NM Adopts Plan to Boost State's Investment Returns - NYTimes.com

Warren Buffett often describes investor behavior as similar to someone driving down the road.

Rather than focusing their attention on the road ahead, investors are driving with their eyes fixed firmly in the rear view mirror.

In other words, rather than look forward, and make investment decisions based on the outlook for the next few years, many investors tend to base their decisions on the most recent investment history.

As we all know, the last 10 years for stocks have been dismal. Although returns in 2009 turned out to be very strong, the market swoon of the last few weeks has moved returns YTD into the red again.

And yet, if you consider today's valuations, it seem logical that stocks - especially large cap, dividend-paying US stocks - offer the best potential for reasonable returns over the next 5 to 10 years.

However, public pension plans continue to reduce their allocation to stocks in favor of either bonds or private equity in a desperate attempt to close their funding gaps.

Here's another example from today's New York Times.

After years of disappointing returns, the investment board for the state of New Mexico has decided that stocks are too risky for them. Instead, they are cutting their exposure to the stock market in favor of bonds (probably yielding around 3%) and private equity.

Consider the latter allocation. Private equity returns, for the most part, have been disappointing. There have been numerous studies finding that, after fees, most private equity investors would have been better off in corporate bonds or even higher quality stocks, yet the appeal of a "black box" approach sold by very smart (and very rich) private equity managers continues to sway investment committees.

This is a perfect illustration of why public pension plans are in such dire straits.

Pension boards - whose investment horizons ought to very long term, given the nature of their liabilities - are fleeing an asset class which probably offers the best chance of achieving their objectives based mostly on past history.

Here's an excerpt from the piece; I have added the highlights:

To help reduce volatility and improve earnings, the council on Tuesday approved a new allocation of fund assets. The plan calls for reducing investments in equities, such as stocks, and shifting more to other investments, including fixed income and alternatives such as private equity. Hedge fund investments also will be trimmed.

''Ultimately we would like to reduce the peaks and valleys we're seeing in performance by reducing that equity exposure,'' Charles Wollmann, a spokesman for the council, said Wednesday.

The two permanent funds have 61 percent to 62 percent of their assets in equities. The council, which is responsible for overseeing management of the funds, decided that should be about 55 percent.

''When the markets are running well that's where you get a lot of your performance, but when they are down that's where you take the big hit,'' Wollmann said.

In other words, according to Mr. Wollmann, you want to be invested in stocks after they have done well, but sell them if they have moved lower i.e., buy high, sell low.

Hope the taxpayers of New Mexico are ready to pay more taxes to close future shortfalls.

NM Adopts Plan to Boost State's Investment Returns - NYTimes.com