We live in an era where many bemoan the speed of change and wax nostalgically about the past. I like to focus on the opportunities that change brings about and frequently look for the benefits of change. We all know that some change is good, very good in fact. Recent reading on the subject of change produced a point of view that matched my experience and is worth noting for the personal investor. Given the concern surrounding investing and the personal finance environment, a look at how far individual investors have come in the past 30-40 years is reassuring.
Information is key
The availability of readily obtainable, good quality information is at the center of progress in the investment and personal financial planning areas. Investor types, individual investor behavior and tolerance for risk have had tomes written and expostulated upon. Bringing these issues into the discussion is the important part as many individuals continue to struggle with the identification of their style and behaviors. Information is now segmented and targeted to the pre-retiree, retiree, newly married, non- traditional couples, recently widowed, my first job, saving for college and retirement simultaneously to name a few. You don’t have to look too far back to a time where this would have been unheard of. Financial planning was rare, advice was one size fits all and investments were sold based on the brokerage companies need, not the investor’s goals or style. Once sold the investor was forgotten about. Receiving reports detailing returns or changes in values or allocation was filed under ‘why bother’.
Paying attention to your lifestyle, time of life and your personal tolerance for risk pays off. We know what questions to ask and are able to craft a plan incorporating personal attributes which makes for a happier, more successful investor.
There has also been positive change in personal investing.
According to James Cloonan the founder of the nonprofit American Association of Individual Investors (AAII) “There’s more opportunity to do well, and less opportunity to be cheated, than there was in the past”. He thinks there is less for investors to worry about, in a lot of ways, than there used to be. Mr. Cloonan founded AAII in 1978 and notes the following comparisons – to which we have added some of our own – then versus now:
In the past, brokerage costs and mutual fund fees were very high. Added together, your trading costs to purchase stock shares would have exceeded 3%. Today, stock trades cost 5-8 dollars, a far cry from the hundreds of dollars charged for each trade in the past, not to mention penalties for odd lot trading which is almost unheard of today. Fees would have been much higher on less frequently traded stock. Commissions for mutual fund purchases were as high as 8.5% and you paid the same fee to reinvest your earnings in the fund. The inclusion of funds with 12b-1 fees were the norm. Today, they are increasingly rare and with a bit of research you can avoid paying them altogether. Currently many mutual funds trade without fees to purchase and there is a movement towards lowering the internal fees.
Let’s not forget taxes. If you could get past the trading costs and lack of information on what you were buying, the tax man would get you. Tax rates were almost triple what they are today. In all there is much reason for optimism.
We believe we will continue to experience rapid change in our cultures, business dealings, technology, environment and personal lives. How we deal with and respond to change is the challenge we all face. Creating a plan based on your personal goals is a crucial start. Review the change that has occurred periodically and outline changes that should be made. Opportunities will become apparent, many are the positive result of, you guessed it, change.
Elyse D. Foster, CFP, Harbor Wealth Management