It’s time to address a truly serious problem: the coming collision between the human population and the investment vehicle population. As recently as 1980 the investment account population of the United States was 415. The human population was 226 million.
We outnumbered the investment accounts handily. The investment account population was composed of 400 mutual funds (excluding money market funds) and 15 variable annuity sub-accounts. Some even worried that mutual funds were heading for extinction because the number of shareholder accounts had been shrinking since the 73-74-market crash.
Not to worry. These little buggers are hardy.
At the end of September the number of investment accounts had grown to 32,924. That computes to a 20-year annual compound growth rate of 24 percent. The trend is accelerating. Growth in the last ten years has been at a 28 percent rate.
Doubling every 2.8 years, our fund population could exceed the current human population of the United States in 40 years. Here are the historic figures:
The Invasion of the Investment Products
|
Year |
Mutual Funds |
V.A. Sub-Accounts |
Total |
|
1950 |
84 |
0 |
84 |
|
1960 |
133 |
2 |
135 |
|
1970 |
248 |
2 |
250 |
|
1980 |
400 |
15 |
415 |
|
1985 |
823 |
195 |
1,018 |
|
1990 |
1,728 |
831 |
2,559 |
|
1995 |
5,695 |
3,974 |
9,669 |
|
2000 |
12,713 |
17,611 |
30,324 |
|
9/2001 |
13,342 |
19,582 |
32,924 |
Source: Morningstar Principia, September 30, 2001 data
Why is this happening?
Perhaps we should start with the non- reasons.
It isn’t happening because there is unmet public demand for more investment choices. We had enough choices to be perplexed in 1970. We certainly had enough when the number of mutual funds exceeded the number of common stocks in the Russell 5000 index. As the number of choices has grown, one thing has become clear. The major differences between investment products are in marketing and salesmanship, not investment methods or results.
It isn’t happening because investment companies are devoted to public service. As I have pointed out on other occasions, the best investment any of us could have made over the last twenty years would not have been any of the mutual funds offered by any of the mutual fund companies or the sub-accounts of any of the variable annuities offered by the insurance industry. It would have been in the stocks of the management companies. Eaton Vance (ticker: EV) has provided a return of 42.2 percent compounded annually over the last 10 years. Its best fund, Worldwide Health A shares, has provided a return of 20.82 percent. T. Rowe Price (ticker: TROW) has provided a return of 23.14 percent over the same period. Its best fund, Small Cap Value, has provided a return of 13.87 percent. Franklin Resources (ticker: BEN) has provided a return of 19.94 percent. Its best fund, Balanced Sheet Investment A shares, has provided a return of 14.39 percent.
I could go on but I think you get the idea.
So why does the number of investment accounts continue to grow?
The account population is growing because money management is a highly profitable business. Everyone wants a piece of it. Whether we are talking about investment accounts with punitively high expenses or accounts that have below average expenses, investment management pays extraordinary incomes to investment professionals while maintaining extraordinary rates of profit growth for the management company.
The only problem: Every dollar that sustains those incomes and profits is a dollar that reduces our investment returns. This would not be a problem if investment management expenses bought superior returns. But it was demonstrated, more than 25 years ago, that active investment management seldom beats passive investment management.
Marketed by a growing army of sales people, not to mention hundreds of millions spent on television and print advertising, the investment industry has been extraordinarily successful at selling lottery tickets to retirement and dreams of wealth.
It’s time for a change.
It’s time for investors to ask, as a book title once suggested, “Where are the customer’s yachts?” It’s time to stop paying for someone else’s Mercedes and to secure our own futures.
Stay tuned and I’ll tell you how to do it.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Pixabay
(c) Scott Burns, 2022