< — Go to Part 1
The Biggest Personal Finance Story of the Past 30 Years – Part 2
To understand what has happened to the market valuation of the financial services sector, particularly over the last 30 years, you should view Figure 4 on page 16 of the financial study by Jeremy Siegel and Jeremy Schwartz entitled: The Long-term Returns on the Original S&P 500 Firms.
Click the link to this .pdf document in the previous sentence, and a separate browser window will pop up. After you have studied Figure 4, then continue reading this article on The Skilled Investor.
By the way, in addition to the point we are making with Figure 4, the rest of this Siegel and Schwartz paper is well worth reading. This study shows that revisions of the S&P500 index over time have not enhanced the value of the index:
1) because new stocks tend to be added when relative valuations are peaking, and
2) because of the market trading impact of index funds that must buy these newly added firms, while they jettison those that are removed from the index.
In addition, this study is yet another proof that a passive, low cost, buy-and-hold strategy is superior over the long haul to all this frenetic active investing that individuals and investment funds do.
When you looked at Figure 4 of the Siegel and Schwartz paper, did anything seem stunning to you? I was stunned, when I first saw this graphic. Figure 4 shows that the “Financial” sector grows from next to nothing to become about 20% of the value of the S&P 500 by 2003. No other sector grows like this. Health Care expands, but not at as high a rate as Financials. Info Tech expands over the long-term but not at as high a rate as Financials. This graphic also shows how the boom and bust of the Info Tech bubble temporarily displaced the percentage market share of all the other sectors.
Beside Financials, Health Care, and Info Tech, all of the other sectors shrink in percentage terms over the 45 years of S&P 500 market capitalization percentage data that are presented in Figure 4 of the Siegel and Schwartz paper.
As of July 2007, the S&P 500 Fact Sheet on the Standard & Poors website indicated that Financials currently represented 20.77% of index market capitalization. The next four largest sectors in order of percentage market capitalization are:
1) Info Tech at 15.45%,
2) Health Care at 11.67%,
3) Industrials at 11.43%, and
4) Energy at 10.79%.
Concerning these four other sectors listed above, for years, we have very often heard about:
1) Info Tech sector — the growth, market bubble, and crash of the information technology sector with all its increasing technological marvels and productivity contributions to the world economy;
2) Health Care sector — the continually escalating costs of the U.S. health care system, the aging of the population and attendant medical costs, and the growing crisis of millions of uninsured and underinsured people;
3) Industrials sector — the continuing migration of industry manufacturing overseas with outsourcing, dramatic job losses, and huge balance-of trade-deficits; and
4) Energy sector — the escalating price of gasoline, natural gas, and heating oil, the negative impact of energy costs on consumer spending and economic growth, and quarterly record after quarterly record of energy company profits.
Yet, at the same time, the Financial sector has grown to be almost twice the value of the Energy sector in S&P500 market capitalization. Nevertheless, we have not heard a widespread media clamor about escalating financial services costs and profits. Instead, all we hear about are financial scandals related to greed, fraud, and scams. Even then, many of these scandals have faded from memory, as securities market values have risen in recovery following the market bust.
Why don’t we hear about the real financial sector scandal, which is the huge, growing, and continuous wealth transfer from individuals to financial intermediaries through exorbitant visible and hidden fees and costs? The financial media rarely focuses on exorbitant financial costs. Instead, we get “perp walks” of high profile fraudsters. It is as if we can just weed out some bad apples and get back to business as usual.
Catch John Rigas, Ken Lay, Martha Stewart, Dennis Kozlowski, and on and on. Walk them in handcuffs or prison fatigues before the cameras, and then everything will be okay. With regulatory and judicial slaps on the wrist, everything will be OK, if we can just stop the more visible scandals of mutual fund market timing, corporate accounting funny business, broker sales incentives, soft dollar payments, Richard Grasso’s compensation, etc.
Well, Figure 4 of the Siegel and Schwartz paper shows that things will not be okay after a few tweaks to the regulatory system and a few perp walks. Individuals have in the past and apparently will in the future continue to pay exorbitant banking, credit card, insurance, and securities costs. The wealth transfer will continue unabated.
Personal Financial Planning
- 15 Value-Added Individual Investor Activities (Before estimating the investment value that you might add or take away from your portfolio, you first need to determine whether your strategies are or are not likely to lead to optimal risk-adjusted investment returns.
This value estimation is separate from any hourly opportunity cost related to spending time on your investments versus an alternative use [...])
- Select investments rationally – Step 6 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION
Given the extremely large number and variety of available securities, investors need a rational basis to select among them. Without rational selection criteria and a good understanding of which factors are more or less likely to increase [...])
