Regular readers of my column here likely recall that I recently wrote about the move by the California state retirement plan toward retirement indexing over active management.
It will take the Calpers system, which manages several hundred billion in retirement funds, some time to make this kind of change — but things will change. For ordinary retirement investors, however, the Calpers decision triggers serious questions today.
Namely, if this is a “tipping point” for professional money management, what does it mean for retirement savers calling their own shots?
Thankfully, there’s nothing really new about retirement indexing and passive investments. There was a time, back in the 1970s, when retirement indexing was considered an academic peculiarity.
What a difference a few decades makes. Now even the mainstream press, including recently The Atlantic, has embraced the idea that you don’t have to work at investing to win.
The retirement investor who wants to consider index investing shouldn’t leap blindly. But, luckily, the academic bomb-throwers who first proposed indexing are now leading lights of the industry.
For instance, a classic read is Charley Ellis’ Winning the Loser’s Game. It started out, as a lot of influential books do, as a long-form gripe, published in The Financial Analysts Journal in the summer of 1975.
You should read the whole book, but here’s the preamble from the original:
“Gifted, determined, ambitious professionals have come into investment management in such large numbers during the past 30 years that it may no longer be feasible for any of them to profit from the errors of all the others sufficiently often and by sufficient magnitude to beat the market averages.”
If this was just starting to be true in 1975, imagine how things are today, when supercomputers routinely try to catch each other out in trades. This one article helped push Vanguard Funds toward launching the first index fund a year later. Ellis later served on Vanguard’s board.
If you like your arguments all-embracing, another great read on retirement indexing is Princeton Professor Burton Malkiel’s A Random Walk Down Wall Street. Far more than an academic treatise, Malkiel provides a true one-stop-shop for every idea that matters in behavioral finance — the science of why our brains make us screw up in investing — and how to fix it. Malkiel also served on Vanguard’s board.
These erudite gentlemen know how to reach a professional audience and the academic worlds in which they work. Talking to ordinary retirement investors was the goal of The Elements of Investing, which they co-wrote. A far less taxing read, this book nevertheless maintains the rigor and seriousness for which both men are famous in the investing world.
I’ve pointed to the Amazon pages for the books written by these gentlemen, but they don’t need your money. The books have gone through multiple editions already. Check out a copy from your library if you prefer.
Retirement indexing resources
Now, what Burton and Charley want is for you to retire with more. That’s why they agreed to join the investment committee of Rebalance, my own firm, and that’s why they recently agreed to speak directly to the key topics of portfolio index investing, including retirement indexing.
At The Center for Retirement Investing you’ll find a suite of short videos (to which we’ll soon add) that covers a range of passive investing topics, such as asset allocation, diversification, indexing, rebalancing and, importantly, what we learned from the crisis of 2008.
Especially timely is Charley’s discussion of his reaction to 2008 and how investors should prepare for the inevitable return of a down market. Malkiel, meanwhile, provides a thoughtful explanation of the supposed “failure” of diversification during the first decade of this century.
Their colleague Jay Vivian, the former managing director of the IBM Retirement Funds, gives an especially keen argument as to why IBM preceded Calpers in turning to index funds for its $100 billion in retirement assets.
There’s a YouTube version of the entire collection as well. I hope their collective wisdom inspires you to deeper reading and better long-term retirement indexing results.