Friday, November 11, 2016

The water hits the side of the bucket and sloshes up, when you walk

Hearing about pensions is hearing about a pail of water sloshing around:

Nevada Think Tank (If they have one) :
A new study published by Harvard’s John F. Kennedy School of Government joins a growing chorus of academic research that has raised alarm bells over the state of public pension funding in the U.S.
The authors found that:
“…the existing status quo is enormously risky…The current system of pension accounting, whatever the discount rate used, doesn’t convey the risks inherent in the system and how policy choices affect those risk.”
GASB standards do not account for these risks in any meaningful way. While outcomes are better at the median, performance in the left tail of the return distribution are dramatically worse.”

They explain:

While the new portfolio may still be expected to return 8 percent on average, the damage done during periods of below-average returns is significantly higher. This is because, as PERS undertakes more risk, below-average returns move farther away from the expected mean (or midpoint) return of 8 percent. In other words, the damage caused from periods of below-average investment periods grows exponentially, as the level of risk increases.

Or, skip the bucket analogy, go with: Big funds have Big Bit error 

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