With the onset of boomer retirement, pension funds would face some tough choices in a weaker market. The funds—the aircraft carriers of the financial fleet—are already wrestling with the troubling prospect that returns may not be as generous as they had hoped. That could spawn more risk-taking by funds, not less. MIT's Lo, who manages a hedge fund, says many will return to hedge funds, private equity, and other alternative investments in a scramble to boost their returns. He predicts a wave of money pouring out of mundane stocks and bonds and into riskier assets that promise higher returns will add another strain to stocks. "Over the next year or two, we may see more financial market gyrations because of these assets sloshing around from one segment of the investment industry to another," he says.
A more rational view of risk. In some ways, a tamer stock market could be a good thing. There is a sort of indirect benefit from an end to equity mania. For companies, reliance on funding outside of the stock market could mean less frantic scrambling to manage their businesses under the yoke of unrealistic pressure to meet quarterly earnings projections. For everyday investors, a realization that the idea of equities producing highly stable profits is simply naive will hopefully prompt more Americans to rethink debt and risk.