May 1, 1975, was a spectacular day for U.S. retail investors. You see, the market was up 1%.
That's not why it was awesome
We might take its legacy for granted now, but "Mayday," as it was called by stockbrokers, was the day the U.S. government ended fixed brokerage commissions.
Prior to May 1, 1975, no matter which broker you used, commissions were standard. Mayday allowed investors to "shop among competing brokers for the lowest commissions and the best services," as Time wrote back then.
The effect was predictable -- with competition forcing the big players' hands, discount brokers rose up and undercut their pricing. While the Internet would later revolutionize discount brokerages (and the way in which investors can buy and sell securities), Schwab (Nasdaq: SCHW), TD Ameritrade (Nasdaq: AMTD), E*Trade (Nasdaq: ETFC), et al., wouldn't exist today if not for Mayday.
The other side of the coin
Of course, with lower prices and the new Internet information age, brokers found a way to make up for lower rates. Volume.
I've made the case before that trading can be harmful to your portfolio, but it's difficult to keep your brain calm amid a constant -- and constantly flashing -- stream of news, tickers, and prices. All those bells, whistles, and "alerts"? They're designed to spur action … to create volume.
Now on to the other thing that will affect your returns in 2008
Long before Mayday, one big Wall Street player invented a new product that, more than 80 years later, you should get to know (if you haven't already).
Selfridge's, a London department store founded by an American entrepreneur, was prospering in the 1920s. Toward the end of the decade, JPMorgan Chase made it so that U.S. investors could own a piece of the English retailer. From Deutsche Bank's Depositary Receipts Handbook:
"American Depositary Receipts (ADRs) … were introduced in 1927 in response to a law passed in Britain, which prohibited British companies from registering shares overseas without a British-based transfer agent. U.K. shares were not allowed physically to leave the U.K., and so, to accommodate U.S. investor demand, a U.S. instrument had to be created; this was called an American Depositary Receipt."
It may be a fixture now, but the ADR was a novelty decades ago. Today, any American with a brokerage account can buy shares in the hundreds of foreign companies that have ADRs -- among the most widely owned are Brazilian mining giant Vale (NYSE: RIO), Finnish telecom titan Nokia (NYSE: NOK), BP (NYSE: BP), and Israeli generic drug maker Teva Pharmaceutical (Nasdaq: TEVA).
The advantages are clear. Based in U.S. greenbacks, ADRs represent ownership in the foreign company "without concern for the differing settlement timetables and the problems typically associated with overseas markets."
According to adr.com, depositary receipts make up more than 15% of the U.S. equity market; U.S. investment in foreign equities is greater than $2 trillion. With more than half of the world's market capitalization existing beyond the United States, perhaps you're not surprised by that -- especially considering the "global economy" we hear about all the time.
You had to know I was coming around to this
Low-cost brokerages and foreign stocks you can purchase directly on our major exchanges are the two things that will affect your returns in 2008 -- and 2009, 2010, and beyond. How so?
Both developments have incredible potential to help the long-term results of your portfolio. But you need to make certain you:
- Shop for your brokerage -- assuming the research is equal, if you're paying more than the $10 or so you can find at a discount shop, consider switching providers.
- Keep your broker commissions to less than 2% of your cost.
- Sell not on emotion but on reason.
And if you haven't looked at international stocks, now's the time. With so many ADRs so easily accessible, you have no excuse to keep your portfolio parked at home. If it's just ideas that you lack, our Motley Fool Global Gains service has been recommending foreign stocks for more than a year, and the team's picks are beating the S&P 500 and MSCI EAFE benchmarks by a double-digit margin.
To see our picks, research, and best ADRs for new money, we offer a free trial with no obligation to subscribe. Click here to get going.
Brian Richards
is pretty sure it's time for some fresh air. Brian does not own shares of any securities mentioned. JPMorgan is an Income Investor recommendation. Schwab is a Stock Advisor selection. The Motley Fool has a disclosure policy.
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