7 ms·

Ask HN: 50% of stock market is pension funds,what happens when everyone withdraw?

23 points by punnerud 9y ago

noir_lord 9y ago
50% of people don't retire in any one year (though some years a larger percentage of people do retire because of bumps in the pipeline). Also when people retire the pension fund doesn't draw out their entire pension in one go.
cbanek 9y ago
I'm honestly not sure if it's 50% or not, but I suppose the idea is that not everyone withdraws at the same time. Ideally, you would only sell off assets that you need to raise capital to pay for benefits. Also, there's new money coming into the fund by employees paying in, and I'm not sure they can stop. But in general, if everyone wanted to sell their assets at the same time, that's when the stock market "crashes", because there's no buyers. I suppose the pension fund managers can make these types of decisions, but in general they are governed by rules and best practices in terms of what investments they can make. If these funds stopped investing their money, they'd be at greater risk of inflation, and where would they put it? What would be the next step? But you're right there is a lot of retirement money in the market, and when people start to retire, some of that money will go out of the market, but also a lot of people are trying to live only off the interest/dividends, and keep the principal because they are worried they will live longer than they were expecting.
- dv_dt 9y ago
  In general not everyone withdraws at the same time, but there are generational demographic pressures. As more and more time progresses, the baby boomers will withdraw more and more of their savings - so one could characterize a set of outflow models of some sort there. The saved amount of discretionary pay going to younger generations is an inflow. I really don't know if the outflow will exceed the inflow, but I would note that younger generations live under many decades of squeezing of 'excess' margins in wages to labor. And that makes the question of wether the outflow will exceed the inflows much more of something to ponder.
SirLJ 9y ago
No matter what kind of investment, you have to have a system with clear entry and especially an exit strategy, all part of your solid risk/money management. In any event of a market down turn I'll be out long before the bottom and will be probably in some sort of alternative investment which will rise, because the money will seek to go into something else, maybe gold for example. I strongly recommend to look into systematic stock trading systems like trend following for example and to have a plan in place when the stock market turns down from the Friday all time high... Also i makes the greatest life style business with no customers, no employees and no investors and will run on autopilot as long as the stock market exists...
- stouset 9y ago
  Assuming you are not some kind of savant who can time the market, how exactly do you anticipate being able to reliably get out "before the bottom", without advance knowledge of where exactly the bottom will be? How, exactly, do you know what other assets will be inversely affected? And why do you believe you'll get in on those alternative investments before other panicked investors with equal access to information as you dogpile into them as well, raising the price you need to pay to enter into a position? What you're saying sounds suspiciously like a common yet mistaken belief that you can time the market.
  - SirLJ 9y ago
    Test for yourself, one strategy is called trend following, you follow the trend up and down with the market, it is not a secret... There a lot of strategies that are outperforming the market for years, the best example is probably Renaissance Technologies: https://en.wikipedia.org/wiki/Renaissance_Technologies https://en.wikipedia.org/wiki/Renaissance_Technologies
    - stouset 9y ago
      Better-than-market returns are possible. You, personally being able to beat the market on risk-adjusted returns with any sort of predictability is the part I find difficult to believe. RenTech has a legion of Ph.Ds and billions of dollars at their disposal — advantages I suspect you are not likely to have. And they are only one of a very, very select few who've reliably demonstrated the ability to beat the market.
danjoc 9y ago
Ask 2008. That's when all the boomers started hitting early retirement age.
- fred_is_fred 9y ago
  No. "all" of the boomers didn't hit early retirement in 2008. Since "boomers" cover a broad age group and were not all born in the same year.
stouset 9y ago
You continue your long-term strategy of buy and hold, and feel lucky to be able to buy these assets at a hefty discount. If you're nearing a point in time where you expect to be withdrawing these assets, you should be gradually reducing your exposure to riskier investments and put greater percentages into lower-return but stable assets (classically, this would be bonds). In the event of a downturn, you would plan to have enough money in such stable assets to ride out anything shy of a total economic meltdown (in which case there probably wasn't much you could have done anyway).
- SirLJ 9y ago
  Unfortunately with the interest rates close to 0%, bonds are not going to be a good investment at the moment, especially in retirement and when the avg life expectancy is growing past 80 years, the only "hope" is to save enough money or work until death... That's why I am advocating that everybody spent the time and test different investment strategies, so we don't have to "hope", but make decisions based on data and analysis...
ThrustVectoring 9y ago
This and the low birthrate in the west are fundamentally why interest rates are so low and why college and housing is so expensive. When someone decides to forgo consumption now in exchange for consumption later, it has to net out into someone else consuming now in exchange for forgoing consumption later. The interest rate and price of financed goods adjusts until counter-parties meet on price and the market clears. Where are the sources of new debt in modern western economies? Mortgages for the most part (70%), with student and auto loans taking up much of the rest (~10% each).
- meric 9y ago
  >> When someone decides to forgo consumption now in exchange for consumption later, it has to net out into someone else consuming now in exchange for forgoing consumption later That's not true. You are a farmer, there is no one near you for a thousand miles, you have an unplanted field. You have a bag of seeds and no food. You can decide how many seeds to eat now, and how many seeds to plant for consumption later. No matter what level of consumption & investment you choose, no one else has to change their consumption & investment habits.
spectrum1234 9y ago
It's amazing to me how many smart people don't understand this. The prices would bounce back to almost exactly what they were before the withdrawal. Edit 1: This is because the stock market is mostly (quasi) efficient. Every other answer in this thread is wrong. Random people buying and selling have nothing to do with what the correct price of assets are. Edit 2: The question makes this answer particularly easy because pension investors are by definition buy and hold investors (not day traders). If 50% of day traders did this the answer would be more complex. However, on average the answer would still be the same. If it was fundamental investors, this would be a much more interesting question. However using induction previous fundamental investors would have never invested in the first place...And the end game here is risk must always carries a premium...which leads us back to...prices bouncing back yet again.
- SirLJ 9y ago
  Let's agree to disagree on the Efficient-market hypothesis, what cracks me out there is one of the pioneers Paul Samuelson, Nobel laureate economist - who ended up co founding one of the first quantitative trading company Commodities Corporation - I guess hi did hedge his bet... and let's finish with one of my favorite Warren Buffet quote: “Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.”
Someone 9y ago
_If_ (that's a very, very big if as in "won't happen") everybody withdraws, they presumably do so with reason. The most likely reason I can think of is that they want to buy goods or services. If so, the economy will boom. On the other hand, stock prices will fall, giving "everybody" less worth to withdraw. Net effect likely would be transfer of wealth from the older to the younger and from those with capital to those who have to work to make a living.

