Investing Guidance From CalPERS

You know what CalPERS is, right? The California Public Employees' Retirement System manages pension and health benefits for about 1.6 million public employees, retirees, and families in the Golden State. Even if you live in Davenport, Iowa, you may have heard of CalPERS, just because it's so big. At the end of October last year, it peaked in value at $261 billion. Got it? Big.

Of course, as you might expect, it's a little less big now than it was last year, thanks to a little turbulence in the stock market. As of Dec. 4, it had dropped to $179 billion, down 31%. Here are some of the stocks it held as of Sept. 30:

Source: Capital IQ, a division of Standard and Poor's. Market value based on current share prices.

Still, that's considerably better than the S&P 500, which is down some 44% in the same period.

The explanation is simple: management. While some managers of companies and funds have steered their charges over cliffs, others have proven to be more prudent stewards. CalPERS, for example, uses "smoothing" mechanisms to reduce the effect on the fund of big market swings. While the market was advancing, between 2004 and 2007, the fund reserved some 14% of its assets as a hedge against a downswing.

I liked what I read of comments from CalPERS staffers. Rob Feckner, president of the CalPERS board, noted, "Our job is to make sure we protect the system and the funds that are there for the pensioners." If only more CEOs had such an outlook! They might then not have taken some of the risky chances they took, some of which wiped out companies like Lehman Brothers.

California's state teachers' retirement system, CalSTRS, has been similarly managed, with its spokesperson, Sherry Reser, explaining, "As a patient, long-term investor, we're built to make it through these ups and downs. We're a forever investor. There is going to be a recovery; we've done this before."

That should be how we think about our own investments. We should always be taking a long-term view, since no one can know what will happen in the short run. We should also brace ourselves for occasional downturns. And if we've accumulated some cash with which to take advantage of rare opportunities, all the better. (My colleague Tim Hanson has called today's market the best opportunity in 35 years!)