The Mutual Fund Revolution

Good morning everyone! I’m excited to announce we're rebranding the Saturday Morning Muse to Money Lessons with Andrew Temte!

The new name better reflects our shift from general weekend musings to a focused financial literacy series. If you're new to the show and want to follow the complete journey from the foundations of trade and money through modern markets, start with our episodes from January 2025 and work forward—each lesson builds on the previous ones.

Thanks for being part of this journey. Now let's get to today's lesson! Today is November 22, 2025.

Last week, we explored how the 1929 crash led to sweeping regulatory reforms—the Securities Acts of 1933 and 1934, the creation of the SEC, and Glass-Steagall's separation of commercial and investment banking. These reforms established disclosure requirements, prohibited market manipulation, and created investor protections that remain foundational today.

But regulation alone didn't solve a fundamental problem: how could someone with modest savings achieve diversification? Remember from our insurance series how spreading risk across many participants makes individual losses manageable? The same principle applies to investing—owning many different stocks reduces the impact of any single company's failure. But building a diversified portfolio required substantial capital and expertise most Americans lacked.

Today, we're exploring how mutual funds solved this problem and enabled millions of ordinary Americans to participate in equity markets.

The Diversification Challenge

Picture yourself as a middle-class investor in 1940 with $1,000 saved—a substantial sum at the time. You want to invest in stocks, but face several obstacles.

Broker commissions were high, often several dollars per trade. Building a diversified portfolio of twenty or thirty different stocks meant substantial costs eating into your investment. Research was difficult without the internet or readily available company information. Evaluating businesses required time and expertise most people didn't have.

The result? Most Americans either avoided stocks entirely or took concentrated risks by buying just a few stocks—exactly the opposite of what prudent investing requires.

The Birth of Modern Mutual Funds

The concept of pooling investors' money wasn't new. Investment trusts existed since the 1800s, and we saw how problematic some became during the 1920s speculation boom. But the Investment Company Act of 1940 created a regulatory framework that transformed these investment pools.

The Act established strict rules. Fund managers had to register with the SEC, provide detailed disclosure about strategies and fees, maintain independent boards protecting shareholder interests, and calculate share prices daily based on actual securities values.

Most importantly, mutual funds offered continuous redemption—you could sell your shares anytime at that day's calculated price. This liquidity made mutual funds far more accessible than earlier investment trusts.

Here's how it worked: When you invested $1,000 in a mutual fund, your money pooled with thousands of other shareholders. The fund used this combined capital to build a diversified portfolio—perhaps fifty or one hundred different companies. You owned a proportional share of this entire portfolio.

If the fund held $10 million in assets and you invested $1,000, you owned 0.01% of every stock in the portfolio. Your $1,000 gave you instant diversification that would have required far more capital to achieve alone.

Mutual funds grew steadily in the postwar period. By 1950, fewer than one million Americans owned mutual fund shares. By the early 1970s, assets had grown to tens of billions of dollars with millions of shareholder accounts. The mutual fund had successfully brought stock market participation to the middle class.

The Revolutionary Idea: Index Funds

In 1976, a revolutionary development occurred. Jack Bogle, founder of Vanguard Group, launched the First Index Investment Trust—the world's first index mutual fund available to individual investors.

Bogle's insight was profound and, to many, heretical. Rather than paying managers to actively pick stocks, investors should simply own all stocks in a market index like the S&P 500.

This passive approach offered several advantages. Costs were dramatically lower—index funds charged a fraction of what actively managed funds demanded, with fees that have continued dropping over time. Index funds were more tax-efficient, trading rarely and deferring capital gains taxes. And most surprisingly, index funds often outperformed actively managed funds. After fees and taxes, most professional managers failed to beat the market over long periods.

The investment industry initially mocked Bogle's creation, calling it "un-American" to settle for average returns. But decades of research proved him right. S&P Dow Jones Indices—the organization that maintains major market indices like the S&P 500—has tracked thousands of actively managed funds against their benchmarks since 2003 (aka, the SPIVA Reports).

The results are striking: approximately 85% of large-cap actively managed funds fail to beat the S&P 500 over 10-year periods, and nearly 90% underperform over 15 years. While costs certainly matter, academic research by Nobel laureate Eugene Fama and others suggests the core challenge is that in competitive markets with widely available information, consistently outperforming becomes extraordinarily difficult—even for skilled professionals.

Connecting to Real Wealth Building

Remember our compound interest series where investing $5 daily could grow to nearly $1 million over forty years? That calculation assumed earning the stock market's historical 10% average return.

Index funds made that assumption realistic. Before index funds, achieving broad market returns required either substantial wealth to build your own portfolio or accepting high fees and potential underperformance. Now someone investing $5 daily could buy fractional shares of a fund owning five hundred companies, at minimal cost, with no expertise required. The power of compound interest became accessible to everyone.

The Modern Transformation

Today, trillions of dollars are invested in index funds. Mutual funds—both actively managed and indexed—enabled genuine democratization of equity investing. A teacher, nurse, or factory worker could now build the same diversified stock portfolio that previously required substantial wealth.

We've only scratched the surface of diversification and mutual fund investing today. In future episodes, we'll explore how to build properly diversified portfolios, understand different types of mutual funds and ETFs, evaluate fund performance, and navigate the practical decisions every investor faces.

This democratization set the stage for the next revolution—electronic trading systems and zero-commission brokers that would make investing even more accessible. Next week, we'll explore how technology transformed markets from crowded trading floors to smartphone apps, completing the journey from exclusive clubs for the wealthy to truly accessible markets for everyone.

Until next week…

Grace. Dignity. Compassion.