Nevada’s public employee pension fund invests passively and beats peers (2016)

Original Article ↗ Hacker News Discussion ↗

Nevada’s public employee pension fund, which largely uses low-cost passive index investing, has outperformed many actively managed peers, reigniting debate over whether trying to “beat the market” is worth the fees and risk. Commenters cite decades of data showing most active managers underperform broad indexes after costs, discuss concepts like risk-adjusted returns and diversification, and point to Buffett’s own advice to favor simple S&P 500 funds. Others raise concerns about heavy reliance on U.S. equities and the growing dominance of passive funds, arguing that while indexing is usually best for individuals, it may distort price discovery if it becomes too large a share of the market.

Passive vs. Active Management

  • Many commenters see Nevada’s passive, low-cost pension strategy as strong evidence for indexing: after fees, active management tends to match or underperform the market, with higher dispersion of outcomes.
  • Repeated theme: it’s extremely hard to identify outperforming active managers in advance; once you remove obvious bad ones, net returns cluster around the index.
  • Counterpoint: some hedge funds and private equity strategies have beaten the market (e.g. market‑neutral, Medallion‑style, niche value/PE), but:
    • Capacity is limited, alpha decays with scale, and best strategies are often kept for insiders.
    • Publicly available active funds, on average, underperform indexes after fees.

Can Individuals Beat the Market?

  • One side: individuals should not expect to beat the market; outperformance is usually luck and indistinguishable ex‑ante from skill.
  • Other side: some individuals and funds clearly have long runs of outperformance; markets aren’t perfectly efficient; there is room for skill—just rare and hard to verify before the fact.
  • Analogies used: casino or coin flips (variance guarantees some winners) vs. skill‑plus‑luck games like poker or stock picking.

Buffett and Outliers

  • Discussion of why Buffett’s returns are exceptional:
    • Early start and very long compounding horizon.
    • Access to leverage (insurance float) and special deal flow.
    • Active control and private‑equity‑like behavior, not just stock picking.
  • Noted that Berkshire has underperformed the S&P 500 over the last ~20 years, and Buffett himself recommends S&P index funds for most people.

Risk, Volatility, and Rebalancing

  • Several argue you must look at risk‑adjusted returns (e.g. Sharpe ratio), not raw annualized returns.
  • Debate over modeling returns as (approximately) normal vs. fat‑tailed; some say normality is a practical simplification, others call that academically outdated.
  • Ongoing arguments about:
    • Stocks vs. bonds mix by age.
    • Whether fixed‑percentage rebalancing is rational (sell winners / buy losers) or counterproductive.
    • Use of leverage on low‑volatility portfolios vs. tail‑risk “black swans.”

Index Choice and Global Diversification

  • Strong support for simple “buy the market and forget it” via broad, low‑fee ETFs.
  • Disagreement on which index:
    • Pro‑S&P 500: superior historical performance, global revenue exposure from US multinationals.
    • Pro‑world/ACWI/VT: better diversification; protects against country‑specific stagnation (e.g. Japan, possible future US slowdown).
  • Acknowledgment that long‑term equity returns hinge on economic growth, demographics, and policy; in low‑growth countries, passive indexing may mostly minimize losses rather than maximize gains.

Concerns About Passive Dominance

  • Some worry that widespread index investing:
    • Weakens price discovery.
    • Overweights large constituents and may cause “stickiness” or bubbles in top names.
    • Creates predictable flows when stocks enter/exit major indices.
  • Others respond that as passive share rises, opportunities for active arbitrage increase, which should limit distortions; overall impact remains unclear.

Behavior, Psychology, and Practical Tactics

  • Behavioral economics (e.g. loss aversion, narrow framing) cited as a reason most people should:
    • Auto‑invest in diversified index funds.
    • Check balances infrequently and avoid financial news and day‑to‑day tinkering.
  • “Fun money” approach is popular: keep 90–98% in indexes; use a small slice for speculative single‑stock or crypto bets to scratch the itch without risking retirement.
  • Several personal anecdotes:
    • Long‑ignored 401(k)s in index funds compounding for decades with solid returns.
    • Individual stock home runs (Apple, Nvidia, AMD, Tesla, etc.) contrasted with survivorship bias and many unreported losers.

Pensions, Governance, and Systemic Issues

  • Nevada pension’s tiny staff raised “bus factor” concerns; the state eventually added a second investment professional for continuity.
  • Some note that many public funds are more easily swayed by high‑fee sales pitches and political pressures, making Nevada’s discipline unusually strong.
  • Discussion that private equity and hedge funds can be useful in pension portfolios not mainly to “beat S&P 500,” but to add uncorrelated or lower‑volatility return streams—though fee drag and opaque risks are concerns.