Thankful for plentiful research and investment choices
Reprinted courtesy of marketwatch.com.
To read the original article click here.
Investors have plenty of complaints these days (and rightly so).
Rock-bottom interest rates make it nearly impossible for retirees to live off their fixed-income investments. Government regulation of business and the markets is too weak (or too overbearing, depending on your point of view). The economy is weak. Congress is weak. The federal government is bitterly divided along partisan lines. Business executives and Wall Street kings live high off the hog while millions of investors struggle.
But even with all our problems, we as investors are far, far ahead of where we were in that dark Thanksgiving week just after John F. Kennedy died.
In 1963, there were mutual funds. But 90% charged sales loads to get in, and a load of 8.5% was standard. Often the load was applied even to reinvestment of dividends and capital gains.
The first publicly available index fund was still 13 years in the future. The funds you could invest in had vague names and vague objectives like “growth and income,” “aggressive growth,” “capital appreciation” and “equity income.”
Today we take for granted the ability to know what’s inside a fund portfolio through the analysis at Morningstar.com and other services. None of that was available to individual investors in 1963. Even if we had had the information, few people even in the academic community understood the importance of asset allocation. The concept of value investing was largely unknown.
Now we take instant information for granted. If you were a typical individual investor in 1963, you owned 10 to 20 individual stocks — probably large growth stocks such as AT&T, Eastman Kodak, Sears, General Motors and Westinghouse.
If you owned bonds, you owned them individually, not in a bond fund. You likely received interest checks every six months. By today’s standards, that seems very quaint. If you needed to sell a bond before it matured, you had to sell at least one bond, and commissions were very high on anything less than 10 bonds.
If you wanted to know how your portfolio did at the end of a day, you hung out at your broker’s office watching the electronic ticker tape, writing prices on paper for later calculations with your slide rule or large desktop calculating machine. Or you dialed up your broker for the information. Or you waited for the next day’s newspaper to look up your stock prices.
If you wanted to make a trade, you went into your broker’s office or dialed (yes, dialed) him (yes, your broker was almost certainly male) on the telephone. Speaking of “dialing” the phone, it was in November 1963 that AT&T first introduced its touch-tone phone. It had only 10 buttons, no star or pound. And the buttons could not do anything except make phone calls.
When you finally got through to your broker and placed a trade, you were charged a commission up to 20 times what you would pay today. Commission rates were controlled, so there was no price competition. The radical concept of a “discount broker” was far in the future. Adding to your costs were controlled spreads between bid and ask prices. Oh, and if you needed cash, your bank was likely to be open from 10 a.m. to 3 p.m. — and of course never on weekends.
Today’s investors and Wall Street sales people jump through all sorts of hoops — many of them quite unreasonable — to minimize taxes, which top out at under 40%. In 1963, the top marginal tax rate was 90%.
Fifty years ago, saving for retirement was less necessary — and much less efficient. Chances were high that you worked for one company — two at most — for your career, retiring with a secure pension that lasted for life. You didn’t have to worry how the money was invested. Your only responsibility was, after you retired, to get your monthly check in the mail and get it into your bank. If you had anything substantial beyond your monthly pension and Social Security checks, you were unusually fortunate.
If you did set aside money for your old age or your heirs in 1963, the IRS was ready for its share. The brand-new Keogh plan was introduced that year to let small-business owners and executives defer taxes on their savings. But There was no such thing as an IRA or a 401(k) for ordinary investors. If you signed up for payroll deduction, your money (unmatched) was likely to wind up in a bank account — and the interest rates that banks could pay were strictly regulated.
If you managed to overcome these obstacles and salt some money away for the long term, you weren’t likely to get advice that would be considered worthwhile today. Brokers and analysts had little understanding of asset class selection or asset allocation. They ignored — or perhaps just had little control over — the long-term implications of turnover and expenses.
Diversification was regarded as the strategy of fools. “Beating the market” was regarded as easy; all you had to do was let your broker pick the “right” stocks.
If you wanted independent information in 1963, you could subscribe to newsletters that touted stocks and investment services. But there was no Mark Hulbert to give you an objective look at the advice those newsletters dispensed.
You could subscribe to Value Line or trudge to the public library every week to see its updates. You could of course read The Wall Street Journal or Sylvia Porter’s newspaper column. Kiplinger published a good consumer-oriented magazine called Changing Times. But there was no Money magazine or any of the multiple publications that followed it.
Naturally, there was nothing on television (most likely still black and white) that remotely resembled CNBC, the Nightly Business Report, Fox Business or Bloomberg.
Yes, today we have much to be thankful for. Low-cost exchange-traded funds, target-date retirement funds, index funds, 401(k) and other employer retirement accounts, Roth IRAs, multiple sources of instant information. We also have wisdom and analysis based on academic research and available through writers like John Bogle, Larry Swedroe, Bill Bernstein, Richard Ferri, Dan Solin, Mark Hebner, Allan Roth — and if I am bold enough to presume that I belong in such company — Paul Merriman.
In 2013, most investors have personal computers, tablets and smartphones to keep them up-to-date. Perhaps all that computing power is needed more than ever in today’s world of lightning-fast communications and mind-numbingly complex financial products.
And in some ways we are barraged with too much information, too many opinions, too many choices.
To sum things up: As the role of the traditional corporate pension has declined, we investors are now largely responsible for making sophisticated decisions and choices that have huge impacts on our financial welfare.
At the same time, we have information and tools that were undreamed of in 1963. If we use them well, we have good prospects for prosperity. That’s my Thanksgiving wish for all my readers.
Richard Buck contributed to this article.