Thursday, February 02, 2012

Pension Investing and Seeking Out High Rates of Return in LDCs

In the developed West, individuals seek to have a comfortable retirement and have saved trillions of dollars in private savings and mutual fund holdings and retirement plans.   The institutional investors are aware that U.S Treasuries pay 0% right now.  Will the U.S Stock Market yield a 7% annual return over the next decade?  It is possible but this would mean that the Dow Jones will be rise to 25,000 in the year 2022.  If the Dow Jones experiences such a rise, then Glassman and Hassett will be selling more copies of their 2nd edition of Dow 36,000.

So, I predict that institutional investors will turn to the developing world seeking higher returns but what are the risks of seeking those returns?  Will Moodys and S&P invest in highly trained institutional analysts so that Western investors actually know the true risks that they face in investing in the developing world?

I predict that the asymmetric information issues that we faced with the mortgage backed securities in the U.S will be even more severe here.

There is also the issue of political risk.  How will the ratings agencies use econometric models to predict whether there will be a coup in Egypt and whether the new government will renege on foreign debt?  I recognize that if investors know that they don't know these risks that they will demand  a larger risk premium in terms of higher interest rates.

As the U.S has trillions invested in certain LDC nations, will we ask our military to get involved to protect our interests in these nations?  In the past, there were multinational companies such as Exxon who had invested in irreversible capital in such nations but I'm anticipating that moving forward that hundreds of millions of Americans will have a financial stake in the health of these LDCs because the productive growth is taking place there and our capital has been invested there.  Will this "skin in the game" make our people more interested in foreign affairs?  Will more Congressmen get a passport?


Mac said...

When it's time to retire, often your pension plan reaches maturity and you're faced with some decisions. A great option is to transfer its accumulated value into a pension annuity. It seems simple enough, but with all the options offered to investors, it's hard to know what's best.

Annuity NH

Giana Forzareli said...

I was just discussing this in one of my classes. I find it fascinating that you can tweak a tiny aspect of your insurance and increase the return one way, but if you tweak it the other, you are committing fraud. I could be completely wrong as well. It is a 8am class on a Friday. I know I am going to have to do more research on this topic because we are discussing structured annuity next week. I have a feeling that our professor wants us to do the research because she is retiring in two years. Thanks for sharing!