Tuesday, August 25, 2015

Another Lesson from the Stock Market

You've probably seen headlines like the one above from the San Francisco Chronicle website in the wake of the big drop in the stock market yesterday (about which we posted yesterday). The essence of such articles - which are really aimed at folks with defined contribution pensions - is that the stock market goes up and down so you shouldn't panic; the down will inevitably be followed by an offsetting up. But wait! If that is the case, shouldn't the headline tell you to buy? In fact, since downs will inevitably be followed by ups, how could the market have gone down in the first place?

If you find all of that to be confusing, you have just discovered the key advantage of defined benefit pensions over defined contribution. With defined benefit, you don't have resolve such issues. You don't have to make your retirement dependent on pop advice from the news media. A defined benefit pension, however, doesn't work out so well if you hop from job to job like certain UC presidents, since it is based on - and provides incentive for - a long-term career attachment. Maybe there is a second lesson there somewhere.

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