- American Funds – AMCAP Fund – Class A Shares (AMCPX) fetch a +1 Fund Authority Score (The table below in this article presents The Skilled Investor's Fund Authority Score and other information for the American Funds - AMCAP Fund - Class A Shares.
The diversified investment fund strategy of the American Funds - AMCAP Fund - Class A mutual fund shares (AMCPX)
According to its prospectus filing on the U.S. Securities and Exchange [...])
- Rational Mutual Fund and ETF Screening Rules (Scientific mutual fund and ETF screening criteria: a summary
Scientifically based selection criteria are rational methods to screen mutual funds and ETFs.
Recently, The Skilled Investor Blog published a series of articles on scientifically based selection criteria for mutual funds and exchange traded funds (ETFs). These screening rules help you to winnow down the thousands of available [...])
- Vanguard Total Stock Market Index Fund (VTSMX) achieves a +9 Fund Authority Score (
The diversified investment fund strategy of the Vanguard Total Stock Market Index Fund
According to the Vanguard website, the investment strategy of the Vanguard Total Stock Market Index mutual fund is to use a "passive management—or indexing—investment approach designed to track the performance of the MSCI® US Broad Market Index, which represents 99.5% or more of [...])
- How Many Mutual Funds are Needed for a Well-Diversified Portfolio? – Evidence (Actively-managed mutual funds are not created equally. Performance can vary significantly - even when funds pursue similar strategies or "styles."
This article addresses the impact on portfolio diversification of holding more than one actively-managed mutual fund. (For the companion article to this, see: How many mutual funds are needed for a well-diversified portfolio? – a commentary)
- Your Valuable Assets Are Simply Your Evolving Estate (
Your investment portfolio and other property assets are simply your evolving estate
A previous financial article, “The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that investors are much better off with a well-considered financial plan. A stable set of financial beliefs can [...])
- Commodity Futures in Your Investment Portfolio (Commodity futures in your investment portfolio - Is there really any future for individual investors?
The Skilled Investor's previous article, "Be wary of the new investment asset classes," voiced skepticism about many supposedly new asset classes. This article delves into the financial science behind this skepticism, as it relates to one of these supposedly new asset [...])
- A Financial Decision Tool That Becomes Increasingly Valuable Over Time (As a financial decision tool, VeriPlan becomes increasingly valuable with the passage of time
Summary: While VeriPlan is an genuine bargain because of its low cost, it is an even greater bargain, when you consider that VeriPlan has no built-in obsolescence and that it can be used productively for years. We have engineered VeriPlan, so that [...])
- Fund Authority Scores for Stock ETFs and Mutual Funds – Historical investment performance (
Fund Authority Scores rate stock mutual funds and ETFs on the most important economic factors affecting long term diversified equity investment fund performance. This article explains how historical fund performance is calculated.
<<-- Go to Part 1
Go to Part 3 -->>
Part 1 of this article discussed direct and hidden investment costs, the most heavily weighted factors [...])
- Pay Lower Investment Expenses To Get Higher Investment Returns (
Pay Lower Investment Expenses To Get Higher Investment Returns - Part 1
Excessive investment costs are a plague on your personal financial planning.
Excessive investment expenses are one of the most significant barriers to lifelong family financial security. While financial services industry sales people tell you that you need to pay more to get more, the correct [...])
- Avoiding Financial Advisor Frauds and Scams – Part 1 (
Part 1 of the The Never-Do List - 22 Good Ways to Avoid Financial Advisor and Investment Counselor Frauds and Scams
This article discusses things that you should “never do” with a financial planner or investment advisor, and it covers adviser selection, contracts, signatures, and ownership title of your assets.
You should never do certain things with [...])
- Screening Mutual Funds On-Line with Morningstar.com (
Screening mutual funds on-line with Morningstar.com
Summary: In this article, The Skilled Investor discusses how to screen mutual funds on-line using our seven scientifically based mutual fund screening criteria. This article focuses on using the free mutual fund screener and database available at Morningstar.com.
In a previous article, The Skilled Investor has discussed minimum requirements [...])
- What are My Credit Card Contract Rights? (PIRATES OF THE CREDIT SEA - Part 2: What are my rights?
What are my rights in the situation that I summarized in my previous article: "PIRATES OF THE CREDIT SEA: My Treasure Is Taken!"? Well, the answer is very simple. I have a contractual right to get my treasure back. I also have a right [...])
- Most Individual Investors Are Poor Personal Portfolio Managers (Most individual investors are poor investment portfolio managers
Investors more easily understand investment costs that are directly measurable, such as fees deducted on investment statements. However, many investors ignore or are unaware of the “opportunity costs” of their sub-optimal investment behaviors. Opportunity costs are usually much more difficult to measure directly, but these investment costs can [...])