best forums such as this should be treated as entertaining financial reading. Any and all decisions regarding long term financial planning should be developed between an investor and a qualified professional.


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## mind_business (Sep 24, 2011)

humble_pie said:


> that's what i was saying. It's the younger investors who tend to gamble too much.
> 
> to rescue every generation, they have now invented the couch potato. How is it that you never heard of this early in your investment career, mind_business?


Good question. Early on, couch potato simply meant lazing out on the couch watching TV ... without the investment portion LOL. 

I started my career in 1991 prior to the commercialization of the Internet. So my options for learning about investment strategies was through books or learning from others. Well, I decided to 'learn from others' which didn't go so well. I did read 'The Wealthy Barber'  ... but ignored the advice. Like most people in my 20's and 30's I was more interested in accumulating 'stuff' than I was saving for the future. It wasn't until I was in my mid-30's and 40's before I decided to take some actions. One of those actions was to buy a good chunk of Nortel ... enough said.

Mine is a story of would of, could of, should of. Thankfully I consider myself a bit wiser now, but still with many mistakes in my future. I don't discount the advantages for younger people to invest wisely, but there's nothing wrong with taking a conservative approach to that investing ... along with a lot of saving thrown in for good measure.


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## peterk (May 16, 2010)

naysmitj said:


> The information garnered on the internet should never be used as a foundation for developing and managing any type of investment planning. At best forums such as this should be treated as entertaining financial reading. Any and all decisions regarding long term financial planning should be developed between an investor and a qualified professional.


I don't agree with that. Much of the high quality advice on this forum is at a level of detail, honesty, and diversity that cannot easily be had from a "professional". The trick is of course in identifying the good advice from the bad. "Qualified" doesn't mean much to me in this subject, when so many conflicting interests must arise in the advice that the qualified individual makes, bias is a certainty. At least with the forum you know that there is no ulterior motive, only sharing, from knowledgeable posters. And if there is occasionally someone with bad intentions, other knowledgeable posters, their speech unhindered by whatever conflicts there may be in the real world of investing advice, can call-out those posters for their BS.


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## Eclectic12 (Oct 20, 2010)

mind_business said:


> ... Therefore, I doubt that a DB impacts investing strategies early in one's career. And then later in life ... approaching retirement has a way of getting you to focus on protecting what you've built.
> 
> If you were to look at overall investor strategies, wealth, etc of Canadians as statistics, the majority of the posters on CMF would be considered outliers ...


Given that most people I talk to *about* their pension have their eyes glaze over then change the topic, I'm pretty confident the CMFers are outliers in that they have a bit of interest/knowledge. Having followed some of the threads ... that does not mean that what is posted on CMF is being acted on.


Cheers


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## RBull (Jan 20, 2013)

James4beach, this is an interesting thread. 



GoldStone said:


> ^ Right.
> 
> BTW, another school of thought says that those who won the game can stop playing.
> 
> Folks with rich, safe DB pensions won the game. They don't have to take any risks in the market.


FWIW, I'm somewhat of this mindset, considering both a pension and the accumulation of enough assets to retire relatively early (fully for the past 1.5 years, and my wife for about 4 years now). Larry Swedroe in particular make me think more about the "won the race" mentality although we are a long ways from avoiding the markets altogether. If interest rates were different we might be closer to that though. 

My wife has a DB taxpayer backed pension although (not likely, but potentially partially) indexed, currently providing approx 50% of our spending. Typical thinking might have us invested more heavily in the markets because of this (bond like asset). We're currently 59/41 EQ/FI and my plan is to continually raise this EQ ratio slightly over time (likely opposite of most thinking) as we are further into retirement and CPP (for me) & OAS add to our base. Although rates will play a consideration in this,as they are now.

I tend to agree with mind_business in that, in retrospect I would have done better with a more balanced portfolio (and certainly with a couch potato) rather than the 100% equity one I had throughout all (since 1982) but the last couple of years prior to retirement. YMMV


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## fraser (May 15, 2010)

We work with a fee for service financial adviser. We take a dual approach now that we are retired.

First off we calculate the value of our portfolio. This includes the NPV of my DB pension-and of course it changes every year because of my age or with the interest rates. We do not bother to include CPP. We view it as a buffer for margin of error. Once we have the total value, we determine the mix that we are comfortable with and the amount of Canada vs. foreign holdings.

Part of the approach is also the level of comfort based upon our total annual pension income...CPP and DB. Our comfort level changes each year based upon these pension amounts (DB is not indexed), our after tax burn rate in the preceding year, our projected after tax burn rate in the current year, plus any large anticipated capital expenditures. We estimate the tax rate. Bottom line, how much can we count on, what is the shortfall, and how best to guarantee this increasing shortfall as time moves forward while at the same time growing our equity at a rate several points above inflation.

So far, this has worked well for us.


