IU: Pensions are no longer something people can expect, and Social Security seems like it might be undergoing some major changes. How has the concept of retirement and retirement savings changed? 

Clements: I said earlier that I thought that ordinary investors had become more financially sophisticated. In truth, they've been pushed into this. The demise of the traditional company pension and the rise of 401(k) plans has compelled investors to become more knowledgeable about the financial markets.

I think the most interesting issue today is how to generate retirement income. Now that we've got the baby boom generation retiring, that issue is coming into sharp focus, and we're seeing a slew of new products coming out and a slew of new thinking about how to generate retirement income.

Among financial advisors and academics, the focus up to this point has been on generating a stream of income that rises along with inflation. But the problem is, if you own a portfolio that includes stocks, it's very difficult to generate that stream of income that rises with inflation, because short-term stock performance is all over the place. There's a mismatch there. I think what we're going to see in the years ahead is people are going to have to make a trade-off. You can go for something that is conservative that will give you that steady stream of income, but you'll give up return and you may have to give up principal. Alternatively, you can accept that your income will fluctuate much more from year to year, which will allow you to invest more in stocks, get higher returns and possibly leave more money to your kids.

IU: Do you think that lifestyle-type index funds are a safe route for the uneducated investor? Is that going to solve the problem?

Clements: I think target date retirement funds are a brilliant solution. We have a lot of investors out there who are very unsophisticated. These are people who don't have enough assets to attract the interest of a well-educated financial advisor, and they don't have the knowledge themselves to build a well-diversified portfolio, so it makes sense for them to go out and get one of these target date retirement funds where they have one-stop investment shopping. Sure, we can argue about whether these funds could be better diversified, whether they should have more in stocks, whether they're appropriate for everybody of a particular age group. But in the end, these funds are far better than what many folks will manage to build on their own.

IU: What was the market highlight of 2007?

Clements: As an investment junkie, what was great about 2007 was that we finally had change. The story of the decade up until that point was that foreign stocks beat U.S., value beat growth and REITs beat everything. In 2007, those trends finally started to break down. For market junkies, it made the world a little more interesting. And so far, things have remained interesting in 2008.

IU: Are you anticipating any particular trends in 2008?

Clements: Now you are asking me to look into my crystal ball, and I can tell you it's very, very foggy. The markets are a remarkably good antidote for overconfidence. Every time I think I know something, the market defies me. Maybe U.S. stocks will do a little bit better than foreign stocks. Maybe large-caps will beat small-caps. But am I going to bet good money on that? Not a chance.

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