Content provided by Sierra Morris, CLS Junior Investment Research Analyst
Looking at today’s top stories with headlines about tapering, interest rates rising, geopolitical turmoil, and stretched valuations, you may be tempted to ask yourself if investing is really worth it right now. However, looking back at history, it is evident that there has never been any better time than the present to be an investor.
There are three key benefits that we have now, that were not available to generations past.
A greater variety of investment choices
The tools and investment vehicles that are now available to the common investor would have been a dream to investors of yester-year. For example, let’s consider CLS’ vehicle of choice – the exchange traded fund (ETF). By the end of last year there were 1,332 ETFs available which is stunning considering that State Street only introduced SPY, the SPDR S&P 500 ETF in 1993! These funds offer a broad and diversified scope of investments within each fund, and have trading benefits over mutual funds. As of late, these funds have been picking up so much steam that it is estimated that assets invested in ETFs could soon reach $2 trillion.
In addition to ETFs, the other asset class that has revolutionized investing is Treasury inflation-protected securities, commonly known as TIPS. These allow investors to purchase a bond backed by the federal government which protects against rising inflation within consumer prices.
As well as offering investors additional choices on where and how they would like to invest, ETFs also benefit investors in their lower costs as compared to mutual funds. According to Morningstar, the weighted average that investors paid in expenses for equity mutual funds and ETFs in 2003 was 1%, while last year, this number had been greatly reduced to only 0.73%. This cost savings becomes extremely important when considering that these lower costs equates to higher returns for investors.
Taxes ultimately can become a larger cost for investors than both trading and money management fees, creating quite a burden. Investors however have seen tumbling tax rates over the past couple of decades due to a few improvements. First, capital-gains rates have been greatly reduced. Do you remember that in 1997, this tax rate was at 28%? Now, for the common investor this is 15% or less. By taking advantage of the differences between the capital gains rate and income tax rates, investors can realize large savings.
In addition, think about the options of accounts that are also now available to us. Roth IRA’s, which were introduced in 1997, allow for some tax-free withdrawals. There are now also Coverdell education savings accounts and college savings 529 plans. These offer tax-free savings when used for educational expenses.
At the end of the day, we as investors today have it better than anyone has ever had it prior. While there are real issues in the markets and returns may not be quite as robust as the past few years, by taking advantage of lower taxes, easy diversification, and reduced fees, we have better opportunities than anyone before us to squeeze out every last basis point of return we can!
This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument. There is no guarantee that investment in any program or strategy discussed herein will be profitable or will not incur loss. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance. Individual client accounts may vary. Investing in any security involves certain non-diversifiable risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies.
An ETF is a type of investment company whose investment objective is to achieve the same return as a particular index, sector, or basket. To achieve this, an ETF will primarily invest in all of the securities, or a representative sample of the securities, that are included in the selected index, sector, or basket. ETFs are subject to the same risks as an individual stock, as well as additional risks based on the sector the ETF invests in.