A Brief History of Investments
With online trading and mobile apps that allow investors to buy, sell, and trade at the drop of a hat, it is difficult to imagine a time when investing looked different than it does today. Believe it or not, the history of investing dates back well beyond the advent of the computer and the Dow Jones Industrial Index. Would you believe that investing dates back as far as the 1600s? Let’s learn more about the history of investing.
Investing started in the 1600s when institutions like acceptance houses and merchant banks agreed to finance foreign trade for governments, monarchies, or individuals, and accumulated funds for long-term investment projects overseas. In America, the New York Stock Exchange opened for the first time in 1792 as the fledgling nation took its first wobbly steps.
Investment banking became a common practice, particularly in the United States, in the late 19th and early 20th centuries. However, even this practice had its roots in medieval Europe, as merchants in Siena, Florence, Genoa, and other Italian cities traded commodities such as grain, spices, silk, and metals.
The Roaring 20s
Major investment banking firms cropped up in the United States starting in the late 1800s. The likes of JP Morgan, Goldman Sachs, and Lehman Brothers (now bankrupt), all big names, had their roots in 1800s investing. The roaring 20s brought a whole new approach to investing in the United States. The average investor had only two concerns with investing at the time: what stock to buy, and when to sell it for a profit.
This was the origin of the get-rich-quick scheme in American society. Investors looked for good short-term investments that could be sold for a profit when prices were high. However, this risky approach to investing lead to investor borrowing money from brokers to pay for stocks, and as everyone well knows, eventually resulted in the Stock Market Crash of 1929.
A New Era of Investing Following World War II and the economic boom that occurred in the late 1940s and 1950s, the American point of view on investing began to change. At the start of the decade, only 4.2% of Americans owned common stock. By 1954, the Dow Jones Industrial Average had surpassed its peak of 1929.
Modern portfolios began to emerge, thanks to the “Modern Portfolio Theory” developed by Harry Markowitz, a Ph.D. Student at University of Chicago (and an eventual recipient of the Nobel Prize in Economics for this work). Investors began to build investment portfolios that relied less on individually selected stocks and market timing, and focused on maximizing returns based upon the amount of risk involved, building an overall portfolio. For the first time, investors sought to diversify portfolios by investing in multiple asset classes. This approach remains a standard today in establishing the foundation of any portfolio.
Since it is 2016, it is difficult to think of the 1970s as ‘modern’. When placing it in context of time, from 1600 to now, so much has occurred since the 1970s that it would be impossible to break it all down in this post. The 70s was a strange decade for the markets, as the DJIA advanced just 5% for the decade, but you also saw the advent of NASDAQ (the first electronic stock market), the growth of mutual funds, the elimination of fixed minimum commission rates, and the introduction of the first index fund.
The 1980s saw lower capital gains tax rates, high-risk investing, the increased use of high-yield debt, and the NYSE reach a single-day trading volume of 100 million for the first time ever. By 1990, more than 20% of the American population now owned common stocks (roughly 51 million people), and the Gramm-Leach-Billey Act removed separations between investment banks and depository banks.
Following the recent Great Recession, the American view on investing changed. People began to focus on and worry more about short term volatility and downturns than positive returns. This holds true today, which means it is best to diversify your portfolio using multiple investment strategies that are based upon risk tolerance and the market. A focus on long-term investments can help minimize some of the features and volatility surrounding downturns, but will never offer the perfect solution. For assistance with your portfolio in the latest market, contact Indian River Financial Group.