Back to the future: Lessons from investing history - BetaShares

Back to the future: Lessons from investing history

BY Tom Wickenden | 27 October 2021
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Back to the future: lessons from investing history

Reading time: 4 minutes

For centuries retail investors have faced all kinds of market conditions, suffering long drawn-out recessions, riding the euphoria of market booms, and experiencing the fear and excitement of market volatility.

Today, as investors, we often look ahead to try to capture the next big opportunities and avoid unwanted risks. However, it might be looking back at the lessons learned from investors of the past that best helps us to position our portfolios for the future.

Ancient history – the Roaring 20s

The roaring 20s

The 1920s was a decade of such economic prosperity, market euphoria and carefree living that the period was nicknamed the ‘roaring 20s’. The Dow Jones Industrial Average (Dow) quadrupled from 1920 to 1929 fuelled by millions of new investors capturing the zeitgeist of the era – diving in head first.

High-risk strategies were the norm as investors took advantage of loose margin requirements, allowing buyers to put down as little as 10%-20% for stocks, borrowing the remainder from a broker. Broad market participation gave rise to the timeless sentiment: “When the shoeshine boys have tips, the stock market is too popular for its own good”.

The events that followed, including a 90% drop in the Dow, which did not recover to the same heights for 25 years, served for many as a first lesson in high-risk strategies and fad investing.

The lesson

Avoid the fads

For over a century, investing fads have caught out investors chasing castles in the clouds. Just like Jorts, Heelys, and Shutter Shades, it can be hard to avoid being caught up in the moment. It’s ok to take calculated risks, but keep an eye on company fundamentals and stay diversified to avoid losses you can’t afford.

Take reasonable risks

Set achievable long-term return targets based on your risk profile and stick to the course. Even the highest-risk investor profile does not call for 10x leveraging – save it for the casino.

Mutual ages – the mutual fund comes, the mutual fund go-go’s

The go-go years
Source: Brooks, J 1973, The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60s

At the start of the 1950s, although market participation was still low following the 1929 crash, individual investors owned over 90% of all common stock. The emergence of mutual funds over the following decades saw institutions grow to own 34% of the stock market in 1980, an amount then doubled by 2010, to over 80% today, largely representing retail investors’ money in active managers’ hands.

The first big era of the mutual fund, the ‘Go-Go’ years of investing, was defined by funds offering abnormally large returns, created from shifting portfolio weights around speculative information1 hence ‘Go-Go’, the unrestrained and provocative style of dancing popular at the time.

The promise of the professional manager was enough to fuel a new investing frenzy despite the scars of 1929. By the end of the 1960s almost four times as many Americans owned some form of stock as two decades earlier, largely in high-risk mutual funds promising above-average returns.

When the economic cycle slowed in 1969, the market crashed and many Go-Go Funds experienced worse returns than the broader market, despite the so-called ‘benefit’ of active management.

The lesson

Active managers don’t necessarily perform better

Investing with an active fund manager does not remove your risk. Be careful who is looking after your hard-earned dollars and consider the benefits of passive investments such as ETFs (more on ETFs below).

Modern history – Tech highs and tech lows – the Dot Com bubble

The dot com bubble
Source: The Big Picture 2020, What Caused the Dot-Com Bubble?

The next investing era was defined by technology.

An investing boom was attributed to a combination of better access to information, digital trading systems lowering costs, and online trading accounts providing wider access to stockmarkets than ever before.

Black Monday, a day in which the S&P 500 experienced its biggest ever single-day decline of 20%, was partly blamed on computer program-driven stop-loss models automatically removing bids and triggering selling as markets began to fall, spiralling into a crash.

Towards the end of the 1990s came another period of speculative and fad-based investing, this time in start-up technology companies that never justified their heady growth valuations. The decade came to a close with another spectacular crash with a spectacular name, the ‘Dot Com bubble’.

However, an important detail of the early 2000s crash is often overlooked – while the tech-focused Nasdaq Composite Index fell 39% in 2000, some value-style indices grew as much as 17% the same year, demonstrating the benefits of diversification for investors’ portfolios.

The lessons

Diversification

Don’t put all your eggs in one basket. By spreading investments across styles, sectors, and asset classes with different risk and return characteristics, you can reduce your overall risk.

Present day – ETFs and Wall Street Bets

ETFs and Wall St bets
Source: Reddit Wall Street Bets

Although the index fund came some time earlier, addressing frustrations that some mutual funds were underperforming market indices2, it was the evolution of this concept into a new investment vehicle, the exchange-traded fund (ETF), that saw the popularity of passive funds soar. The ETF addressed some of the key deficiencies of mutual funds: access, tradability, transparency, and cost, and became synonymous with passive index strategies.

Investors gained confidence in the benefits and structure of ETFs as they held up during the 2008 GFC and 2020 ‘Covid crash’ stress tests. Assets globally grew from $US0.2 trillion in 2003 to $US1.31 trillion by 2010, and with inflows of over $US700 billion this year alone, today stand at over $US9 trillion3.

It is not only the creation of the ETF that has given us more control over our investing than ever before. Ultra-low-cost brokerage, online webinars and education, and access to company information have all helped the retail investor to achieve their financial goals.

Whilst today’s history is writing itself on the forums of Wall Street Bets, GameStop’s price chart, and Elon Musk’s tweets about Dogecoin, it is important to remember the lessons of the past century when trying to position your portfolio for the future.


1. Brooks, J 1973, The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60s
2. Malkiel, B 1973, A Random Walk Down Wall Street
3. https://www.wsj.com/articles/global-etf-assets-hit-9-trillion-11628769548

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