Financial Literacy - Retirement income planning
Should individuals follow the smart money?

While technology hasn't exactly leveled the playing field between regular-Joe investors and ultra-high net worth and institutional investors, it has at least shown all the little people where the playing field is.

Just look online and you'll see that we may all be in the same ballpark, but we're playing different games entirely.

However, individual investors have at their disposal many of the same strategies and investments available to virtually the richest institutional investors in the world.

In many ways, if they want to, individual investors, or retail investors as they're known in the trade, can try to emulate the basic asset allocation strategies followed by some of the heavyweights.

But should they?

Institutional investors -- those that run big pension funds for business and government or endowment funds for charities and universities -- have many advantages over individual investors. They have billions of dollars to invest, plus an unlimited investing time horizon. Those two factors put them in a different league than most, if not all, other players.

How pension funds are different
  1. Certainty of their expenses.
  2. Long time, lots of money.
  3. Access to private equity.

Certainty of expenses

Pension funds know their cash flows with greater certainty than individuals.

"Typically, they might be required to spend 4 percent a year or have a target of a certain amount of dollars," says Larry Swedroe, principal and director of research at Buckingham Asset Management in St. Louis.

For example, pension funds pay out health care and pension benefits to retirees through their lifetimes. Actuaries determine how big these funds have to be to meet their ongoing and future obligations.

"None of us on the planet are able to plan with that kind of certainty. We have liquidity needs, so we might be forced to tap into things: disability, illness, divorce. Things happen; we need more liquidity," says Swedroe, author of "The Only Guide to Alternative Investments You'll Ever Need."

Long time horizon, lots of money

Because of their long time horizon, which is virtually never ending, pension plans can put lots of money into extremely illiquid investments such as private equity and timberlands -- things that might not pay off for 10 or 20 years or more.

And then there is the influence that comes with having more money than the GDP of some small countries. Besides just having access to some esoteric alternative asset classes, pension funds can buy into the top-level performers in some of those areas.

The alternative asset category comprises a broad swath of nontraditional investments, such as currencies and futures; real assets like farmland and commercial real estate; precious metals and other commodities and private equity.


Access to private equity

A major component of institutions' strategies is investment in private equity, which basically means equity that is not publicly traded.

The term covers many different styles of investing into private enterprises, including venture capital, leveraged buyouts, mezzanine capital or debt, and distressed debt or special situations.

In general, it is a realm of investments that is essentially not accessible to individual investors due to sky-high minimum investments and the long time that the money is invested.

Usually though, only a fraction of a pension fund's total portfolio is devoted to private equity investments.

Show Bankrate's community sharing policy
          Connect with us

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.


Jennie Phipps

Scamming Medicare just got harder

Congress finally passed a law that removes Social Security numbers from Medicare cards.  ... Read more

Partner Center

Connect with us