Do I Consider My Pension in My Asset Allocation?
I’m a big fan of the theory that basic asset allocation is likely to have a larger impact on the real returns of most investors’ portfolios than how good they are at picking specific stocks. Numerous academic studies back up that assessment, and given the average person’s inability to rationally think about stock or bond market returns, this makes a lot of common sense as well.
In that vein of thought I was thinking about my overall asset allocation last week. At this point is my life as a relatively young person, I have almost 100% exposure to stocks in my portfolio (which admittedly isn’t very large) due to the fact I won’t be touching my investments for several decades. Within retirement investments I currently have substantial portions of Canadian, American, and international equities (all done through low-cost, efficient ETFs). I plan on following a very straight forward couch-potato strategy and re-balancing amongst those equities, and when I get a little closer to retirement, re-balancing along asset class lines as well.
The interesting consideration that I hadn’t built into my investment model was what my pension assets are invested in. Now I’m not sure I even need to worry about this too much for two main reasons:
1) I have no control over my pension (as frustrating as this is, it’s interesting that it is the envy of most Canadians). A rather large amount gets deducted from my paycheque every month and gets automatically thrown into a large pool of money (along with my employer’s – the government’s – contribution) that is handled by a third party. I have no input into how much gets taken off or what it is invested into.
2) Regardless of what our pension fund is invested in, there are contractual obligations to provide me with a certain periodical amount once specific conditions are met (like most pension agreements), so to one way of thinking it doesn’t really matter what the third party invests the money in. I have no faith in CPP or OAS to be there for me when I retire, but I’m fairly certain my teacher’s pension will still be there, even if it is modified a bit (for example maybe the cost of living adjustment might be less generous).
Since I have no control, and the investments don’t appear to matter a whole lot, I’m not sure I even really need to worry about what my pension fund is invested in. However, there might be some merit in slightly overweighting my personal retirement savings in US and international equities since I’m already fairly heavily invested in Canadian companies through the CPP (another fund I pay into every month) and my teacher’s pension.
What do you all think? Is there a systemic risk to me being overweight in Canadian equities as far as my overall financial picture is concerned? Or does the pension-related investments not really matter because of the points noted above?