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Do We Live in the Golden Age of Investing?

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The landscape for individual investors is unequivocally better than it was last century.

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Do we live in the golden age of investing?

Moronic question, right? Of course we don't. The S&P 500 (INDEXSP:.INX) sits at about the same level it did five years ago. Bond interest rates have never been lower, and the Fed says it's planning to keep them that way through mid-2015.

Turn on any financial channel and you'll find as many gloomy predictions as you care to sit through: Debt-fueled implosion in Europe, the next flash crash, the shrinking dollar, a stagnant labor market, and the Great Depression 2.0 (or is it 3.0 by now?).

Perhaps I'm just hardheaded, but my money is still invested and my mattress is filled with memory foam, not cash. It's been a while, I know, but does anyone else remember the 20th century? The century in which every conceivable horrible human catastrophe happened, but investors, on average, did great?

Well, the landscape for individual investors is different now than it was for most of the last century: it's unequivocally better.

It's All About the Fees

Last year I had the privilege of interviewing Burton Malkiel, author of the classic book A Random Walk Down Wall Street. He reminisced, not too fondly, about the investing landscape of the 1970s, when the first edition of his book came out.

"The typical mutual fund at the time had a 7% load fee," said Malkiel. "So a $2,000 investment might mean $140 in essentially a commission."

In addition to the 7% front load, that mutual fund probably also charged about 2% in annual expenses. Keep that in mind as we look at a price war that broke out last month between two mutual fund giants.

In September, Schwab announced price cuts on most of its exchange-traded funds (ETFs). An ETF, for our purposes, is basically equivalent to a mutual fund.

Schwab's flagship stock fund, the US Broad Market ETF (NYSEARCA:SCHB), now charges 0.04% per year and their Intermediate Investment Grade Bond ETF (NYSEARCA:SCHZ) will cost you 0.05%. If you also buy and sell the ETFs through Schwab, there are no trading fees whatsoever. (Disclosure: I'm a Schwab account holder but don't own these ETFs.)

Schwab's price-chopping executives had a particular competitor in mind: Vanguard. This month, Vanguard struck back by announcing changes to the indexes underlying some of their most popular funds.

I realize this is about as exciting as the political scenes in the Star Wars prequels, but there is an upshot: The new indexes are cheaper to license, which will mean lower costs in the future. Vanguard's Total Stock Market ETF (NYSEARCA:VTI) currently charges 0.06%. (Disclosure: Vanguard is a Mint.com Ways to Invest partner, and I own the mutual fund version of Total Stock Market.)

So, let's compare the fees paid on a $10,000 investment by a 1970s mutual fund investor versus someone investing in that dirt-cheap Schwab stock fund today:

Front load Annual expenses Total fees
1970s $700 $200 $900
2012 $0 $4 $4

That's a 99.6% reduction in fees.

But wait, maybe you got more for your money back then. In a sense, you did: You got a friendly brokerage representative who would always try to sell you new stuff.

If you invested enough, maybe you'd get to join him for golf, unaware that your money paid for his clubs.

The actual mutual fund, however, was much worse: Less diversified and more likely to underperform in the market.
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No positions in stocks mentioned.
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