The New Way: Investing for the 99%
For some people “investing” sounds like a risky, complicated activity that only the richest 1% do. This view causes them to keep most of the money they have saved for retirement in savings accounts, CDs, or other low return accounts. This is very unfortunate because it will likely cost them tens of thousands in future growth, and it is unnecessary because investing has become much more “democratized” in the past 25 years. I’d like to compare the New Way with the Old Ways of investing your money.
Setting up an Investment Account:
Old Way: You had to go through a stock broker or financial advisor to set-up an account, and they usually encouraged you to turn over all of your money to them to “manage”. The brokers acted like they were allowing you into their special club, and you paid them for the privilege.
New Way: You can set-up a free investment account on-line in about 15 minutes (at Schwab or Fidelity, for example), then link it to your checking account, and get your money invested within a few days, with no one acting as a gatekeeper.
Getting Your Money Invested:
Old Way: You had to buy individual stocks or bonds or other types of investments, that you either researched yourself, or more often, that your broker told you that you should buy.
New Way: Most individual investors buy mutual funds or newer Exchange Traded Funds, (aka ETFs) which are broad collections of stocks and/or bonds. This requires minimal research, and the results will typically match the broad stock or bond market, which have historically been a good place for long term (>10 year) investments. Buying these funds means the investor isn’t doing the risky thing of putting all his/her “eggs in one basket”.
Cost of Investing:
Old Way: You were charged a commission every time you bought or sold any investment, and then you were also often required to pay an on-going fee of 1% or more to the investment manager. This is still fairly common, so if you own mutual funds, you might want to check the fees you are paying on a site like Morningstar.com: put in the fund name and check the fund’s “Expenses”.
New Way: Many funds are offered commission-free and with very low, on-going management fees (<0.1%). These types of funds can also be found on Morningstar.com or on a broker’s website under the Research tab.
Relying on Experts?
Old Way: “Expert” managers picked the stocks and bonds that “you should buy!” or that they bought for you in high-cost, proprietary mutual funds.
New Way: Academic research has shown that individual investors will get better results most of the time by ignoring the experts and instead buying low-cost index funds which only attempt to match the whole market or a sub-segment. You can see an on-going scorecard of experts vs. index funds at https://us.spindices.com/spiva/#/ .
Bottom Line: Investing has changed significantly in the past few decades. It has become:
- Lower cost
- Less blocked by people and companies acting as gatekeepers and experts (and taking a cut out of your investments).
Access to this New Way of Investing is open to anyone, and it is a good idea for anyone who is saving for their retirement or other long-term needs.