Number-crunching

After nearly two decades of seemingly inexhaustible prosperity, living in a bear market sure takes some getting used to - so much so that some people would simply rather ignore the new reality.

After nearly two decades of seemingly inexhaustible prosperity, living in a bear market sure takes some getting used to - so much so that some people would simply rather ignore the new reality.

By Michael Carroll, Editor
November 2001
Institutional Investor Magazine

In the stages of grief, this is of course known as denial; embracing denial as a financial strategy appears to appeal to legislators of a number of major states, including Arizona, New Jersey, Pennsylvania and Texas. Each of these states chose this year to increase benefits for state workers. Not such a bad idea (with elections on the way). The trouble is how they chose to pay for these hikes: by raiding the state pension fund surpluses, which grew mightily during the bull market.

As Staff Writer Justin Dini shows in “Squandering the Surplus” pension accounting allows states to average their assets over several years rather than use current market valuations to determine their value. Hence these states are relying on two-year-old data that inflates the amount of money actually in the funds. The net result, says Dini: “The states were counting on their surpluses to last another ten years or so. But the surpluses may, in fact, already be gone.”

Anger is another response to grief. That’s an emotion that anyone opening a quarterly 401(k) statement lately is familiar with. An increasing number of investors are now channeling this anger into that most American of responses: litigation. In “Bracing for a Backlash,” Staff Writer Rich Blake previews what many market experts expect to be a coming tide of lawsuits by workers who have seen their retirement balances shrink two years in a row.

Then, of course, there’s acceptance. Recognizing that the stock market wasn’t going to revive anytime soon and adjusting recommendations accordingly were two major qualifications for making this year’s Best of the Buyside, our tribute to the most successful analysts at asset management firms. Facing the facts isn’t easy, but right now it seems the wisest course.

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