If You Can't Beat the Market, Join It

CalPERS, the large California pension fund, is moving most of $300 billion (yes, billion) into index funds. They're not trying to pick individual corporate stocks that they think will do well. They're not trying to find a mutual fund manager that consistently beats the market. They're just going to bet the employees' future benefits on the market as a whole. They'll be investing in index funds that invest in the companies that make up the Dow Jones, Standard and Poor 500, Russell 2000, etc. If the market goes up, so will CalPERS' value; if the market is down, so is CalPERS. The only way we know if the market is up or down is because of DJIA, S&P 500, Russell 2000, etc.

If you look at some data, it would suggest that in the last eight years, more than half of the mutual funds provide better returns in a bear market than the market as a whole. And more than half lose against a bull market. You'd think it would be the other way around.

You'd also think actively managed mutual funds, with a manager (or two) and a staff to watch companies, industries, markets, etc. would be really good at identifying winners and losers. But they aren't. Either they're not good, not rational or the market is not rational...or as some suspect, they're just as smart as everyone else using similar algorithms as everyone else. A lot of mutual funds mitigate some risk and therefore squash out any extreme wins or losses and settle for mediocre. You might not win much with mediocre.

I once looked at the aggregate data for 401(k) reports and concluded that they are not a great investment. In a 24 year span, a market index value increased twice as much as the average retirement plan participant's. 401(k) growth would be better if they had been invested in index funds more than 20 years ago.

In some small sense, it's one of the reasons $10 billion left one of PIMCO's mutual fund when one of the managers left. There's a portion of that that was going to leave anyway. The manager's departure provided a point of illumination on some investors' sticky note reading "move money from PIMCO mutual fund to index fund" that's been sitting around for a while.

So if you can't beat 'em, join 'em (index funds).