The coronavirus effect on the stock market has been terrible, the gains of the past 3 years are gone and will take a few years to return. Unlike the President who believes the stock market will suddenly roared back to higher gains before November for him to be re-elected. One has to remember the President’s fortune is in real estate, not the stock market. Besides individuals who owned stocks, one of the greatest beneficiaries of the rise of the stock market was pension funds.
There are two types of pension funds — one could a defined benefit and the other a variable rate. The defined benefit is a pension which provides you a set amount every month for the rest of your life. Variable rates will move up and down as interest rates go up and down. Pension funds tend to have a broad mix of assets besides stocks, they own bonds, and some own real estate and infrastructure. At the end of their fiscal year, the pension plan’s liabilities are estimated by expressing those future benefits in present day dollars. The question then becomes does the pension plan on that day have enough assets to pay for the pensions in the future? With the rising stock market the answer was yes.
If you had a defined pension in one of the areas of hospitality and tourism, not only has the shares collapsed, you would be also worried about your pension. In the case of Carnival – the cruise line the decline in the stock likely is triggering the banks to look to the company to raise more money. It is possible the money is coming from the US government bailout.
In 2008, the collapse of the auto companies stocks resutled in many auto workers having reduced pensions. One other aspect for the pension plans is with almost 0 interest rates, they make little interest on their bond portfolio, fortunately most of it must be in government bonds or corporate bonds higher than BBB. This means as the economy falls, they had to sell some corporate, but they what is their return? Forced selling is painful but reduces losses and with a pension plan there will be more money to reinvest every two weeks or a month when payroll is done.
Linking to dividend paying stocks, similar to investor in dividend paying stocks pension plans are for the long term horizon. The stocks they buy are similar to dividend paying because they do the same thing – provide a steady stream of income whether the person is retired or not. As a dividend investor, you should mark on the calendar when you companies pay their dividends to ensure you can use the money or reinvest.
There are more questions than answers, till the next time – to raising questions.