20th Century Investing

Everyone is an investor. Everyone has access to investment platforms, investing information (such as excellent blogs), a wide array of assets to choose from, etc. You can easily start an investment account in 5 minutes by depositing a few quid and almost immediately start trading with 0 commissions. What a time to be alive.

But it wasn’t always like this. Retail investing didn’t always use to be so easy.

50 years of change

Investing by individuals grew significantly in the UK from the 1860s until the outbreak of WWI with growing economic prosperity and the development of financial products (e.g. diversified products, in which one could gain exposure to many shares, for example). This growth then stagnated until about the 1960s due to high taxation on investment income and the slight distraction of two World Wars and everything that came with them. Investing is the last thing on your mind when food is rationed, your house might get blown up and you’re wondering if your son is alive or dead.

This changed in 1957 when the Stock Exchange lifted the ban on unit trust advertising, which promptly exploded in popularity. 51 of these trusts managed £200M in 1959 compared to 208 managing £1.4B just 10 years later. This was accompanied by other financial developments. In 1966 the London Stock Exchange published its first survey finding that 1.8M people owned industrial shares (3.3% of the population) and 800,000 held GILTs.

This development in the UK was in some part an attempt to catch up with our friends across the pond. 7 times as many Americans held shares by the end of the 1960s than during the height of the 1929 bubble, spurred in part by the obsession with the “Nifty Fifty”.

In the 60s, it was largely individuals who owned stocks, not companies. But this doesn’t mean that everyone was an investor. Investing was highly concentrated: at this time, only about 3% of the population owned about 50% of the stock market.

The 70s, by contrast, were not a happy time for investors. This period was characterised by high inflation, accompanied by sub-par stock and property market performances. Not a fun time to invest. As a result of this inflation epidemic, interest rates were raised to (by today’s standards) eye-wateringly high levels, even rising above 15%. This prompted retail investors to turn away from stocks and property to safer assets like bonds. It also seems to have been accompanied by an increase in the saving rate:

This trend was reversed in the 1980s. Inflation had been “taken care of” and it was time to party. This was a decade of financial deregulation and prosperity. Corporate takeover activity was exploding, a new financial product was being created every week, national companies were being privatised left, right, and centre (most of which would have been a good investment, it seems). Activity in the City flourished, ignited by abolishing fixed commissions on trades, allowing advice and trading to be done by the same person (sounds like a good plan), and opening the floodgates to foreign investment.

This was the first transition of financial asset ownership in the post-war period in the UK. Money used to flow directly from individuals to the financial markets but there was now an extra step in the process. In the 80s, money flowed to institutions (like pension funds and insurance companies) who then invested on the behalf of individuals. Ask your parents about their investing during this period – it probably only existed in the form of the company pension. This was justified at the time – working for 20 years+ at a major corporation with a defined benefit pension scheme was a very good deal at the start of the 80s.

The 90s represented a period of globalisation and technologisation. At the start of the decade, 75% of pension fund’s stock market investment was within the UK. This started to change. The world was opening up, technology was improving which aided the flow of money both into and out of the UK. With this came the second major change in investor composition, a trend that has continued to this day. Now, the biggest investors are not pension funds or insurance companies but international institutions. Now pension funds channel funds to these massive multi-national institutions to invest in across the globe. The share of international ownership in UK shares grew from around 10% in 1990 to roughly 30% in 2000.

That’s where most of the investment comes from today (over 50% of UK shares are owned by international investors). You contribute to your pension scheme, who give the money to an international asset manager to manage, who then invest back in the UK. Funny how that works.

The 90s was also the decade that retail investing as we know it was really born. During the dotcom bubble of the late 90s/early 2000s, “investors” would buy and sell shares in the latest technology company that was going to be the next “big thing”…sound familiar? These stocks were ridiculously overvalued but the difference with today is that it wasn’t isolated to specific memes…everything that was in any way related to the internet was shooting up in price. Eventually of course, the market crashed spectacularly. Turns out castles built on clouds don’t have the sturdiest of foundations.

Today

These trends – an increasing emphasis on technology, increasing access to investing, increasing internationalisation, etc. – continued throughout the 2000s until today. Today, 80% of UK pension fund’s stock market portfolio is invested overseas, for example.

Although the average household is saving and investing just £9.20 a week, at least most know that they probably should be doing something and, more importantly, that they can do something. This has led to an increasing awareness and education when it comes to investing and, ultimately, to more investing. Today, one third of Brits say they own shares. Two thirds say they plan on owning shares.

This has been partly driven by the low interest-rate environment, boredom and saving during the pandemic, and the recent trend in meme stonks. However, these temporary phenomena are not the only reason for the increasing participation in investing. As mentioned in the introduction, investing has never been easier (or cheaper). Everyone now can be (and should be) and investor…including you.