Public pensions report that over the 25-year period from 1985 through 2011 they have achieved a median investment return of 8.8 percent, exceeding the 8 percent returns they project for the future, and have earned these returns without taking undue risks. Given this, they say, why shouldn’t we assume they can keep on doing so into the future?
The answer, of course, is that that period had a reduction in rates from 10% to 3%. The raised the sample return to an average bond portfolio by about 3% annually. If long term interest rates went to zero, the benefit would only be about 2.1% annually. Most likely, rates will rise, because that is what the Fed wants them to do! Thus, instead of a 3% tailwind, there will be something like a 1-2% wind in our faces over the next 25 years.
I hope there are lots of Doug Edwards's out their, eager to pay more taxes.
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