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From Tea to Bogle: Finding a Better Way to Invest, a History

If you’re an experienced investor, your portfolio today is unlikely the same as when you started investing. Over time, you’ve probably made efforts to make it work better for your goals. Maybe the financial crisis taught you to be more mindful of risk, or years of high fund fees prompted you to switch to low-cost investments.

Thankfully, as humans – and as investors – we have the ability to learn from mistakes in hopes of increasing the probability of positive outcomes. Investing, like the rest of life, is a learning experience with its own set of basic principles established over time. In some cases, those principles were created in a chain reaction ignited by seemingly unrelated events.

Consider what the evolution of the mutual fund can teach us about the principle of proper diversification, as well as the will to find a sensible strategy that works best for us and our long-term financial goals rather than repeatedly chasing the elusive, highest return. And, it may have all started with a cup of tea.

Tea and crisis in the 18th century

A major source of the financial crisis of 1772-1773 that gripped Europe was heavy speculation in the stock of the East India Trading Company. The company found itself in severe financial trouble as it lost its hold on the tea trade in the American colonies. As a result, two large British banks overexposed to the company failed, spreading losses to financial institutions across Europe and taking down individual investors with them.

In Amsterdam, a merchant and broker named Adriaan van Ketwich became motivated by the crisis to find a better way to provide investment diversification to small investors. He created the world’s first mutual fund in 1774. Its success led to the release of several subsequent mutual funds.

Meanwhile, in an attempt to reestablish the East India Company monopoly on the tea trade in America, the British government passed the Tea Act in 1773. The imposition of the Tea Act angered a group of American tea merchants who became motivated, like van Ketwich, to start a revolution of their own.

An honest salesman

Edward G. Leffler is a name lost to finance history. However, he was behind one of the greatest advances in modern finance. Before he became a securities salesman, Leffler was going door to door selling aluminum pots and pans.

During his time selling securities, he was disturbed by how small investors were treated and by their lack of investment options. He came up with the idea of an investment trust in which customers could redeem shares at any time. In 1924, the first open-end mutual fund was born.

Index inspiration

After a stock boom and bust in the 1970s led to financial trouble at the investment management firm, Wellington Management Company, its CEO, John Bogle, was ousted. Undeterred by the experience, Bogle was inspired by new academic research that indicated that small investors may be better served with investments that provided diversification and tried to achieve market averages rather than beat them.

In 1975, John Bogle formed the Vanguard Group. It released the first index mutual fund to the public one year later. His idea helped spawn the creation of exchange-traded funds (ETFs) in the 1990s.

So, what does this brief history lesson mean to you? For one, the mutual fund investments in your portfolio, remarkably, tie you to 240 years of financial history. But, most importantly, these historical vignettes emphasize the value in a desire to learn from mistakes and find a sensible investment strategy that empowers the small investor.

Another investing principle here is: don’t take what you learn for granted. Find the right mix that works for you and your long-term goals and let the rest become history.