In the parlance of Wall Street, there's the "smart money" and the "dumb money." The dumb money falls for investing fads, sells into market panics and pays ridiculous fees. The smart money doesn't.
It's getting a lot harder to tell the two apart. More amateur investors have given up on trying to outsmart the market. And even the most sophisticated investors are rejecting strategies that require Ph.D-level math and managers with million-dollar salaries.
Leading the way this week is the U.S.'s largest pension. The $298-billion California Public Employees' Retirement System, or Calpers, is ditching all of its hedge funds -- $4 billion worth. The dramatic move isn't tied to performance, though that's been lousy. It's to "reduce the complexity [and] costs in the program," interim chief investment officer Ted Eliopoulos told Bloomberg.
Cut cost and complexity -- it's a slogan that fits on a bumper sticker, and it's being adopted by investors large and small. It took a while for this argument to go mainstream. Index fund advocate John Bogle founded low-cost fund firm Vanguard Group Inc. in 1975. Now trillions of dollars are following Mr. Bogle's advice.
See: Jack Bogle's 5 Warnings for Investors
The Boston Consulting Group estimates the market share of index funds and exchange-traded funds, designed for simplicity and low fees, has doubled since 2003. Vanguard itself has almost $3 trillion in assets, making it the world's second-biggest money manager after BlackRock Inc., the biggest provider of ETFs.
Investing programs are getting easier than pie. With a target-date fund, for example, a 401(k) investor no longer needs to know the difference between a stock and bond. These all-in-one funds, which automatically adjust risk levels as workers approach retirement, are taking over retirement plans, and are the favorite of young workers. At the end of last year, $618 billion sat in target-date funds, the Investment Company Institute (ICI) says, up from $160 billion in 2008.
The ultimate in idiot-proof investing is a new raft of start-up online advisers, sometimes called “robo-advisors.” These firms, which include Wealthfront and Betterment, design extremely simple and slimmed-down web sites and put all clients in cheap, basic index funds and exchange-traded funds.
Unlike established discount brokers such as Charles Schwab Corp., the new firms pare away "a million features that only five percent of the user base actually wants," says Grant Easterbrook of consulting firm Corporate Insight. Eleven start-ups were advising $15.7 billion in assets in July, Corporate Insight says. That's a small slice of the investing universe. But that's a 36.5% gain since April, which works out to an annual growth rate of 250%. And major brokers have noticed. Schwab has hinted it's working on its own robo-adviser platform.
Both big established players like Calpers and the hot new start-ups use the same investing mantra: Cut costs and simplify. It's working. Fees are falling, with the average expense ratio on an equity mutual fund down 25% in 10 years, ICI data show. That means even dumb-as-a-post investors get to keep more of their money. And that's pretty smart.