No self-respecting intellectual, academic, or independent person could possibly believe that. What happens is something a little bit different. There's always going to be a firm that does an outstanding job, and then they will fall from grace. You get caught up in this idea that it's easy to beat the index. There's always somebody who can say "look at how easy it is; here's what I've done." Look in chapter 9 [of The Clash of the Cultures] at those charts on reversion to mean. If you don't get the message there, you're a very unwise investor.
Has the switch to defined-contribution plans from defined-benefit plans been good for workers or bad?
On balance, I would say bad. The 401(k) was designed as a thrift plan, not a retirement plan, therefore it has the flaws I identify in the book: It's easy to get out of the plan when you change jobs, spend it all, start all over again. Also, it's been inflicted on people: When a company says it's going to give you a defined-contribution plan instead of a defined-benefit plan, they don't ask for your approval. They just do it. It's more expensive, we know that, because individual funds cost much more than institutional funds. Individuals by and large are less intrigued by indexing than pension funds. The biggest pension plan in America—the thrift savings plans of the United States government—is indexed. So, you can make it work but you've got to keep the employees there. We have to revise the system.
What's your response to PIMCO chief Bill Gross's assertion that the "cult of equity is dying," and that investors should no longer expect 7 percent returns? Is he making faulty assumptions about how accurately the stock market reflects the real economy?
I think the love affair with equities, which were growing at 18 percent a year for two decades, in the 80s and 90s, is certainly over. That was the romance. That was a fling. What follows is marriage—marriage for a lifetime. If [Gross meant] investors will stop owning equities, I think that's absurd. Somebody's going to own them. If it's not investor A, it's going to be investor B.
But Bill is not so far from where I am on future returns. They're not going be up to the past levels, because we don't have the same circumstances as in the past. It was very nice to get these returns when you bought stocks for 10 times earnings, but in the long run, we know that total returns represent the total of dividend yield and earnings growth. I say the return of a portfolio that's half stock and half bonds should be in the general range of a nominal 5 percent. If I take inflation out, that's a 2.5-percent real return. That's not far from where Bill is.