THE GODFATHER OF INDEX FUNDS As a grad student at the University of California at Los Angeles in the late 1950s, William F. Sharpe was among a group of intellectuals whose theoretical insights became the basis for modern portfolio theory, derivatives, and equity-index funds. For his work in changing finance, Sharpe in 1990 shared the Nobel prize in economics with Harry M. Markowitz and Merton H. Miller. Now 64, Sharpe is still going strong. At an age when many profs are spending more time on the tennis court than in the classroom, Sharpe teaches at Stanford University and is producing a textbook, Macro-Investment Analysis, on his Web site (www-sharpe.stanford.edu). The Boston native is also the force behind Financial Engines Inc., a Net-based company offering individuals easy-to-use, but sophisticated, asset allocation. BUY AND HOLD. Sharpe's best-known contribution to finance is the capital asset pricing model. Sharpe showed that every equity investor faces two different risks: being exposed to the entire stock market and to the unique fortunes of a particular company. You can't protect yourself against the former, he maintained, but can do something about the latter by diversifying a portfolio among numerous holdings. One implication: The optimal stock market investment strategy is to buy and hold broadly diversified baskets of stocks, such as index funds. While he does invest through some money managers, ''most of my investments are in equity-index funds,'' Sharpe says, citing how hard it is to beat the market consistently, after adjusting for risk. In light of the market's spectacular performance, Sharpe does see an increased likelihood it will decline. But what really concerns him is that individuals aren't taking into account the risks of investing in stocks. Diversification can help moderate those risks, and if anyone understands that, it's Sharpe. By Christopher Farrell RELATED ITEMS INTRODUCTION COVER IMAGE: How to Retire THE NEW MATH OF RETIREMENT TABLE: Asset Allocation Helpers TABLE: Retire Later and Reap the Rewards THE GODFATHER OF INDEX FUNDS MAKING THE MONEY LAST--AND THEN SOME TABLE: How To Keep Your Income Flowing TABLE: Reverse Mortgage Resources FUNDS THAT CHANGE WITH YOU TABLE: These Funds Follow You to Retirement BW/HARRIS POLL: NOTHING RETIRING ABOUT THESE RETIREES (extended) ONLINE ORIGINAL: COVERING THE HEFTY TAB FOR LONG-TERM CARE ONLINE ORIGINAL: A TALK WITH TIAA-CREF'S INVESTMENT HONCHO (with audio) ONLINE ORIGINAL: FOR INVESTORS: A STOCK THAT COULD RIDE THE AGE WAVE COMMENTARY: WHAT'S LEFT FOR THE LATE-BLOOMING BOOMER? CHART: A Looming Threat to the Stock Market? WHERE SILVER-HAIRED SURFERS BROWSE TABLE: Net Resources If You're Retired...Or Thinking About Retirement PRODUCTS THAT MAKE LIFE USER-FRIENDLY AGAIN TABLE: It's Not All High-Tech WHEN A HOME NEAR THE FIFTH HOLE ISN'T ENOUGH TABLE: Making Your Move Online TABLE: College Towns TABLE: Job Meccas TABLE: Urban Hot Spots FAR FROM THE TOUR-BUS CROWD TABLE: Mapping Out Adventure Travel FOR ATHLETES, THE GLORY DAYS AREN'T OVER YET TABLE: Want To Compete? Here's Where to Start LATE-BLOOMING SCHOLARS TABLE: Advice to the Senior Class ONLINE ORIGINAL TABLE: States That Give Senior Students a Break, or Not FIRST STEPS TO A SECOND CAREER TABLE: Online Career Assistance ANYONE WANT TO LEND A HAND? TABLE: Helping Others COMMENTARY: JIMMY CARTER: THE BEST YEARS OF OUR LIVES Return to main story

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