Successful Defined Contribution Investment Design

CHAPTER 9Additional Strategies and Alternatives: Seeking Diversification and Return

Is that all there is?

—Miss Peggy Lee

In 1969, American singer Peggy Lee won the Grammy Award for the Best Female Pop Vocal Performance for her version of the song “Is That All There Is?” Originally written during the 1960s by American songwriting team Jerry Leiber and Mike Stoller, who were inspired by the 1896 story “Disillusionment” (Enttäuschung) by Thomas Mann, the lyrics capture a person’s disenchantment with life’s events. The song begins with a little girl witnessing her family’s home burning down, then seeing her first circus—and later, falling in love for the first time. In the song’s refrain, with each experience she asks, “I that all there is?” expressing her successive disappointment.

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As we consider DC investment offerings, we may ask the same question, “Is that all there is?” Many DC programs anchor heavily on mainstream stocks and bonds, both in the target-date allocations and the core investment lineups. Unfortunately, at the time of writing, we are in a low-yield world, with core U.S. bond yields of 1 to 2 percent, which center return expectations on 1 to 2 percent (net of inflation, that’s near 0 percent). U.S. stock valuations are similarly high, with dividend yields near 2 percent and cyclically adjusted P/E multiples well above 20x, which, based on history, may mean 10-year future returns of 5 percent or less. Yet, investors don’t expect returns of 2 to 5 percent; ...