Index Pensions

This should be the most nonpartisan issue in America: don’t give middle class retirement dollars to high-priced Wall Street money managers for no good reason. And yet…

Honestly, this should have all been settled years ago. Decades ago! It has been accepted knowledge for quite some time now that the effort of investors to “beat the market” by selecting various professional asset managers who charge high fees is sucker’s game. In aggregate, it never works. Yes, some will beat the market each year, and a very very tiny number will beat the market for many years, but in aggregate, the fees charged by money managers causes investors to actually make less in the long run than they would have gotten simply by investing in a low-cost index fund, like those offered by Vanguard, which mirror the broad market.

Everyone on Wall Street knows this and their response is “Yes, but I am the one who will beat the market for you!” Statistics tell us that A) they are likely wrong, B) even if they are right for the moment they will experience reversion to the mean, and C) when we look at the entire pool of money managers, their high fees make it a certainty that they will not do as well for investors as an index fund. Searching for the genius money manager who will beat the market is the rich person version of buying scratch off lottery tickets. You’ll win here and there, but in the long run, you will lose money.

Now then. Let’s consider pension funds: huge pools of money that will ostensibly fund the future retirements of millions of workers who paid into them. Both public and private pension funds across America are in varying degrees of crisis, because they made assumptions about how much money they would earn on their investments that turned out to be much higher than the amount they actually earned. How big is this problem? Well, local, state, and federal government pensions alone…

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