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BEING STREET SMART 

by Sy Harding

A MORE LEVEL PLAYING FIELD FOR INVESTORS! January 21, 2009.  

I was reminiscing about 'the old days' last week - what it was like for investors fifteen years ago. The thoughts were triggered by how quickly we were able to re-position our newsletter's Market-Timing Strategy portfolio recently when our market indicators deteriorated - and how quickly we may soon have to re-position again for a resumption of the upside. Such is the volatility in the market the last two years.

A couple of hotline messages on the Internet to subscribers, instant online trades, and we went quickly from being 85% invested, 15% cash, to being only 45% invested, 55% cash, and with two of the five positions downside positions that go up when their sectors decline. All done, thanks to low online commissions, at almost no cost.

As recently as fifteen years ago reversing positions that quickly and inexpensively would not have been possible. Even as recently as five years ago it would have been more difficult.

The rapid improvements in investing methods made available to investors over the last 15 years are in sharp contrast to the snail's pace at which improvements were made for the last generation of investors.

For more than 150 years investors in individual stocks could buy or sell only through broker-dealer firms, usually by telephone, paying the high fixed rate commission set by the NYSE.

In 1975 the SEC finally abolished fixed-rate commissions, and discount brokerage firms like Schwab and Fidelity began to appear.

However, with the advent of the Internet, the pace of improvements picked up dramatically in the mid-1990's, when numerous discount brokers introduced do-it-yourself online brokerage services. With investors placing their own trades directly, transactions took place much more quickly, and a further dramatic drop in commission costs took place.

Knowledgeable investors took to the changes enthusiastically. The number of online accounts grew from 0.3 million in 1995 to 18 million by 2000, and are estimated to now account for 25% of all investor transactions, including the buying and selling of mutual funds.

Similarly, start-up mutual funds used to need a way to bring in investors. So they paid commissions to brokers to sell their funds to their customers. To cover the commissions they charged investors one-time fees or 'loads' of 5% or more, and an extra ongoing annual charge, usually also partly paid to the broker-dealer who brought the investor in, known as 12b-1 fees, which could be as much as 1% a year.

When investors, money-management firms, and institutional investors complained that they were interested in mutual funds, but should not have to pay 'sales' fees since they were making their own decisions on what to buy or sell, no-load mutual funds were introduced and are now the largest category of funds.

But still, in order to invest in a particular fund an investor had to send his money to the fund family that offered the fund as one of its products. If later the investor wanted to switch to a different fund offered by a different fund family it was a slow and awkward process to get the money back and send it to the other fund family.

That situation improved in the early 1990s when discount brokerage firms formed agreements with many mutual fund families. The result allowed investors to buy most no-load funds through their one brokerage account, and thus switch among the funds of different fund families. As an example, in its Mutual Fund One-Source program, Schwab now offers several thousand no-load mutual funds from many fund families, at low or even no commission cost to the investor.

Further big improvements took place just in the last five years, when mutual fund families began offering exchange-traded-funds (etfs). Investors quickly caught on to the many advantages of etfs, including that they can be bought and sold from their existing brokerage account, and at any time during the trading day. So there are now more than 600 etf's, offered by several dozen mutual fund families.

The changes continue to take place.

In just the last three years, 'inverse' etf's have become available, designed to move up when the market moves down. Thus rather than just moving to cash, investors can quickly position at least some of their portfolio to make gains in market downturns.

That the majority of investors have become much more knowledgeable about markets and investing can be seen in the way they have taken to these new ways of managing their money. Discount and online brokerage firms have pretty much replaced the full service full commission operations of brokerage firms. ETF's are taking over the mutual fund industry in much the same way that no-load mutual funds pressured load funds.

The downside is that the ease with which investors can move in and out of the market these days has no doubt contributed to the volatility, and the dominance of shorter term trading.

But that is likely to continue, causing investors clinging to the old ways to become frustrated, not finding it easy to obtain information quickly enough, or to respond quickly to changing conditions, something that was perhaps not necessary in 'the old days' of 10 or 15 years ago.

Sy Harding is President of Asset Management Research Corp., and publisher of the financial website www.StreetSmartReport.com, and the free blog www.SyHardingblog.com. He also authored the timely 1999 book Riding the Bear - How to Prosper in the Coming Bear Market, and 2007's Beating the Market the Easy Way - Seasonal Strategies that Double the Market!

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