News & Announcements
A letter from PERA's Chief Investment Officer
April 8, 2025
Dear PERA Members,
Given the recent volatility and downturn in the stock market, I thought it would be a good time to remind our members how our investment program is structured and why. The defined benefit plan, or PERA fund, is designed for the long-term. Meaning, the PERA Board approved a long-term Strategic Asset Allocation (SAA), which the investment staff allocates to various active and passive investment managers. The SAA is designed to be a well-diversified portfolio, that will only change every 3-4 years. This is opposed to a Tactical Asset Allocation (TAA), which may be changed constantly depending on the staff’s view of market conditions and the macroeconomic environment.
Why do we have an SAA versus a TAA? Because timing the market is very difficult even for the biggest, most equipped, and most informed investors. Like most public pensions, PERA lacks the systems, team size, and information advantage to time the market effectively. As such, it is best for PERA to have a well-diversified SAA rather than a TAA. In addition, there is plenty of research demonstrating that timing the market, even for the biggest investors, is both difficult and perilous.
Charles Schwab conducted research showing that market timing, even if done perfectly, is only little better than buy-and-hold (Full Charles Schwab report can be found here). In summary, the Schwab paper concludes that unless you are a perfect market timer, it is better to stay in the market and ride out the volatility and downturns. Further, the return differential between a perfect market timer and someone who stays invested is not significant enough to risk missing the market upswings.
The other thing to remember is that PERA fund is well diversified globally by asset class, geography, and industrial sectors, and we expect this to benefit PERA during times like this. Further, as of 2/28/2025, we only have 33% of our current portfolio in public stocks and about 14% in private equity, which lags public stocks pricing both up and down. Our bond portfolio (both credit and high-grade bonds) makes up 32% of our portfolio and has held up fairly well through this volatility. Below, there are charts to emphasize key themes members should keep in mind.
Current PERA Asset Allocation is well-diversified across asset classes (see Verus report below):
Current PERA Asset Allocation is well-diversified across geography and sectors (see Verus charts below):
Often when the US underperforms, international markets outperform and vice versa (see Hartford Funds chart below):
The stock market generally rises, so it is easier and more predictable to remain invested rather than to try market timing (see Vanguard chart below):
The best stock market days often occur during bear markets (general market downturns), which makes stock market tops and bottoms hard to predict (see Vanguard chart below):
If you miss the best 20 days of trading in any given year over the last 30 years, you will miss out on all the gains in that year and even lose money (see Carson Investment Research chart below):
Perfectly predicting the market versus staying fully invested. The difference in gain is not worth the risk of missing one or more best days (as indicated above). Investor A invests by perfectly timing the market, Investor B invests immediately whether the market is up or down, Investor C invests at the peak of the market or the worst timing, and Investor D invests only in cash (see Charles Schwab chart below):
The bottom line is that trying to predict the market can be worse than designing a well-diversified portfolio and riding through the volatility and downturn.
Best Regards,
Michael Shackelford, CFA
PERA Chief Investment Officer