The Importance of Adhering to a
Long-Term, Disciplined Investment Strategy

Last week, I wrote about the General Board of Pension and Health Benefits’ (General Board) consistent, long-term and disciplined strategy for managing a diversified investment program. I pointed out that we have maintained this strategy during up and down markets and that it has stood the test of time.

But with daily moves of hundreds of points in the major stock market averages, some participants have questioned the wisdom of maintaining this strategy. They have been concerned about the General Board continuing to hold stocks in this volatile financial environment.

In order to understand the value of maintaining a long-term investment strategy with retirement assets, it is important to consider the many factors that play a role in making sound investment decisions. The most important retirement planning goal is to be able to have enough money to pay for living expenses during retirement. In fact, a recent survey conducted for The Wall Street Journal asked Americans to identify key financial issues and decisions, and the number one response was “maintaining my existing lifestyle.”

Some factors to consider when making investment decisions are readily apparent. For example, we know—or we can determine—how much we spend to fund our current lifestyle. We also can find out how much money we have by reviewing our checking, savings and other account statements. But there are several other elements that may not be as obvious. For example, most of us will receive a benefit from Social Security when we retire, but we may not know how much it will be. In addition, we may be entitled to monthly payments from a current or previous employer’s defined benefit retirement plan, but we don’t always know how much that will be either.

In addition to known factors, there are unknown ones that are very difficult to predict. Perhaps the most important is the rate of inflation. The purchasing power of our accumulated benefits may be eroded by high inflation rates. We also can’t predict with confidence how gains or losses in the financial markets will affect the value of our investments. And if we are planning to purchase a steady stream of monthly benefit payments in the form of an annuity, we have no way of predicting the interest rate at which our accumulated benefit will be converted. Perhaps the biggest unknown of all is our lifespan—we don’t know whether we will outlive our retirement assets.

A successful, long-term, disciplined investment strategy takes into consideration various possible outcomes for these unknown factors. It is more than simply looking at your account statement, assessing the current market and making decisions on how to invest your assets. All too often, individuals react to the emotions of the day. While understandable, this tactic probably is not in their best interest. In times of economic prosperity and when stocks are rising, these individuals may move all or a significant portion of their assets into high-risk investments. In times of economic turmoil and when stock prices are falling (as we are currently experiencing), they might move all or a significant portion of their assets into very safe investments. While this strategy might seem like a wise one at the moment and allay their anxieties, it is actually a very risky one. This approach most likely will jeopardize their long-term goal of accumulating sufficient assets to maintain their lifestyle in retirement.

Even the most skilled investors recognize the value of consulting financial advisers when making their investment decisions. A qualified professional can help them assemble a clear picture of their retirement goals, accumulated assets, expected benefits and other factors that help shape a financial plan. The financial planner can then use this information to assist them in developing a long-term, disciplined investment strategy that takes into account the potential unknown factors, such as high inflation rates, losses in asset values, interest rate fluctuations and the possibility of outliving retirement assets.

Wise investors don’t panic in periods of economic distress. They take comfort in knowing that they have a well-developed strategy that accounts for possible economic downturns, and they maintain their approach during these stressful periods.

We have experienced market panics before, and we will undoubtedly experience them again. The General Board resists the temptation to abandon its tried-and-true, long-term strategy of managing a diversified investment program. We continue to believe that our strategy is the best approach for managing retirement assets.

Participants who need assistance managing their account balances or making other financial decisions are strongly encouraged to consult with a financial planner, such as those with Ernst & Young Financial Planning Services. This valuable resource is available at no cost this year to:

• active participants with an account balance,
• retired and terminated participants with an account balance of at least $10,000, and
• surviving spouses with an account balance.

Please visit www.gbophb.org/sri_funds/planning.asp for more information about Ernst & Young Financial Planning Services.

In addition, MPP participants can take comfort in knowing that their assets are being managed by the LifeStage Investment Management Service (LifeStage). This investing tool is designed to allocate a participant’s MPP balance among five of the General Board’s funds using an investment approach similar to one that a financial planner might recommend. Participants may also elect LifeStage to manage their non-MPP account balances. Next week, I will write more about LifeStage and why it is an appropriate tool for managing participant account balances.

Ignoring the impact that current events are having on our account balances is extremely difficult. However, I cannot stress enough how important it is to maintain an informed, long-term investment focus. Talk to a financial adviser, from Ernst & Young or elsewhere, for help making decisions that will give you the best chance of reaching your retirement goals. Once you and your financial planner have developed your long-term strategy, take comfort in the wisdom of your strategy and try not to let any market fluctuations that arise divert you from that strategy.

Dave Zellner
Chief Investment Officer
General Board of Pension and Health Benefits