What mandatory pension investors need to know about the Corona crisis

If you work, you’re an investor. Here’s what you need to know

In Dostoevsky’s 1872 novel The Possessed, the governor of a burning province cries out in despair, “The fire is in the minds of men, and not in the roofs of the houses.” Things are different today.  There is a fire burning in the roofs, and we can’t be sure how intensely it will burn, or how long it will last. The uncertainty ignites fires in our minds, which we’d best contain if we want to limit the fire in the roofs’ damage and duration.

The spread of COVID-19 to 190 countries has created a cascade of collective and personal uncertainties along three dimensions:

  1. Physical safety: Will Israel’s social distancing efforts “flatten the curve?” How about the efforts in countries Israel has economic ties with? How long will this take?
  2. Current salary safety: What will happen to my job in the meantime?
  3. Future retirement salary safety: What has happened to my mandatory pension investment portfolio accumulation with markets falling over 20% in the past month and what should I do about it?

Economists sometimes differentiate between risk and uncertainty.  In situations of risk, we can effectively estimate possible outcomes and their likelihoods.  In situations of uncertainty, effective estimation is not yet possible, usually because data is lacking.   Our moment is one of uncertainty.  As Fred Brauer, a mathematical epidemiologist, recently put it: “Because it is impossible to estimate the extent that people will actually alter their contacts, it is not possible to estimate the effect on the final size of the epidemic…When the data become more reliable, sharper estimates will be available.”[1]

Financial markets are very good at evaluating risk and lousy at evaluating uncertainty.  So, we’re seeing many of the same symptoms of market stress that we saw in 2008 during the sub-prime market meltdown, despite the fact that that crisis originated within the financial system while this crisis originated outside of it in an event (a pandemic) that financial markets had effectively assigned a zero probability of occurring until very recently.

Mandatory pension investors with several years or more left until retirement should understand that:

  • We will all be wiser in the coming weeks (and months), as data on the spread of COVID-19 and its public health and economic consequences accumulates. As it does, uncertainty will increasingly be reduced to risk and financial markets will be better able to “price” COVID-19 than they are able to do now.
  • They probably have enough time and their monthly mandatory pension investment rates are likely high enough (about 20% of their monthly salaries!) to eventually recoup their current losses and significantly more, provided they invest patiently, cool-headedly and well.
  • Their “pension savings” are not like piggy banks, which contain exactly what is put into them, but rather are investment portfolios whose performance depends upon their investment choices.
  • In the coming “restoration” period after the crisis resolves, lower mandatory pension investment accumulations will mean that they will no longer be able to ignore their mandatory pension investments while simultaneously counting on them to fund the retirement salary they hope for.

Until COVID-19 uncertainty is reduced to COVID-19 risk, the wisest thing we can do as mandatory pension investors is to accept the fact that we–and financial markets–don’t know.  Still, committing to a proactive mandatory pension investment stance once that becomes possible can help to calm the COVID-19 fires raging in our minds as they rage in our roofs.

How do I become a better mandatory pension investor? I will address the question in my next blog.

*This blogpost does not constitute pension or investment advice.

[1] Fred Brauer, “Viral Math,” Tablet Magazine, March 17, 2020, accessed March 25, 2020, https://www.tabletmag.com/sections/science/articles/viral-epidemiology.

About the Author
Professor Kenneth Mischel received his PhD in Financial Economics from Columbia University. In addition to teaching, he creates robo financial advice systems and trading algorithms.
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