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## Davis (Nov 11, 2014)

GoldStone said:


> ^ Right.
> 
> BTW, another school of thought says that those who won the game can stop playing.
> 
> Folks with rich, safe DB pensions won the game. They don't have to take any risks in the market.


I think that's going to depend on when you want to end the game. If I were working through to my normal retirement date, I would get a comfortable income from my DB pension, so why would I take a lot of risks with my other investments? Because i am going to leave well before i qualify for a full pension, the security of the DB pension allows me to use my investment portfolio as the risky part of my overall plan, so I have been close to 100% in equity for several years, and now have about 97% equity six months from finishing work at 50. I will build a somewhat larger cash cushion over the next six months, but not by much -- just enough so I don't have to sell any shares to fund my retirement for a couple of years.


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## CPA Candidate (Dec 15, 2013)

My wife and I have zero fixed income in our portfolios, we are in our 30s. I counter equity risk by using a certain amount of surplus cashflow to pay down mortgage/LOC debt which has a larger return, rather than investing it. 

I can get 1.5-2.0% on a corporate bond, or 2.6% on my mortgage or 3.7% on my LOC. Just doesn't make sense to own bonds. I prefer a smaller, higher risk portfolio and smaller interest payments/less debt.


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## humble_pie (Jun 7, 2009)

peterk said:


> ... But I agree with HP that a lot of the other way around is happening too. Seniors being led astray by an unprecedented amount of information on the internet and listening to "advice" from young people that are talking out their ***.



actually i was joking. Totally joking. I've never seen one single senior on here who was ever led astray by advice from any young person.

it's an anonymous chat forum. Folks participating should update their skepticism firewalls.

seriously, what i see is that an interestingly high proportion of young persons visiting cmf have marked investment skills. I don't mean superficial skills, i mean good lifetime habits, including the presence of native yellow caution warning signals.

james4 might be feeling a tad sensitive lately since a few of the bluff, hearty old rogues on here have been cuffing him for being timid. But it's premature. James works hard at his portfolio & i'd bet a truly interesting amount of money that he's never going to die poor, not at all.

what one is more likely to see here are folks occasionally being rescued from poor or money-sapping situations foisted upon them by so-called "professional" outside advisors.


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## pwm (Jan 19, 2012)

I agree with j4b's initial premise. Having one's living expenses covered by one's pensions does influence the extent of one's equity exposure, which is the case for me. I've been retired for 10 years and my investments are 100% equities. I'd rather get a 5% dividend than 2% interest. 

That doesn't mean I have never held fixed income. When I was 35 years old and saving to pay off my mortgage I was 100% in GICs so that they all matured around the time I intended to clear off the mortgage. After I was debt free, I went all-in with stocks and stock funds and was able to retire at 55. That's where I will remain from now on because I consider my pensions to be the FI component of my net worth.

BTW, I consider GICs to be a savings vehicle and not an investment.


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## RBull (Jan 20, 2013)

fraser said:


> We work with a fee for service financial adviser. We take a dual approach now that we are retired.
> 
> First off we calculate the value of our portfolio. This includes the NPV of my DB pension-and of course it changes every year because of my age or with the interest rates. We do not bother to include CPP. We view it as a buffer for margin of error. Once we have the total value, we determine the mix that we are comfortable with and the amount of Canada vs. foreign holdings.
> 
> ...


Interesting. This is exactly how I am attacking it too, although as a DIYer.


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## james4beach (Nov 15, 2012)

Great thoughts from everyone! This has blossomed into an interesting discussion.



humble_pie said:


> james i don't have a pension so i hope u don't think i'm leading you astray when i say that you should have bought five (5) shares of valeant instead of three (3)


lol... for those who may not be in on this joke, I actually do own exactly three (3) shares of VRX. They're not doing so great.



humble_pie said:


> james4 might be feeling a tad sensitive lately since a few of the bluff, hearty old rogues on here have been cuffing him for being timid. But it's premature. James works hard at his portfolio & i'd bet a truly interesting amount of money that he's never going to die poor, not at all.


I appreciate that vote of confidence, humble_pie

I've owned a few stocks for many years. I certainly haven't given up on stocks. Although -- in all honesty -- I have a more pessimistic view about the future trajectory of stocks, compared to others on this board. For instance I believe it's a strong possibility that the stock market will give very poor returns for say the next 10 years.


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## humble_pie (Jun 7, 2009)

james4beach said:


> ... For instance I believe it's a strong possibility that the stock market will give very poor returns for say the next 10 years.



possibly. In that case it will be shoe leather for dinner, burn furniture for heat & trade options.

seriously i do not believe there is any pull whatsoever between comfy speculators safely backed up by big pensions vs hungry young things who are being led astray by all the stock talk.

i think the struggle in cmf is exactly what it has always been. The couchers vs the pickers. There are young & old couch potatoes just as there are young & old stock pickers. That's the yin & the yang of it.


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