How One Man Helped Create a Nation of Investors

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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.

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.

If you’re as old as I am, you’ll remember what happened next. Inflation surged and interest rates followed. The average 30-year mortgage rate peaked at close to 17 percent by 1981. Tens of millions of Americans, seeing their savings eroded by inflation, made the leap from a bank account to a money market fund. This was the first step in their transition from savers to investors.

By the fall of 1982, the Federal Reserve chair Paul Volcker had brought the inflation rate down sharply, triggering a powerful bull market. Mr. Johnson was ready for the moment.

Fidelity had long before cut its ties with brokers, giving the company a direct relationship with customers. As their money market fund returns diminished, they looked for other vehicles that could provide the yields they had become accustomed to. What Mr. Johnson could offer them was Fidelity’s Magellan fund — or, more specifically, the genius of its manager, Peter Lynch, whom he had installed five years earlier.

It’s hard to overstate how important Mr. Lynch was in bringing the middle class to the stock market. It wasn’t just that his record was off the charts — the Magellan Fund recorded a 29 percent average annual return in the 13 years he ran it, between 1977 and 1990, with nary a down year. It was also that Mr. Lynch did it while making stock-picking seem like something anyone could do if they just used common sense. He demystified the market for millions.

Mr. Lynch, now 78, famously invested in Hanes because he saw his wife buying the company’s L’eggs pantyhose at the supermarket. He called his big winners “ten-baggers.” He used to say, “I like to buy a business that any fool can run because eventually one will.”

Mr. Lynch’s popularity begot the era of the superstar fund manager, who became heroes for the new breed of middle-class investors. The Magellan fund’s assets under management grew from $18 million to $14 billion during Mr. Lynch’s tenure.

There was another factor pushing people into the stock market around that time, and Mr. Lynch and Mr. Johnson seized the opportunity.

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 mutual fund era ended, more or less, on Aug. 9, 1995. That was the date of Netscape’s blockbuster I.P.O. — its stock more than doubled on its first day as a public company — and the beginning of the dot-com boom.

The next few years proved that Mr. Johnson’s goal of bringing the middle class into the market had succeeded. Partly, people had to: How else could they afford to retire or send their kids to college? For better or worse, they embraced those ever-rising tech stocks in the same way they had once embraced Mr. Lynch and the Magellan fund.

I was living in a small town in Massachusetts at the time, and I’ll never forget my neighbors — people I’d never thought of as investors — crowing about the returns they were getting on stocks like Cisco or Juniper Networks or, yes, eToys.

Fidelity had a discount brokerage by then but, more important, it had switched the emphasis of its mutual fund business from individuals to corporations offering 401(k) plans to their employees. There are those who believe that employees were better off when companies offered defined benefit pension plans (I’m one of them) but, when confronted with an array of mutual funds to choose from for self-directed retirement plans, people took it in stride. It was no big deal anymore. Americans had truly become investors.

Mr. Johnson retired as chairman of Fidelity in 2014, turning it over to his daughter Abigail. Today, it holds over $4 trillion in assets and has more than 30 million customers. But Mr. Johnson’s real legacy isn’t just that he turned a small firm in Boston into a financial behemoth, but how he did it — by making investing a part of everyday middle-class life.

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