Pension Cash Flow? Get Bonds Anyway

LOS ALTOS, Calif. (TheStreet) -- In recent years financial planners and investment advisors have written that the cash flow from a defined-benefit pension such as Social Security is mathematically the same as a bond, so a client's investment allocation must be adjusted for this hypothetical bond ownership.

This is wrong, because when you own a bond you can make a profit when rates go down -- because bond prices go up then. When a recession occurs, interest rates drop, making bond prices go up and stock prices go down. During that time the strategy is that you sell your bonds at a high price and use the cash to buy stocks at a low price. This is called rebalancing. You can't do that with a pension income stream.

The risk of a pension is that inflation can destroy value. Cash flow from a pension simply is not enough.