Believe it or not, investing has never been so simple
Reprinted courtesy of MarketWatch.com.
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Most of today’s investors don’t know how good they have it. When I started in the business 50 years ago in 1966, the costs were much higher and choices were much more limited. Knowledge, understanding and information were primitive by today’s standards.
This is not to say that investing is easy today. Investors face a daunting volume of choices. We’re flooded with information and advice, much of it hardly more valuable than self-serving posturing.
Let’s recall the investment scene in 1966, then contrast it with the situation today.
If you were an individual investor in 1966, the chances are overwhelming that you owned mostly (or exclusively) individual stocks and bonds.
Your investment choices may have seemed less crucial than they do today. More than three-quarters of large companies offered pensions to their workers at retirement (today the percentage is less than one-third that high). Along with Social Security, that was likely to cover your needs.
Still, you set aside money for the future. If you were average, you saved 11% of your income — more than twice today’s rate.
Investing back then was quite expensive, and there was no way to avoid sharing a significant chunk of your returns with Wall Street.
Trading and information
The only way to buy stocks and bonds was through your stock broker. If you wanted stock prices, you could wait for the final edition of the afternoon newspaper (or the morning paper the following day). Or you could go into your broker’s office and look at the electronic ticker tape.
Online information? A pipe dream. Online trading? Utter nonsense. To make a trade, you went into your broker’s office, or (more likely) you got on the phone. Stock and bond commissions were regulated, and sky high by today’s standards. A trade that would cost less than $10 today could cost many hundreds of dollars in 1966.
In addition, the spreads between bid and ask prices (the wholesale markup, in other words) was as much as 2.5%. (Today it is often less than 0.1%.)
In 1966, brokerages didn’t compete on price. A few years later, it was considered a scandal (although a legal one) when the first discount brokerage opened for business.
There were some mutual funds available to individuals, of course. They claimed to charge buying commissions of 8.5%, but that up-front sales charge was actually 9.3% of the money that was invested on your behalf. Index funds hadn’t yet been invented.
Investors rarely complained about these high costs. This was just the way things were done.
Diversification was valued back then, of course. Your broker most likely suggested you own 10 to 20 individual stocks, spreading them out over several industries. International investing was regarded as much too risky for most people to even consider.
Your sources of investment advice and information were comparatively limited. You could of course read the Wall Street Journal, Kiplinger’s, Barron’s and a handful of investment newsletters including Value Line Investment Survey. Your broker was glad to provide you with written reports on individual companies (with favorable recommendations on most of them).
There was no academic analysis of investment practices. There was little or no understanding of asset classes, such as value stocks and small-cap stocks. The main distinctions presented to investors were vague mutual-fund descriptions like aggressive growth, capital appreciation and equity income.
When Michael Price’s Mutual Series funds turned in seemingly amazing investment results, nobody knew why. (We now know that he, like Warren Buffett, was a value investor.)
Your job as an investor was to identify and buy stocks that would do better than the market. To do that, you almost certainly relied on your broker. Oh, and “the market” back then didn’t mean the S&P 500 Index. It meant the 30 stocks in the Dow Jones Industrial Average (which still, defying common sense, is widely regarded as “the market”).
Investing in 2016
Today, as you know, the scene is very different. Trading costs and ongoing expenses are much, much lower. Proper investment diversification is much better understood. Information is easily available online. Online trading is available essentially 24 hours a day.
Trading and information
Today’s investing scene is not all rosy, of course. Our overall savings rate is about 5%, double what it was in 2007, but less than half of what it was in 1966.
Unfortunately, even in this new century, emotion-driven buy-and-sell decisions still cost investors untold millions of dollars, as evidenced by the depressing results reported every year by the DALBAR study. (At least today’s investors have access to such information, something that was totally unavailable half a century ago.)
Wall Street is still intent on nickel-and-diming us to death with small fees and promises of gurus who see into the future. We’re constantly taunted with suggestions that we can beat the market (which is itself a pretty lousy idea).
And of course today we have a much better understanding of what “the market” really is. Those who care know that more than half of the investment capital of the world is outside the United States; many reasonably priced international funds are readily available.
Investors in individual stocks know they should probably own 100 companies to even begin to have adequate diversification. Fortunately, it’s easy to indirectly own thousands of stocks via index funds — my own portfolio contains almost 15,000.
Far fewer of us can rely on pensions today, but we have access to IRAs and 401(k) retirement plans with favorable tax characteristics that were unknown 50 years ago. (Taxes on capital gains and many dividends are much lower today, as well).
Thousands of no-load funds offer more choices than most investors will ever need. Many fund families offer target-date funds that provide decent diversification and gradually changing asset allocation between stocks and bonds.
Here’s another welcome change: Today, thousands of fiduciary advisors are available to help individual investors navigate the choices without a conflict of interest. (In 1966, to get fiduciary advice, you had to do business with the trust department of a bank.)
So overall, I think this is a much better time to be an investor. We are much more in control. But the way we exercise that control has a huge influence on our investment results.
So how can you maximize your probability of success in 2016? I summed up my thoughts on that topic in a talk I recently gave called “The habits and attitudes of successful investors.” This talk is available online as either a podcast or a video.
Richard Buck contributed to this article.