Wise old farmers are believed to have long had a saying: “Don’t eat your seed corn.” In other words, every seed that comes into your hands has the potential to be planted and provide more corn in the future, or to be consumed. The analogy for investors is: Every dollar that comes into your hands can be invested to provide additional dollars in the future, or you can spend it.
This is a concept that seems to have escaped the attention of some of those responsible for the investment and distribution of some public sector pension funds.
A recent article in The New York Times, probably precipitated by the problems facing Detroit and its pension funds, focused on a tendency toward “extra” payments to thousands of pensioners and, in some instances, active employees too. Apparently this is a common practice among many public sector pension funds, including Detroit, predicated on the premise that base pensions were too small and that there was “found” money during periods when actual investment returns exceeded the plan’s target, 7.9% in Detroit. Unfortunately, markets fluctuate. During some periods returns are above trend and during other periods are below trend. By spending the “excess” returns, there was no cushion to carry the underperforming periods.
There is an important lesson here for individual investors. Wise portfolio management requires a clear understanding that markets do fluctuate and any long-term strategy should take that into consideration. A strong market should not be a signal to escalate spending and weak market should not be a basis for despair. A balanced approach to distributions and reinvestment, with realistic expectations, has historically provided a basis for successful portfolio management and sustainable returns.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA