This is going to be long and only for the hardcore investment nerds I think. I asked a question, namely, "does the consistent, robotic, unemotional influx of money from US retirement investors (buying pressure) have a stabilizing effect on the US market and does it contribute to US exceptionalism. The answer is a resounding "yes" it would seem.
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The US market holds the largest share of investors on the planet. Over 50% of the entire globe's investors are US investors, representing trillions of dollars.
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As a result, these steady, cyclical drips into the US markets (home bias: most US investors invest in US companies) provide a stabilizing effect on domestic stocks. Even in down markets, there is a constant drip-feed of millions buying stocks undriven by emotion.
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This constant, drip-fed influx of money (regardless of market conditions) provides US companies with an advantage in the form of cheap capital, that is then used for R&D, only further ensuring that US products and companies recieve the highest level of innovation
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This entire dynamic contributes to a de facto "moat" around the US market allowing to better weather troughs in the economic cycle, and maintain an innovation advantage over international competitors, increasing US market performance.
It made me realize that because of our shift from defined pensions (in the 80s) to defined contributions in individual stock portfolios was a "happy accident" of sorts when the first 401k was dreamt up in 1979. By adopting the 401k (or similar) as the de facto retirement vehicle for people, we also managed to create a "self feeding beast" of sorts in the US market. This machine-like drip feed of funds is a major factor in what we call US exceptionalism, and it more than likely will help perpetuate it going forward.
Thoughts? Comments? What say you investing hive-mind? I am not a new investor, but certainly not a vet, and found this conversation illuminating.
I just had a fascinating conversation about US exceptionalism vis a vis our shift to 401k versus pensions
byu/No-Acanthisitta7930 ininvesting
Posted by No-Acanthisitta7930
11 Comments
I had a theory that the once or twice monthly drops of large amounts of retirement money into the S&P might tend to push it up on those days. Did some research and concluded it was not enough to make much difference.
Take a look, see what you think.
Does seem as thought there ought to be nice support there.
>This is going to be long and only for the hardcore investment nerds
Wow modest as well as frugal
I see this sentiment a lot on here, but one point that I never see addressed is whether shifting from pensions to defined contributions really meaningfully changed asset allocation on a large scale.
It’s not like pensions were kept in cash, they were typically managed by pension fund managers who invested into the market. I would presume that most pension fund managers would invest fairly conservatively, so mostly into blue chips and large caps, which doesn’t sound too different from how most people invest in a defined contribution plan.
Is there any data on how the change from pensions to defined contributions impacted regular cash inflows into US equities?
I’m not convinced of the conclusion.
Before 401k’s, pension managers still were investing all of that $$. Pension funds weren’t just a pile of uninvested cash.
So either way, pension fund or 401k, the money’s being invested in some asset mix. The fundamental difference is the method of contribution and who ultimately takes on the risk of investment underperformance.
Pension funds were also invested
Hi from Europe,
>it would seem
Indeed.
There’s a common misconception that everyone in 1970 had a pension. Reality is onky about 50% did. 401k helped fill the gap and also fueled a growth in small businesses who could now compete.
Only about 40% of us equities are in retirement funds, not sure how much is 401k vs IRA. But lots of people have bonds in their 401k not stocks, and some people are in cash/money markets.
There’s been lots of studies about this but growth is fueled by investors and retirement funds are along for the ride. For example look at ORCL up 30% last week. You can’t buy ORCL in a 401k but apparently lots of people did since it boomed in price.
You’re not the first person to have this thought.
Wouldn’t this be offset by 401k withdrawals once the first generation of non-pension retirees comes through? Many boomers had full or majority access to pensions throughout their working years. Gen X had some access and Millennials basically none with a few exceptions.
While probably not a perfect balance, one would think the inflows and outflows would be close enough that the ‘stabilizing effect’ proposed would be more or less moot compared to the overall size of the market.
Pensions have all their funds in the market as well. The main benefit is that if you have a pension you can ALSO have a 401k. Basically turning your retirement from a two legged stool (401k and social security) into a 3 legged stool (401k, Social Security AND a Pension)
I think you can verify your hypothesis (somewhat) with the change that’s about to happen in the Dutch pension world.
“In the new scheme, pension providers can take the differences between groups of members more into account when investing contributions. For example, younger groups are still far away from retirement and are able to pay contributions for years to come.” (https://www.dnb.nl/en/current-economic-issues/pensions/the-new-pension-system/)