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Hate Investment Planning? Are there shortcuts?


Planning is worthwhile and the availability of online tools makes the process easier. (There are fewer and fewer excuses for not planning). Yet, many Individual investors still don’t or won’t plan.

Why?

Planning is no fun. (It’s like doing your taxes instead of going to the driving range or watching the game). It’s much easier and more fun to, instead of plan, simply buy a bunch of investment products. Planning can also be hard work. Collect, organize, interpret, analyze and then make choices. Making choices can be hard. It’s ‘thinking’ work. It can be an uncomfortable process for some of us. It can also be intimidating because some might feel they just don’t know (and so they guess). Guess what, Institutional investors feel the same. But it’s because of uncertainty that we all must plan. It’s the only thing we can control. And serious investors focus on what they can control. Investment policy. Suitable risk through appropriate asset mix. Reasonable return expectations. Costs. And the planning process. The beauty of a realistic plan is that it helps prevent wishful thinking and can survive and endure across time and different environments.

Still not convinced?

If an Individual investor won’t plan and wants to build an investment portfolio without planning, then there might be a shortcut.

Why not replicate the work that Institutional investors have already done. Copy it. Using the CPP as a guide, the Individual investor can piggyback on all of the upfront actuarial asset & liability modeling and other planning work plus take advantage of all of the ongoing resources, technology, expertise, strategy and analysis and implementation of the Institutional investor – for free. The CPP’s investment portfolio looks like this:

The CPP is basically a $127 Billion balanced fund with an asset allocation roughly = 55% equities, 34% bonds and 10% real assets. So if an Individual investors did nothing else but implement their investment portfolio to look something like the CPP asset allocation, which would be a lot better than not having a plan, strategy or view to their requirements or asset mix at all. If the Individual accepts that the CPP knows what they are doing (more so than the Individual), then he could simply buy or build a balanced fund with the same approximate mix. (All balanced funds have the same approximate mix. Once difference might be in how active the fund manager is at making over or under weight decisions around the mix).

Don’t like the folks at CPP? Then instead try, OMER’s, Ontario Teachers, Alberta AIMCo or BC IMC.

Take a look at the asset mix for all the registered pension plans in B.C. … pick one. Don’t like B.C.? Try another Province or use a big US Ivy League schools’ endowment. Harvard  Yale  Princeton  Wharton  Stanford

Or use one of the broadest Institutional ‘benchmarks’ available.  The Pension Investment Association of Canada (PIAC). PIAC’s asset allocation is a composite of “130 Canadian pension funds that manage assets in excess of $892 billion on behalf of millions of Canadians”. Because it’s a composite of 130 different plan’s – both defined benefit and defined contribution both included – PIAC’s allocation will be different than the CPP allocation but both will be representative of the broadest, most general asset allocation for the ‘average’ Individual investor. CPP’s asset mix will reflect the ‘Canadian average’. Because it’s a composite, PIAC’s asset mix will be a bit more specific and looks something like: 39.5% Equities, 34.5% bonds and 25.5% real and other assets.

Here is a small sample of asset allocation mixes from some of Canada’s largest Institutional pension funds.

CPP PIAC OMERs OTPP Alberta AIMCo Me
Stocks 56% 44% 34% 43% 43% – 59% 55%
Bonds 31% 33% 27% 7% 20% – 49% 30%
Alternatives 14% 23% 39% 48% 7% – 23% 15%

And here is a small sample (about 25%) of the US Institutional marketplace (available from Pension and Investments online Magazine. See Special Reports, Money Managers directory, Manager statistics at a glance, May 31, 2010 issue).

The point is to leverage the Institutional planning work … for free.

Observations:

  1. Institutional asset allocations are similar. Different but similar. (Ergo, their Investment policies must be ‘similar’).
  2. An allocation of about 1/3rd Bonds, 1/3rd Stocks and 1/3rd Alternatives (real assets, emerging markets or commodities) is common. (Currently, some Bond allocations are a bit lower than normal in favour of currently higher yielding assets).
  3. Bond allocations across Institutional investment portfolios nearly always approach about 1/3rd… hmmm.
  4. If an Individual investors investment portfolio doesn’t look ‘something like’, the CPP or PIAC, say, then … why? How can an Individuals portfolio look so different than the $ Billions being managed on behalf of millions who, it is fair to assume, have ‘similar’ requirements? Not exactly the same. But similar. If an Individuals investment portfolio doesn’t ‘approximate’ what the major Institutional investors (those with all the technology, people, resources, educations, skill, experience … and money), then they might want to revisit their strategy. They may be off the mark. (Not that there is anything wrong with that. If you know that you are off the mark and why … that’s different. The concern is for those who have ‘unintended’ variance or bets away from these ‘Institutional benchmarks’. That’s where the surprises come from). See also a January 2009 article.

Shortcuts are shortcuts and the above examples are simply examples. They are based on the general population and as such are broad and general. The asset mixes are averages. For the Individual investor, they will not likely be ‘the’ answer. They might be, perhaps, for some, be ‘an’ answer. They are not the preferred or perfect solution for many. But, I suggest, using an Institutional pension as a guide is a better starting point than having no plan, no strategy or no guide at all. As such, they might be ‘good enough’ for some. If the Individual investor won’t plan, the Institutional benchmark idea is at least a starting point that won’t ‘hurt’ the Individual investor.

Next time?

Using the CPP as a guide.

Doug Cronk, CFA is Manager, Investments for a Canadian Pension fund.

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