1990s Bull Legacy About More Than Just Money

Happy sixth anniversary to the 1990s stock bull market--now feared as much as revered, and so underappreciated for its most important contributions to the long-term welfare of the average investor.

The performance numbers are what most people focus on, of course, and they’re awesome enough: From the 1990 low of 2,365.10 on the Dow Jones industrial average, reached on Oct. 11 of that year as the United States and Iraq sped toward war, the index has rocketed 152% to a 5,969.38 as of Friday.

Depending on your measuring tape, this is either the greatest or second-greatest bull market in U.S. history. The Dow’s 1990s gain so far ranks second to the 345% surge of the 1923-29 bull market. But in terms of longevity, this advance is now No. 1.

Whether stocks deserve to be at these heights and how long this bovine wonder can be sustained are perpetual debates. But they’re not today’s subjects.

What is little discussed is how different this bull market has been from all others in the positive changes it has helped spur for small investors. There is a very good argument that the investment playing field has never been more level, more fair or more accessible to individuals than it is today.

Certainly, average Americans have never in history had the information and tools they have now to help them make the right investment decisions. Much of what is available to individuals today, in fact, was the sole province of big institutional investors as recently as the late 1980s.

Big investors have always been able to choose to invest in any asset class--wherever opportunity beckoned. But only with the mutual fund explosion of the last 10 years has the individual of limited means had the same opportunities.

There were 2,700 mutual funds in 1988. Today there are 6,100. Through the funds, you can own real estate, global bonds, convertible bonds, stocks nearly anywhere in the world and, of course, every type of U.S. stock.

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Is too much investment choice a bad thing? For some people, perhaps. But just as in the case of your neighborhood supermarket, would you rather shop at a store that has a lot of choices or a few?

Kurt Cerulli, whose Cerulli Associates in Boston has done numerous studies on the expansion of financial services for individuals in recent years, says the 1990s’ emphasis by many mutual fund companies and brokerages on “asset allocation” also marks an important difference between this bull market and all others.

Basic asset allocation--how you diversify your portfolio among stocks, bonds, cash and other assets--has been shown to be the major determinant of investment returns over time, Cerulli notes. In other words, in the long run your overall mix of stocks, bonds and other assets matters more in determining what you earn than the individual securities that you buy.

“If you look back 10 years, that concept was hardly known outside of pension funds,” Cerulli says. Today, it is a staple of the educational materials offered by many mutual funds and brokerages.

Wall Street hasn’t responded with all of these choices and tools for altruistic reasons, of course. Investment firms expect to make money, and they do. And they have clearly benefited from the fact that many individuals have been forced down the path of making their own investment decisions by corporate America’s massive shift from defined-benefit to defined-contribution (i.e., 401[k]) pension plans since the late 1980s.

“That shift has created a level of consciousness [about investing] that a huge segment of the population never had,” Cerulli notes. “It is also irreversible,” he adds.

But as demand for investment choices and information has soared among individual investors, so too has genuine innovation by Wall Street--not just in terms of the sheer number of products, but in the delivery of those products.

Samuel Hayes, a Harvard University professor and Wall Street historian, points out that the discount brokerage industry was born in 1975, when commissions were deregulated. But it has only been in this decade, he says, that the industry has blossomed.

Technology is the prime reason. It has allowed smaller brokerages to deliver more options to their customers, and at lower cost, than ever before. The leaders have been West Coast firms like Charles Schwab Corp. and Jack White & Co., which in recent years have launched no-fee marketplaces where individuals can quickly and easily buy or sell hundreds of mutual funds.

Now, major full-service brokerages like Smith Barney are going down the same path, giving customers access to the broad universe of mutual funds, not just to their proprietary products.

And the benefits that technology has brought to the individual investor go far beyond expanding the list of available mutual funds.

Individuals seeking information about specific stocks, bonds or other assets now have a virtually limitless amount of data at their fingertips, via the Internet. A small investor has the same ability to tap into the Securities and Exchange Commission’s company database, for example, as the manager of a $50-billion pension fund. That wasn’t possible a few years ago.

Just as important, individuals have, through the Internet, the ability to ask questions of other investors, of companies and of investment-services providers on a global scale.

Finally, the Internet is making trading of all securities easier, and at lower cost, than ever before. Online trading is mushrooming, and it is only in its early stages. Most investors still don’t do business over the Net. But imagine where this industry will be in five to 10 years.

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Could all of this have developed without the phenomenal 1990s bull market? Probably, but the process would have been slower.

The bigger questions are whether there is a downside to the wealth of choices open to small investors, and whether the tidal wave of individuals’ participation in securities markets will someday reverse, when this bull market inevitably--if temporarily--gives way to a bear market.

Unquestionably, some people will be burned by having more choices, especially if they don’t understand them. But it’s a good bet that a huge number of Americans know instinctively that they can’t walk away from investing for long, if at all. Nor will they need to, if they have made good use of the investment information available to them and diversified well.

What is truly encouraging is that many Americans know exactly what they need: to learn more about investing, not less. As a recent survey by Dalbar Inc. showed, what most small investors want from a personal financial advisor is education. People aren’t asking for fewer choices, but to be smarter about making them.

In that sense, the greatest legacy of the 1990s bull market isn’t its tremendous performance, but the doors it has opened for us all.

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The Next Wave: Getting Smarter

Asked want they most want from a financial advisor, the majority of consumers list education first, according to a new survey of 4,000 households. That’s a strong indication that people are hungry for understanding of the financial options available to them. In contrast, higher returns came in third.

What do you want from a financial advisor?

Education: 83%

Minimize taxes: 80%

Highest returns: 70%

Protect from loss: 68%

Prevent mistakes: 68%

Written plan: 64%

Help define goals: 63%

Change investments: 58%

* Note: Respondents could pick more than one answer.

* Source: Dalbar inc.