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Schwab’s CEO embraces passive management. And Fidelity confirms a trend. Tipping point?

Greg Carpenter

February 17, 2023



I think we may have reached the tipping point for passive, indexed-based investing. Two remarkable developments last week bear this out. One got a lot of press and the other was just kind of throw-in to a larger report.

The big press came from Walt Bettinger, President and CEO of Charles Schwab. His latest blog, “Let’s Fix the 401k”, provides the most compelling case for low-cost index investments from the world of investments by anyone not named Bogle. A key quote:

“Instead of actively-managed funds, we can deploy index mutual funds and indexed exchange-traded funds in 401(k) plans. The low cost index approach strives to match the market’s performance rather than beat it, and research shows that one of the most important components of successful investing over a lifetime isn’t choosing the right fund or stock, it is assembling the right mix of asset classes: stocks, bonds, and cash.”

Please read the whole blog. The points made apply equally to both large company mega-plans and small business 401(k) plans. Coming from the CEO of a Wall Street powerhouse makes it truly remarkable.

The other development was a single sentence in a posting by Fidelity on the growth of average account balances. Fidelity states that 3 in 10 401(k) participants are using managed accounts (i.e., target date retirement funds). That fact alone is pretty amazing, but here is the quote that caught my eye:

“For younger Gen Y participants [aged 22 to 34], 55 percent had all their assets in a target date fund…”

The implications are staggering. The majority of younger investors are using TDFs! And the ones who are not probably don’t have the option available. This fact means that the investors who will dominate the next generation of individual investors are already aware of and using investments that mange asset allocation. And if they are using them now they will likely continue to use them when they become the middle-aged CEOs and decision makers.

We’ve reached the tipping point. TDFs and index investments are now the mainstream, and other strategies are becoming marginal.

As the Urban Dictionary defines “frugal”: “Another word for cool or awesome.” Frugal is trending!

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