How the Middle Class joined the Money Class.

[Tomconroy]

DealBook
April 2, 2022





Illustration by The New York Times; Photo by Brian Snyder/Reuters
A nation of investors
Author Headshot
By Joe Nocera

Among the trailblazers who made finance more accessible to the masses starting in the 1970s — John Bogle of Vanguard with his index fund, Charles Schwab with his discount brokerage and Louis Rukeyser with his weekly interrogation of one Wall Street sage or another — Edward C. Johnson III, the longtime leader of Fidelity Investments, was the least well known yet arguably the most important.

The others were all public figures, but Mr. Johnson, who died last week at the age of 91, was a Boston patrician with a patrician’s aversion to the spotlight. Despite his upper-class background, he is credited with helping to change the way the middle class thought about its money, transforming Americans from savers to investors. That’s why he matters.

Mr. Johnson, widely known as Ned, was 42 when he took over Fidelity, a small mutual fund company his father had run for three decades. The year was 1972: The market was in the doldrums, inflation was on the rise and Fidelity’s assets were in decline.


Like other financial executives, Johnson realized that a new investment vehicle recently approved by the Securities and Exchange Commission might offer a way to attract more money. This vehicle was called a money market fund; by investing in ultrasafe bonds, it could generate returns that matched real-world interest rates. At a time when bank interest was regulated — fixed by law at 5.25 percent — these higher-yielding funds were sold as an alternative to savings accounts.

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[question everything]

1. In the 70s and 80s with high inflation Money Market was a safe bet for savings

But in the past 30 years or so, interest rates are around 1%.

In 1992 I was a volunteer on the AARP tax preparers and one senior after another showed me their 1099 with the miserable interest on their CDs and Money Market accounts.

Yes, we still hold some funds in our brokerage money market and have checks associated with it if we need quick cash.

[Tomconroy]

2. The link may not be working. The article goes on to describe

How Johnson hired a guy named Peter Lynch whose incredible management of the Fidelity Magellan Fund popularized stock mutual funds just as the market took off in the 80s. Also how Johnson marketed in his funds to newly created corporate 401 accounts.

[progree]

3. I copied the whole URL and pasted it in my Chrome browser's address line - works fine

Thanks for posting.

This might work too: click here

Just to finish the money market fund part, which I didn't know about --

They were not, however, consumer friendly. While it was easy to move money in and out of a bank account, it often took weeks to redeem money market fund shares, requiring onerous paperwork. That was a turnoff to people who were used to having easy access to their money.

As his obituaries have all noted, Mr. Johnson threw that business model overboard by allowing Fidelity customers to write checks against the company’s money market fund. In one stroke, he made it as easy to take money out of a fund as to put money in. His thinking was that people would be more willing to entrust their money to Fidelity if they knew they could easily withdraw it. He would treat investors like consumers.

And to add to your summary, IRA's ---

In 1982, Congress created the Individual Retirement Account, or I.R.A., which allowed people to defer taxes on $2,000 a year if they put it aside for retirement. By 1984, Fidelity’s marketers were traveling the country, talking up I.R.A.s as a great middle-class tax break — and mutual funds as the way to make the most of it. Fidelity by then offered a variety of funds; Mr. Johnson was also among the first to make it easy for customers to switch from one fund to another, further enhancing the firm’s appeal.

The only thing that GRRR'd me is they would show those wonderful graphs of your account value in an IRA and compare it to one in a regular taxable account over 30 years, and obviously the IRA started out higher (with the up-front tax deduction), and grew much faster ...

but those eye-popping graphs left out the part about paying the taxes on withdrawal. I'm a big believer in the power of tax deferral, but still, let's not leave out the withdrawal phase. Especially when those withdrawals jack up one's Medicare Part B and D premiums (search IRMAA), and the amount of one's Social Security benefits that are taxed.