23 points by punnerud 9y ago

50% of people don't retire in any one year (though some years a larger percentage of people do retire because of bumps in the pipeline). Also when people retire the pension fund doesn't draw out their entire pension in one go.

cbanek 9y ago

I'm honestly not sure if it's 50% or not, but I suppose the idea is that not everyone withdraws at the same time. Ideally, you would only sell off assets that you need to raise capital to pay for benefits. Also, there's new money coming into the fund by employees paying in, and I'm not sure they can stop. But in general, if everyone wanted to sell their assets at the same time, that's when the stock market "crashes", because there's no buyers. I suppose the pension fund managers can make these types of decisions, but in general they are governed by rules and best practices in terms of what investments they can make. If these funds stopped investing their money, they'd be at greater risk of inflation, and where would they put it? What would be the next step? But you're right there is a lot of retirement money in the market, and when people start to retire, some of that money will go out of the market, but also a lot of people are trying to live only off the interest/dividends, and keep the principal because they are worried they will live longer than they were expecting.

dv_dt 9y ago
In general not everyone withdraws at the same time, but there are generational demographic pressures. As more and more time progresses, the baby boomers will withdraw more and more of their savings - so one could characterize a set of outflow models of some sort there. The saved amount of discretionary pay going to younger generations is an inflow. I really don't know if the outflow will exceed the inflow, but I would note that younger generations live under many decades of squeezing of 'excess' margins in wages to labor. And that makes the question of wether the outflow will exceed the inflows much more of something to ponder.

