Managing Risk in Tough Times
PERF’s Diversification of Investments is Key Strategy
Ongoing news reports regarding the stock market and the struggles of financial firms such as Lehman Brothers, Merrill Lynch, and AIG have caused concern for investors worldwide. This includes many members of the Indiana Public Employees’ Retirement Fund (PERF).
While no investor, large or small, is immune from this market downturn, PERF members can be assured that the fund’s management has, for years, been prepared for the difficult market conditions we face today.
While the stock market was booming in 2006, PERF’s investment professionals were certain of one thing … neither booms nor downturns last forever.
So while PERF investment returns topped 17.8 percent and assets under management rose to more than $17 billion, PERF’s management and board of trustees were implementing an asset allocation designed to protect the portfolio from market downturns.
“The idea is that when one type of investment, such as public equity, is down, other types of investments may be stable or even up,” said PERF Executive Director Terren Magid. “While we’re not immune from difficult markets, this long-term approach to investing is aimed at insulating our investments from major swings, up or down, in the market.”
- Asset Allocation:
The process of diversifying investments among different types of assets, such as stocks, bonds, and cash, to optimize the trade-off between investment risks and rewards.
While long-term investors know that the market is prone to booms and downturns, this year’s specific market challenges did not come as a surprise to PERF’s investment professionals.
“These changes and consolidations in the financial sector are not unexpected,” said PERF’s Chief Investment Officer Shawn Wischmeier. “With about 65 percent of our portfolio in the public equity market, we will feel an impact. However, our overall asset allocation is designed to manage this sort of risk through diversification to mitigate the overall impact on the fund.”
What is PERF doing now?
Armed with a strong plan for difficult market times, PERF’s investment staff is actively and closely watching each development in the market and assessing its impact on the investment portfolio. The team is not “day trading” or “playing the market,” but relying on a prudent long-term investment strategy focused on managing risk through diversification.
What should I do?
Investment professionals uniformly extol the virtues of a long-term approach to investing with an appropriately-diversified asset allocation. If this market downturn has caught you without a clear approach to your retirement investing, this may be a good time to seek out a professional financial advisor to help you get started on a personal retirement plan.
Is PERF in solid shape?
The fund’s prudent asset allocation noted above reflects PERF’s status as a solid retirement system with an overall funded status of 99.8 percent at the start of the fund’s 2008 fiscal year. A key measure of pension plan health, funded status is the ratio that measures actuarial plan assets to actuarial liabilities.
“This solid funded status means we can focus on a prudent approach to investing, rather than seeking the types of investment returns that bring a high level of risk to a portfolio,” said Magid. “We take very seriously our responsibility to protect the funds that provide well-earned retirement benefits to our members.”
