MARK RIEPE: I'm Mark Riepe. I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.
This is a shorter show than normal and I'm recording on May Day, that’s May 1. And what makes this day special is that May 1 is National Investing Day. May 1 was selected because, from the perspective of investors, a key event happened on this day in 1975.
We’ll get to that in a minute, but prior to 1975 there were a couple of other important events that helped set the stage.
The first was a construction project. On May 1, 1653, the wall that put the "wall" in Wall Street was completed on Manhattan. It cost 3,166 guilders or $1,266. It was paid for in guilders because the Dutch ruled Manhattan at the time and the wall was a fortification against a potential invasion from the British.
Fast-forward 139 years and 16 days to May 17, 1792. At that time Manhattan was ruled, and still is ruled, by the relatively new nation of the United States. That was a long time ago, but there was, in fact, a stock market of sorts. A group of 24 brokers got together and signed the Buttonwood Agreement. This group eventually became the New York Stock Exchange.
Just like the literal wall that the Dutch built, the Buttonwood Agreement established a metaphorical wall against competitors. The brokers who signed the agreement, agreed to only trade with each other and charge a fixed commission to outsiders that no one could go below.
In other words, it was minimum commission rate. Remarkably, this metaphorical walling off of competition due to pricing stayed intact until May 1, 1975 when brokers were free to lower commissions. The law was a big win for the individual investor – because now it was much less expensive to invest in stocks.
Let me give you an example, in April 1975, if you wanted to trade less than 200 shares of a stock, you were charged a commission of about 2%.
That’s an amazingly high price by today’s standards and is a barrier to becoming a more successful investor. But the wall that fixed commissions represented was only one barrier or wall that made it harder for individual investors to be successful.
There are many others. So if costs are barrier number one, here are six other barriers to investing, or bricks in the wall, if you will, that investors used to face that are far less of a burden today.
Brick number two is knowledge. By this I mean the increase in financial literacy. Knowledge used to be hard to come by. The experts on Wall Street had the inside track.
But the advent of the internet plus investing-oriented TV stations on cable gave individuals access to knowledge that had been harder to find. And much of that information is of high quality. There are books and online courses and countless resources that cover all aspects of financial health and investing. There are also, as you know, podcasts.
This matter because the more financially literate you are, the better. You'll feel more confident as you make important decisions. And if one expert isn't explaining something in a way that works for you, you can find someone else. It's easier than ever to find the communication style that suits you and helps you learn.
Brick number three is related to knowledge, but it's more specific. It's financial advice.
This is different from knowledge. Knowledge is that baseline understanding of financial matters. Once you have knowledge, the next step is to figure out what to do with that knowledge – how to apply it to your situation. Some people can do that without any help, but most could use some advice and the financial advice industry is incredibly large.
The fourth brick that's no longer in the wall is access to the vast array of financial tools that are out there. Financial matters can be complicated. Nobody has all the answers in their head. Today, we have so many more analytical tools to help us navigate the financial and investing landscape. Again, back in 1975, there were fewer tools and they were the province of Wall Street titans.
Now there are retirement calculators, stock selection tools, market analysis and research tools, to name just a few. All of these help the average investor do research and strengthen their foundation of financial literacy so that they can make a wise decision.
Brick number five is restricted Choice. By that I mean the availability and sheer number of products. We need that education to be able to wisely choose from the ever-growing collection of financial products that are now available.
Not only are there more of them, but they are more flexible than ever before. They make it easier for investors to do what they want. To accomplish their goals. To buy a house. To pay for college. To retire well.
Back in 1975, your choices were mostly stocks, bonds, and mutual funds. Index funds for retail investors didn’t exist and neither did exchange-traded funds.
Brick number six in the wall to be broken is the number of account types. Individual retirement accounts, 401(k) accounts, and 529 accounts for educational savings all came into being after 1975.
A common feature of these accounts is that they allow the individual to save and invest in manner that’s more advantageous with respect to taxes. Brick number seven, the final brick that has been a barrier to investors – so far – is more convenience.
Just about everything is digital. There are a multitude of financial apps on our phones. You can open a brokerage account without going into building. Technology has made our financial lives more convenient and accessible. In the old days, if you wanted to check on your portfolio, you would have to call your broker. Or worse, wait for a paper statement to come in the mail.
Not so anymore, of course. And as technology advances, our financial lives will become even more convenient. Overall, it's a lot better than it used to be. More people than ever can participate in the markets and the financial world and hopefully increase their wealth.
Since 1975, investing has gotten better for investors and it’s fair to say that there’s never been a better time to be an investors because so many of the bricks in the wall that were getting in the way of investing success have been broken.
This episode is airing a few days after May Day, so let me be the first to wish you a belated happy inaugural National Investing Day.
Thanks for listening. I'll be back soon with another show. In the meantime, if you'd like to hear more from me, you can follow me on my LinkedIn page or at X @MarkRiepe. That's M-A-R-K-R-I-E-P-E.
And if you like the show, we'd be grateful for a rating or review on Apple Podcasts or comment on the show if you listen to it via Spotify.
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For important disclosures, see the show notes and schwab.com/FinancialDecoder.
