Irrational Exuberance: ? or !

Remember when Alan Greenspan uttered this famous phrase? He spoke these two words at an American Enterprise Institute event in the 1990s. It was a reference to the stock market’s valuation during the Dot-Com go-go era. It was interpreted as a warning to investors that things had gotten too overheated. He was ultimately proven correct!

We think that pension plan sponsors, as well as any other type of investor, should heed this warning once again, as Irrational Exuberance seems to be everywhere today.

Stock market – Historically high multiples based on any fundamental analysis.

Bond market – 39-year bull market dating to July 1982

Single family homes – The median cost for a single-family detached house last month was $391,250, compared with $307,220 a year before (+27.4%)

Cryptocurrencies – What is it? It isn’t a currency. So, let’s pay $42,866.40 for one bitcoin that has no underlying value.

Also, let us not forget meme stocks, which are stocks that have seen an increase in volume NOT because of the company’s performance, but rather because of hype on social media. Now there’s an investment strategy for you!

Any one of these might give you pause, but all of them at the same time – oh, my! As we’ve stated on many occasions, after a successful run at a Vegas casino one should take some risk off the table. Pension plans would be wise to follow the same course of action. There is little from that list above that is suggesting to us that pension systems will be able to generate the types of returns that we’ve witnessed since the Great Financial Crisis and that they are banking on to reduce contribution expenses.

Now is the time to cash in those gains while simultaneously protecting the improved funded status/funded ratios. Defease your plan’s Retired Lives Liability as far out as possible providing your plan the opportunity to wade through potentially troubling markets in the foreseeable future. It would be a shame to see this funding progress wasted through complacency, or worse, neglect.

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