It’s October 1985, and Marty McFly, hero of “Back to the Future Part II,” catches a ride in a decade-hopping DeLorean time machine and goes three decades into the future. Leaving his hometown, Hill Valley of 1985, with Doc and girlfriend Jennifer, he arrives at a considerably different Hill Valley of 2015.
If the movie were reality, the teenage Marty might be a bit disappointed in the here and now—no power-lacing sneakers, no flying hover boards, no “Jaws 19,” and no self-drying clothes.
As a young investor, however, Marty should be quite pleased. Why? Today, he would have access to:
More choices. While in 1985 Marty had the bread and butter asset classes from which to build a portfolio, today he has much greater choice of active and index funds—from style and sector funds to country and regional funds. Or, he could choose just a few total market index funds that span the domestic and international stock and bond markets. He could make those investments via the traditional mutual fund that his father George McFly likely used, or he might use the newer exchange-traded fund.
Marty might also be interested in the target-date fund, the mutual-fund version of a time machine. He might set a course to retire in 2055 and watch his target-date fund automatically shift to a more conservative allocation as he gets closer to his target retirement date.
Better markets. While trading was not conducted under a Buttonwood tree* in 1985, stock markets have since become more transparent, competitive, and liquid, leading to trading that is more efficient and less costly. Marty would find that improved market structure has greatly reduced frictional trading costs and improved investors’ returns over the past 30 years.
Better funds. Markets have improved and so has investment management. For example, index fund managers have honed their ability through technology and trading techniques to more precisely track target benchmarks. In addition, Marty might marvel that benchmark construction methodologies are now more objective, rules-based, and transparent, resulting in indexes that better reflect the underlying market and reduce turnover.
Lower costs. Marty might suffer from sticker shock when he sees some of today’s prices—$1.25 for a bottle of soda; $8.50 for a movie ticket; and $31,200 for a year of college.** But he’d be downright tickled that the expense ratio for the average Vanguard fund has fallen to 0.18% in 2015, down from 0.61% in 1985****. He could gain exposure to, say, large-cap U.S. stocks for 0.05% via the Admiral™ and ETF shares of Vanguard 500 Index Fund. The expense ratio for the fund was five times higher in 1985 at 0.28%.
More information, better account access. Marty would no doubt be thankful that Al Gore invented the internet. With a few clicks of the mouse or touches on the mobile screen, he could find a veritable almanac of information on funds and investing, and transact in his accounts. Marty would also have access to a variety of online tools to help him construct a well-balanced, diversified portfolio or determine the optimal saving rate to ensure a secure retirement. And he could have a robo-advisor manage his money for him.
More tax-advantaged opportunities. IRAs were a little over ten years old when Marty left 1985, and the 401(k) plan was still in its infancy. Today, Marty would have even more tax-advantaged options, such as Roth IRAs (introduced in 1997) and Roth 401(k)s (introduced in 2006) that enable after-tax contributions, tax-deferred growth, and tax-free withdrawals.
Should Marty have the opportunity to invest through his company’s defined contribution plan, he would likely be auto-enrolled, defaulted into a diversified target-date fund, and see his yearly contribution increase automatically. These improvements in plan design (under the 2006 Pension Protection Act) would undoubtedly lead to a more secure retirement for our time traveler.
In addition, if Marty wanted to save for college for himself or other members of his family, he could open a 529 account, which is now the standard tax-advantaged option for education savings.
Yes, in “Back to the Mutual Fund Future,” Marty would be one happy camper. If he’s a fan of the Chicago Cubs, it might even double his pleasure to see Wrigley Field be home to the world champions.***
*Marty would have the set the DeLorean’s time dial to May 17, 1792, which was the date on which 24 stock brokers met under a Buttonwood tree at 68 Wall Street to formalize trading. The Buttonwood Agreement started the New York Stock Exchange.
**College Board data for a four-year private institution.
***In the movie, the Cubs swept Miami to win the 2015 World Series.
**** As of December 1985. Source: Lipper, a Thomson Reuters company.
Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the Fund name refers to the approximate year (the target date) when an investor in the Fund would retire and leave the work force. The Fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date.