SirLJ 9y ago

No matter what kind of investment, you have to have a system with clear entry and especially an exit strategy, all part of your solid risk/money management. In any event of a market down turn I'll be out long before the bottom and will be probably in some sort of alternative investment which will rise, because the money will seek to go into something else, maybe gold for example. I strongly recommend to look into systematic stock trading systems like trend following for example and to have a plan in place when the stock market turns down from the Friday all time high... Also i makes the greatest life style business with no customers, no employees and no investors and will run on autopilot as long as the stock market exists...

stouset 9y ago
Assuming you are not some kind of savant who can time the market, how exactly do you anticipate being able to reliably get out "before the bottom", without advance knowledge of where exactly the bottom will be? How, exactly, do you know what other assets will be inversely affected? And why do you believe you'll get in on those alternative investments before other panicked investors with equal access to information as you dogpile into them as well, raising the price you need to pay to enter into a position? What you're saying sounds suspiciously like a common yet mistaken belief that you can time the market.
- SirLJ 9y ago
  Test for yourself, one strategy is called trend following, you follow the trend up and down with the market, it is not a secret... There a lot of strategies that are outperforming the market for years, the best example is probably Renaissance Technologies: https://en.wikipedia.org/wiki/Renaissance_Technologies https://en.wikipedia.org/wiki/Renaissance_Technologies
  - stouset 9y ago
    Better-than-market returns are possible. You, personally being able to beat the market on risk-adjusted returns with any sort of predictability is the part I find difficult to believe. RenTech has a legion of Ph.Ds and billions of dollars at their disposal — advantages I suspect you are not likely to have. And they are only one of a very, very select few who've reliably demonstrated the ability to beat the market.

danjoc 9y ago

Ask 2008. That's when all the boomers started hitting early retirement age.

fred_is_fred 9y ago
No. "all" of the boomers didn't hit early retirement in 2008. Since "boomers" cover a broad age group and were not all born in the same year.

stouset 9y ago

You continue your long-term strategy of buy and hold, and feel lucky to be able to buy these assets at a hefty discount. If you're nearing a point in time where you expect to be withdrawing these assets, you should be gradually reducing your exposure to riskier investments and put greater percentages into lower-return but stable assets (classically, this would be bonds). In the event of a downturn, you would plan to have enough money in such stable assets to ride out anything shy of a total economic meltdown (in which case there probably wasn't much you could have done anyway).

SirLJ 9y ago
Unfortunately with the interest rates close to 0%, bonds are not going to be a good investment at the moment, especially in retirement and when the avg life expectancy is growing past 80 years, the only "hope" is to save enough money or work until death... That's why I am advocating that everybody spent the time and test different investment strategies, so we don't have to "hope", but make decisions based on data and analysis...

ThrustVectoring 9y ago

This and the low birthrate in the west are fundamentally why interest rates are so low and why college and housing is so expensive. When someone decides to forgo consumption now in exchange for consumption later, it has to net out into someone else consuming now in exchange for forgoing consumption later. The interest rate and price of financed goods adjusts until counter-parties meet on price and the market clears. Where are the sources of new debt in modern western economies? Mortgages for the most part (70%), with student and auto loans taking up much of the rest (~10% each).

meric 9y ago
>> When someone decides to forgo consumption now in exchange for consumption later, it has to net out into someone else consuming now in exchange for forgoing consumption later That's not true. You are a farmer, there is no one near you for a thousand miles, you have an unplanted field. You have a bag of seeds and no food. You can decide how many seeds to eat now, and how many seeds to plant for consumption later. No matter what level of consumption & investment you choose, no one else has to change their consumption & investment habits.

spectrum1234 9y ago

It's amazing to me how many smart people don't understand this. The prices would bounce back to almost exactly what they were before the withdrawal. Edit 1: This is because the stock market is mostly (quasi) efficient. Every other answer in this thread is wrong. Random people buying and selling have nothing to do with what the correct price of assets are. Edit 2: The question makes this answer particularly easy because pension investors are by definition buy and hold investors (not day traders). If 50% of day traders did this the answer would be more complex. However, on average the answer would still be the same. If it was fundamental investors, this would be a much more interesting question. However using induction previous fundamental investors would have never invested in the first place...And the end game here is risk must always carries a premium...which leads us back to...prices bouncing back yet again.

SirLJ 9y ago
Let's agree to disagree on the Efficient-market hypothesis, what cracks me out there is one of the pioneers Paul Samuelson, Nobel laureate economist - who ended up co founding one of the first quantitative trading company Commodities Corporation - I guess hi did hedge his bet... and let's finish with one of my favorite Warren Buffet quote: “Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.”

Someone 9y ago

_If_ (that's a very, very big if as in "won't happen") everybody withdraws, they presumably do so with reason. The most likely reason I can think of is that they want to buy goods or services. If so, the economy will boom. On the other hand, stock prices will fall, giving "everybody" less worth to withdraw. Net effect likely would be transfer of wealth from the older to the younger and from those with capital to those who have to work to make a living.