By Justin Carbonneau (Twitter | LinkedIn | YouTube) —
This may seem like a strange headline given the path of stocks over the past two years. Many equity investors, particularly in the small-cap space, are likely looking at their portfolio values and seeing very little growth, and possibly losses. But today’s investor, mostly due to structural efficiencies, technology, fees, optionality and tools, resources and investing education, is probably better off than ever before.
Let’s look at some quick facts to see why that might be.
Falling Costs
- Zero Commissions and the Savings to Investors: The shift to zero commission trading by major brokerage firms has reduced the cost barrier for individual investors. This change has democratized access to the stock market, allowing more frequent trading without the burden of per-trade fees. Firms like Robinhood were embraced by millions of new investors, and the zero-commission trend is now the standard among major online brokerages in the U.S.
- Low Costs of Indexes and Declining Fees: The increasingly competitive fees in mutual funds and ETFs, especially for index-tracking funds (like the S&P 500 and Vanguard funds), have made cost-efficient investing more accessible. The low expense ratios of these funds mean that a larger portion of investment returns stays in the investor’s pocket. According to Morningstar, the average fund investor has seen fees fall from 0.87% in 2001 to 0.40%, a 54% decline.
Technological Innovations
- Buying Partial/Fractional Shares: The ability to purchase fractional shares allows investors to invest in high-priced stocks with smaller amounts of money, offering greater portfolio diversification and accessibility.
- Transition to T+1 Settlement: Over the past decades, we’ve moved from settlement of stock trades from 5 days to 3 days to 2 days and soon to one day. The upcoming move to T-1 settlement in May 2024 will further reduce counterparty risk and improve liquidity, making the markets more efficient and potentially safer for investors.
- Advanced Tools in Brokerage Accounts and Beyond: Platforms like Fidelity.com offer sophisticated tools and resources, empowering investors with professional-grade analytics, real-time data, and personalized insights to make informed decisions. Sites like Validea.com present investors with powerful screeners, portfolios and fundamental insights into stocks and ETFs, which can help support investors in their investment process.
- ChatGPT and Artificial Intelligence: The power of large language models (LLMs), which is the technology behind ChatGPT, is huge. Academics, investment firms and individuals are in the process of trying to uncover how this technology can be integrated into the investing world. We’re already seeing new AI-power indexes being developed that look to improve on some of the current index construction issues.
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Financial Progress
- Evolution of the ETF Wrapper: The continuous innovation in the ETF space has introduced products that provide exposure to a wide range of asset classes, including niche and specialized markets, enhancing diversification opportunities. Investment firms and ETFs run by Corey Hoffstein (NewFound Research & Return Stacking), Wes Gray (ETF Architect and Alpha Architect), Andrew Beer (DBi), are just a few of the firms running unique investment strategies within the ETF wrapper.
- Emergence of New Asset Classes: The integration of alternative assets like cryptocurrencies into mainstream investing platforms has opened new avenues for portfolio diversification and exposure to assets completely outside of stocks and bonds. As we get closer to a spot Bitcoin ETF, getting exposure to cryptocurrencies will only go more mainstream.
- Direct Indexing & Personalized Investing: Direct Indexing has emerged as a significant trend, allowing investors to own individual stocks in an index, rather than investing in a fund. Through direct indexing, investors can modify their portfolios to more closely match with their personal preferences and financial objectives. Direct indexing is feasible as a result of some of the things I’ve outlined above (fractional shares, commission free trading, technology developments) and firms like Franklin Templeton, which now owns Canvas O’Shaughnessy Asset Management, the creator of Canvas, a direct indexing platform, are allowing financial advisors of offer personalized indexing strategies and Fidelity and Schwab are bringing it to the masses on the retail side.
Proliferation of Knowledge Sharing
- Blogs & Podcasts: Blogs and podcasts focused on producing investment related content have proliferated over the past 15 years and we’ve been part of that trend with the blog posts on Validea and our investing podcast, Excess Returns, which is gaining momentum. Podcasts like The Meb Faber Show, The Acquirers Podcast, Invest Like the Best and Masters In Business act as inspiration for us and have been educating investors with top notch guests to talk investing, business, markets and more over the long-term. But there are so many valuable resources out there. You don’t have to look further than AbnormalReturns.com, a site that has been curating investing and market related content for nearly 20 years, to see all the thoughts and insights from the investing blogosphere. Each day, the amount of valuable commentary being highlighted is tremendous. Then there are writers and bloggers like Ben Carlson (A Wealth of Common Sense), Joe Wiggins (Behavioural Investment), Nir Kaissar (Bloomberg) and Morgan Housel (Collab Blog), just to name a few, that are constantly producing thoughtful and sound investment related commentary.
- Social platforms: And despite its problems and challenges, there is a very smart and active group of investors on Twitter (now X), and I’m not talking about those pumping stock ideas. I’m mostly honed in on the FinTwit (Financial Twitter), which I guess is now FinX. Either way, there’s lots of knowledge and jumping off points to explore further on platforms like this.
Overall, investors have more investments to choose from, more lower fee options, and more resources at their fingertips to help in their investment decision making and education. This doesn’t automatically mean success in the market, though. Things like being diversified, avoiding big mistakes, taking a long-term view, savings, and compounding are the big-ticket items that equate to investing success. But today’s investing environment may be more conducive to achieving these goals than ever before.
