PASADENA, CALIFORNIA.   With major rainfall throughout the Los Angeles area, the grounds of the Ritz Carlton hotel are green beyond lush. They are downright effulgent. That word could also describe the speakers' list for the CFA Institutes' conference here. Marking the 60th anniversary of the esteemed Financial Analysts Journal, the conference celebrates the development of security analysis and modern portfolio theory.

Peter Bernstein, John Bogle, Gary Brinson, Abby Joseph Cohen, Charles Ellis, Martin Liebowitz--- those are just a few of the people here to speak. If the buttoned down world of investment management has a status equivalent of 'rock star,' most of the sky is here, brilliantly visible.

Those attending aren't dim bulbs, either. With the exception of a handful of benighted journalists, all have passed the exams for Certified Financial Analyst, the most demanding of the financial designations. More important, they are responsible for hundreds of billions of investment dollars--- pension funds, mutual funds, private accounts, hedge funds, endowment funds, you name it. Indeed, half of the 350 attendees represent firms that manage at least $15 billion each. One way or another, someone here is likely to have a direct impact on your future financial security and mine.

You'll be glad to know that many of those attending are concerned about the right things. A survey, for instance, revealed they expected to face these challenges during the next three years:

•  Reconciliation of performance and costs

•  Maintaining performance expectations

•  Re-establishing credibility in the public mind

•  Adding value.

So they are pointed in the right direction. Issues of corporate governance, pension accounting, and the role of "agencies" (third party investors such as the people we choose to manage our money) in the financial markets fill the air here. The open question is whether they can walk in the right direction--- or just face it.

In fact, it appears that all of us, investors and managers, are heading down an uncomfortable road.

Vanguard founder John Bogle led with a devastating examination of investment management, pointing out that the average managed fund had returned only 10 percent annually from 1983 through 2003. As a consequence, the average fund delivered only 57 percent of the increase his S&P 500 index fund had delivered. It will come as no surprise that he said the basic problem was excessive costs, pointing to some $350 billion in fees and charges extracted by investment intermediaries like brokers, mutual funds, pension funds, annuity commissions, hedge funds, and personal advisors.

He also showed that the net return of the average corporate pension fund, under realistic assumptions, would be only 4.8 percent while the average pension fund is projecting returns of 8.5 percent. One consequence will be a continuing increase in pension under funding as corporations duck the need to revise their assumptions and divert more of their earnings into their pension plans.

Clifford Asness, founder of AQR Capital Management, drew attention to an idea that has increasing currency in the investment community--- that future returns on common stocks are likely to be lower than the long-term historical average. Worse, he believes stocks remain vulnerable. Dividing the S&P 500 index by its 10-year real (inflation adjusted) earnings, he shows that stocks are still dangerously overvalued, not far from unmapped levels that hold what he calls "Dragon Risk"--- the risk of the extreme and uncharted.

As he sees it, stocks have only two ways to get to proper valuation--- a very long period of low returns or an abrupt decline. It's not a happy choice: endless near stagnation on the one hand or a major drop on the other.

Thinking about his alternatives is a bit like choosing between death by hanging, or death by guillotine. In the end, it's not the method that counts. It's the result.

What does it mean for you and me?

Simple. We need to help make these changes happen. We can do this by initiating four basic steps.

(1)  If the manager for your 401(k) plan, company pension, or personal assets isn't  facing the right direction, let alone walking briskly, fire him or work to get him changed.

(2)  Save more.

(3)  Cut your investment costs.

(4)  Practice real diversification.

On the web:

Learn about the CFA Institute

John Bogle Financial Markets Research Center

AQR Capital Management