Pension plan managers are getting decidedly more cautious. And
some say that's a signal that it's time for individuals to get
Major pension funds are emphasizing "risk management" over
high returns, according to a recent survey by Callan Associates
Inc., a San Francisco-based consulting firm. The bulk of pension
managers surveyed were going to greater lengths to diversify and
to hedge their bets through complicated option techniques, says
Gregory C. Allen, senior vice president of Callan's quantitative
Risk management limits investment profits, but it also allows
pension managers to cut their losses when the market goes against
them. It's a technique that becomes popular when investment
professionals believe the appreciation potential of their
investments is limited, while the risk of losing a great deal in
a market drop is great. That's a picture-perfect description of
today's stock and bond markets, investment professionals say.
Why? Interest rates and inflation rates are at historic lows.
When interest rates and inflation are declining _ as they have
for the past couple years _ it's generally good for the economy,
good for stock prices and excellent for the prices of previously
issued bonds. That's one of the reasons that both stock and bond
markets have posted stellar returns.
But now there's little chance that either inflation or
interest rates will drop any farther. Indeed, many believe
they'll rise _ at least modestly _ within the next year or two.
An interest rate hike would depress the prices of previously
issued bonds, while a boost in inflation could dampen stock
Additionally, there's risk of a "correction" _ marketspeak for
a big drop _ in the stock market because prices, as measured by
the Dow Jones industrial average, are bouncing around their
all-time highs both in real numbers and in terms of key market
measurements such as price-earnings ratios and dividend yields.
"There's been a specter of market adjustment on the horizon
since last year," said Allen. "So you see a lot of pension
managers looking to hedge away some of the risk in equity
Individuals should take the pension manager's shift as a cue
to rethink their own investing, too, said Esther M. Berger, first
vice president of Paine Webber in Beverly Hills and author of a
book called "Money Smart."
"Risk management is critically important right now," said
Unfortunately, Berger and other experts maintain that the key
risk management technique _ diversification _ is being shunned by
many individual investors. Too many individuals are going from
100 percent investments in certificates of deposit to 100 percent
investments in stock mutual funds, they note. Some, perceiving
the risks in the market, may now be shifting back into CDs,
experts note. …