Jason Zweig who writes the “Intelligent Investor” column at the Wall Street Journal has an article up looking the (in)significance of the Dow reaching the 13,000 level. Zweig notes that once you include dividends the market sit just below its all-time highs. More importantly he notes that it has now become ever easier for investors, both big and small, to actually capture the total returns on the benchmark indices.
Zweig notes that this jibes well with our theme that there has never been a better time to be an individual investor. Zweig writes:
I agree with Mr. Viskanta: There has never been a better time to be an individual investor. You often have heard that stocks have returned better than 9% annually since 1792. But for more than 180 of those 220 years, it was impossible for small investors—and many institutional investors, for that matter—to capture the total return of the stock market.
Commissions were so prohibitive that most investors took their dividends only as cash, so they never got to reinvest them in the additional shares that would have given them the fullness of total return over time.
Only since 1976, with the advent of the first index mutual fund tracking the S&P 500, have investors been able to capture the total return of the stock market. Today, you can do so in exchange-traded funds that you can buy commission-free and hold for an annual fee of as little as $7 per $10,000 invested.
You can see Jason Zweig talking with Evan Newmark about this article:
Kid Dynamite at his great blog, who has been on this theme for some time, notes the trouble he had to go through just 15 years ago to execute trades through Charles Schwab. In short,
The technologies, breadth of access, information and product that are available at little or no cost to today’s traders and investors is simply staggering. Today’s young whippersnappers have no idea how it used to be back in the good old days…
Kid Dynamite also highlights just how much easier it has become to be a technical trader. Traders today now have an array of technical tools at their instant disposal that chartists a couple of decades ago could only dream of. In addition he notes how dramatically spreads have come down on all manner of instruments, including commodity futures and stocks. He writes:
So the next time you complain about getting outbid by a fraction of a penny by high frequency algos, remember the Dinosaurs – the Peter Brandts of the world who had the same problem, only they were trying to not get picked off by a human specialist for 3/8th of a dollar.
Not every advance for investors comes in a straight line. In our follow-up post, Wall Street was never on your side, we note how the ETF revolution went from being a benign one to one that now includes all manner of gimmicky funds under the ETF banner. So while investors can benefit from the ETF revolution they do have to be careful consumers in the meantime.
The point that Zweig notes is an important one. All of these century-long return series showing a huge equity risk premium are in a certain sense bunk. While the calculations may be correct they do not reflect the underlying market dynamics that made it impossible for investors to actually capture those returns once you took into account all of the costs, including commissions and bid-ask spreads, that existed at the time. As Zweig notes in an earlier post at Total Return:
Decades ago, a portfolio could easily have cost you 4% of your assets to assemble. Today, through index funds or ETFs, you can put a portfolio together at least 25 times more cheaply. Yes, Wall Street is still a dangerous place. But it used to be worse.
We note in our forthcoming book that to be an equity investor at the turn of the twentieth century was to be a pretty adventurous soul, worthy of earning a high equity risk premium. Today our ability to trade essentially wide swaths of the global capital markets at the click of a mouse makes it a very different risk proposition. For that very reason we should likely expect a lower equity risk premium going forward. However today’s investors, if they play their cards correctly, at least can keep what they make in today’s markets.
Items mentioned above:
Dow 1,339,410: The Lastest Milestone (WSJ)
There has never been a better time to be an individual investor (Abnormal Returns)
“When I Was Your Age…” You Young Whippersnappers Have No Idea (Kid Dynamite)
(video) Zweig to Investors: Count Your Blessings. (WSJ)
Jason Zweig on the “Real Wealth Dow.” (The Reformed Broker)
Wall Street was never on your side (Abnormal Returns)
Why there has never been a better time to be an investor (Total Return)
Abnormal Returns: Winning Strategies from the Frontline of the Investment Blogosphere (Amazon)