A few weeks ago, our blog editor suggested an idea for my next post: “How about, ‘Why I’m proud to be an investment nerd’?”

I closed my eyes, counted to ten. Once the rage had subsided, I said, as calmly as I could, “I am not an investment nerd. I’m an asset-allocating, mean-variance-optimizing couch potato.”¹

“We’ll need the copy by Wednesday,” she said.

I guess she didn’t understand. In order to construct and manage a sensible long-term portfolio, I have no need to be a nerd. Not when I can stand on the shoulders (or sit on the couches) of the nerds who came before me.

From nerd to couch potato

The twilight of the investment nerd began in 1976, when Vanguard founder John C. Bogle launched the Vanguard 500 Index Fund. Until then, the market portfolio²—the stock portfolio with the theoretically optimal balance of risk and return—was available only to institutional investors.

An individual investor might be able to approximate the market portfolio, but the project required nerd-like superpowers: the ability to estimate the expected returns, variances, and covariances of individual securities; expertise in finance theory; abundant computer power; and linear programming skills. Today, couch potatoes can invest in every major securities market—international stocks, U.S. and international bonds—through broad market index funds.

The asset allocation conundrum

Even after the creation of broad market index funds, the nerd still had a tough problem to solve: how to combine the different asset classes into portfolios consistent with various investment objectives.

Again, the effort demanded mad skills. In the past decade or so, however, investors have been able to acquire this nerdy know-how through all-in-one portfolios such as target-date mutual funds. A target-date fund combines a diversified mix of stocks and bonds with the expertise to calibrate a portfolio’s risk-return profile to the retirement saver’s expected retirement date.

With a single decision, a retirement saver can hold a portfolio that incorporates analysis of the capital markets, insight into how investors respond to the financial markets’ periodic setbacks, and disciplined portfolio management—all without ever letting go of the television remote.

New challenges for the nerd

Perhaps this evolution in the investment management industry, from the rarified work of pioneering nerds to well-designed portfolios for the masses, is nothing more—or less—than progress. There are parallels in many industries, of course.

In 1976, when Steve Wozniak and Steve Jobs unveiled the Apple 1 at the Homebrew Computing Club in Menlo Park, California, personal computers were the domain of hobbyists skilled in electronics engineering. Today, enormous computer power is at the fingertips of anyone with a smartphone, most of whom have never even seen a soldering iron.

Is there still a role for the nerd? Of course, but it may have less to do with portfolio construction than with technology, service, and regulatory innovations that promote better investor behavior such as increased savings rates. This role may require new skills, maybe even a new nerd with deep expertise in psychology and neurology. In the meantime, the twilight of the investment nerd has brought us the dawn of the asset-allocating, mean-variance-optimizing couch potato. And that’s something I’m proud to be.


¹ The Couch Potato Portfolio is an investment approach popularized by financial columnist Scott Burns.

²An S&P 500 Index fund isn’t quite the U.S. stock market portfolio. It excludes smaller stocks that collectively make up 20% to 25% of the stock market’s value. Today, total stock market index funds capture the whole megillah.

Notes: Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the Fund name refers to the approximate year (the target date) when an investor in the Fund would retire and leave the work force. The Fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date.

Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.