How Fund Investing has Changed a Decade After the Collapse

A decade ago, as Lehman Brothers went bust and the fragile financial system was teetering, investors in stock funds wondered how bad it could get.

The answer: pretty bad.

“From a number of perspectives, it’s hard to argue there’s been a better time to be engaged in the market, as spreads are tighter, expenses are lower and technology is more powerful.”

The S&P 500 plunged 4.6 percent on Sept. 15, 2008, and would incur worse losses in the ensuing months.

Many investors bailed out. For those who held steady through all the tumult of the Great Recession, a decade later they’re sitting on more valuable portfolios.

Along the way, investors have changed not only what they invest in but how they do so. They have less faith in stock-picking fund managers who promise to protect them from downturns. They are seeking the lowest-cost options.

And they’ve largely played it safe, putting much more money into bond funds than stock funds.

Thanks in part to extraordinary efforts by the Federal Reserve and others to prop up markets, the largest mutual fund by assets, Vanguard’s Total Stock Market Index fund, has returned nearly 190 percent over the last decade. The numbers are similar, if not quite that high, for funds of all different types.

BONDING WITH FUNDS

Investors have been slowly warming up to stocks, putting nearly as many dollars into stock funds last year as they did in 2007, just before the Great Recession. But they’re far more interested in bond funds, which drew three times as many dollars last year as they did a decade ago.

This year, investors have put over 10 times more dollars into bond funds than stock funds through July: $155.8 billion versus $14.8 billion.

Part of that is because the Baby Boomer generation is closer or further into retirement than a decade ago, which creates more demand for the income that bond funds provide.

But investors also are still hesitant to fully embrace the stock market. Bonds are safer investments than stocks, and even though many bond funds are down this year due to a rise in interest rates, they’re not likely to halve in value like stock funds did during the financial crisis.

ACTIVE DECLINE

Before the Great Recession, stock-picking fund managers were big stars in the financial world. They helmed many of the largest mutual funds, and investors trusted them to pick the right stocks that would help them beat the market.

But many actively managed funds found themselves pulled down with the undertow of the financial crisis, as panicked markets punished stocks of all types, indiscriminately. That soured many investors on actively managed funds.

Instead, many moved their dollars into funds that merely try to match the S&P 500 and other indexes, rather than try to beat them. Over the last decade, very few actively managed funds have been able to beat the performance of index funds after fees are taken into account.

FALLING FEES

Speaking of fees, investors are paying less of them.

Another big positive over the last decade is how much cheaper and easier it has become to invest. The fund industry is locked in a price war and has slashed the fees it charges to trade stocks and invest in mutual funds.

Much of that is due to how discriminating investors have become: They’ve increasingly sought out only the lowest-cost funds. And for good reason. Researchers say having low expenses is one of the best predictors of success for a fund, because high fees mean funds have to be that much better just to match the after-fee returns of their rivals.

“From a number of perspectives, it’s hard to argue there’s been a better time to be engaged in the market, as spreads are tighter, expenses are lower and technology is more powerful,” said Mike Loewengart, vice president of investment strategy at E-Trade.

“Retail investors are able to execute investing strategies and oversee their portfolios in ways that were once reserved for professionals,” he said.