Maybe somewhere along the line I missed my calling. Most of the people around me know that I am good with money and I am always imploring people to save and invest more. So when a friend or acquaintance has a money issue, they often come to me for advice on what to do, be it getting out of debt, saving more or just getting started investing.
It has never been easier or cheaper to invest in a wide array of large corporations all over the world. We didn’t get to this point quickly though and it’s worth putting in some historical perspective.
Back in the Day
Investing used to be much more complicated and much more expensive for the average person off the street. Think back to a time like the 1970’s. The stock market was performing poorly for much of that decade after a strong bull run in the 1960’s.
Source: Macro Trends
The generation of baby boomer investors coming of age at that time had parents or grandparents who had likely had to deal with the depression and world war. They were raised by people who vividly remembered those who lost a fortune on the stock market or lost it all in the depression that followed. Based on the performance you see above, the market didn’t even keep up with inflation.
Given the poor performance of the market, there also was much less research interest in it. There were no index funds to be bought and most of the research was on how to make money buying individual stocks.
Most people at the time also had strong job security and a company provided pension. The stock market was a luxury. Unless you were in the financial industry or the pension manager of your company’s fund, many people didn’t pay it much attention.
It was also extremely expensive for the little guy to participate. If you wanted diversity you had to buy a mutual fund. The fund would charge anywhere from 1% to 1.5% of your assets. There may even have been load fees when you bought the fund that could be as high as 6%. If not done directly through the fund company, you would have had to open a brokerage account which may have had monthly fees and they would have charged you as much as $10 in today’s money on a per trade basis.
The whole lot must have just seemed like a scam. All those fees to the fund manager, the fund salesperson, the broker etc and then you lose money over a 20 year period?
It probably seemed like the stock market was sliding the same way as the country too. The country was either in or healing from the societal rift of the Vietnam war, stagflation was producing high unemployment and destroying the savings you had left to live on and crime was increasing at an alarming rate.
When Things Changed
I painted that picture for you to give you a sense of how things have changed in general and how it has changed how an entire generation looks at money and the stock market. The booming market of the early 1980’s to the late 1990’s was the seminal personal finance story of most working Americans at the time. Either you were investing in the market or your job was affected by it via mergers, stock options for employees or the proliferation of the 401k retirement plans. Just take a look below on that period from a price standpoint in terms of the S&P 500.
Source: Macro Trends
This was just the overall market. The media focused on those who became fabulously wealthy, either as money managers or company executives. But this performance also produced a wealth of research that pushed the bar in terms of the way we understand how diversification, management and psychology all affect returns for even the most mundane investor. This research also helped produce some of the most important innovations in finance that make returns so accessible to pretty much anyone nowadays.
Index Funds and ETFs Make You Perform Like a Star
As I have mentioned in my post on John Bogle, the index fund was the first step towards simple cheap diversification that we can now purchase even easier through exchange traded funds or ETFs.
As many articles and studies have shown, index funds outperform most active fund managers over a long term horizon of 10 years or more. For that reason, it’s just easier to buy the benchmark that these managers compete against and focus on reducing the costs as much as possible. Index funds and ETFs do not require much expensive upkeep so can reduce fees to 20 basis points or 0.20% or even less.
Investors have reacted by moving en made towards index funds away from managed funds and in the process, brought down the overall cost of investing for the industry as a whole. That 1-1.5% I mentioned in the 70’s is down to 0.52% for the industry and is estimated to have saved investors $4 billion in 2017.
Brokerage is Basically Free
I was very excited a number of years ago when I found a program through Wells Fargo that, if certain minimums were met, would give me 100 free trades per year. This was done away with a few years ago but soon after that Robinhood brokerage appeared which gives you free trades for whatever you like. I thought this was a gimmick at first but it turns out the model makes is very simple but makes sense. The company makes money off of their daily liquidity, basically the cash on hand at any time, which may be in the hundreds of millions or billions. They invest that cash and collect the interest for themselves. It’s your money, but while it’s being moved around on your behalf they can make a little skim from it.
Either way the point is, not only can you invest in all the stocks in the market via an ETF, but you can buy the fund for free via your broker.
The Diversification Available is Mind Boggling
It’s sounds strange but a few years ago the number of ETFs surpassed the number of stocks available to purchase. In a way this makes sense, it just means there are more strategies for stocks than their are stocks to buy.
It also means that a wealth of options are out there for anyone who opens a simple brokerage account. This wasn’t the case for Isaac Newton when he lost his shirt in the 17th century investing in the South Seas Company. Sir Newton would probably be astonishes that a bus driver could essentially take some of his savings and within 3 days have it fully invested in the ownership of a company in China based in Yuan instead of dollars.
Not that I would advise investing in a single Chinese company if you don’t know the first thing about investing, but the option is there if you would like it.
What I am thinking about more are the investing options like Vanguard World ETF (VT) that gives you access to the entire world of investible securities traded in markets all around the world. Or the Vanguard Total Stock Market ETF (VTI) which, despite being US based, invests in all the companies listed on the New York Stock Exchange, which is about 5,000 listed companies.
Conclusion
With all of this you can’t forget one thing that they did know about and have back when things were more expensive and that’s compounding. It’s never too late to invest. That 7-8% return annually can mean the difference between a few thousand and hundreds of thousands of dollars when you are older. The younger you can get comfortable with investing, be it through index funds or just individual stocks, getting time on your side to let that compounding take effect is key. Hopefully this piece putting the costs and the barriers into price and historical perspective will inspire you to get started on your own.
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