< — 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.
Tags: financial services sector
Personal Financial Planning
- Have You Given Enough to the Financial Services Industry? (
Why don't we hear about the real financial sector scandals, which are exorbitant fees and costs that cause a continuous wealth transfer from individuals to the financial services industry?
This article follows a recent article entitled "The Financial Services Industry is Still the Largest S&P 500 Sector - Even after the Collapse of its Stock Value." [...])
- Fidelity Spartan 500 Index mutual fund (FSMKX) achieves the Best +10 Fund Authority Score (
The Standard & Poors 500 stock index is the most common equity index fund benchmark in the U.S. The S and P 500 tracks about 75% of publicly traded U.S. equity market asset value. The dominant issue in choosing among passively managed index mutual funds and ETF funds benchmarked against the S & P 500 [...])
- The Cost of Investment Counselors When You Pay Investment Sales Loads (How expensive is financial advisor compensation paid via sales loads?
A sales load might be the method that you prefer to compensate your broker or advisor. If your advisor is truly competent and ethical, he may be able to manage properly the inherent conflicts of interest that are associated with commissioned investment product sales. Even if [...])
- Reduce investment expenses and control taxation – Step 7 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
Even with optimal investment strategies, there is still substantial room to improve upon net investment performance through continued and vigilant focus on controlling investment costs and tax realization.
The fees extracted by the financial securities industry increased substantially [...])
- 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 [...])
- Own Investment Mutual Funds and ETFs – Not Individual Securities (Own Investment Mutual Funds and ETFs - Not Individual Securities
Owning individual stock and bond securities is just a big waste of your valuable time and money
Individual investors tend to be terrible investment portfolio managers. Almost everyone can hire an index fund manager to do a much better job for far less time, money, risk, and [...])
- Automated Tool Aligns Your Investment Risk Tolerance and Asset Allocation (Check out this automated tool for aligning your investment risk tolerance and asset allocation - A Tip from The Skilled Investor
Your tolerance for investment risk is a relative thing. Few people like investment risk, but some can handle it better than others can. The more investment risk you are willing to tolerate, the higher your [...])
- Understand Your Projected Expenses Over Your Lifetime (Do-It-Yourself Financial Planning - Understand your projected expenses over your lifetime
Increased savings through conscious expenditure reduction is the largest and most controllable factor in long-term personal finance success.
Anyone interested in improving personal financial planning must understand that tracking expenses accurately and comprehensively is very important. Exactly how your expenses are tracked is not so important, [...])
- 22 Ways to Avoid Financial Advisor and Investment Counselor Frauds and Scams (Avoiding financial advisor and investment counselor frauds and scams - Overview
The best way to avoid being defrauded or scammed by a financial or investment advisor is to investigate carefully several different advisers before hiring one of them.
If you carefully choose a financial adviser or investment counselor, you have a far greater chance of finding one [...])
- Financial Industry Product Development and Your Best Interests (
Financial research drives industry product development, but not necessarily toward the best interests of individuals
Personal financial decisions seem to have become very complicated. To add to the confusion, the financial services industry develops an unending array of supposedly innovative new products. However, a large part of the complexity that individuals face results from the proliferation [...])
- Vanguard 500 Index mutual Fund Admiral Shares (VFIAX) win the Best +10 Fund Authority Score (Here is some really good news for you. The Skilled Investor has published an article about lower cost S&P 500 index mutual funds that you can read, entitled: Low Cost S&P 500 Index Mutual Funds. The Standard & Poors 500 stock index is the most common equity index fund benchmark in the U.S. The S [...])
- Hitting the Citibank Stone Wall in Polite Conversation (PIRATES OF THE CREDIT SEA - Part 4: Hitting the Citibank Stone Wall in Polite Conversation
This article continues my personal saga of trying to get Citibank to fix problems with their management of my credit card account with them.
For a summary of the overall situation, go to Part #1: My Treasure Is Taken!
For an article [...])
- What Works Financial Newsletter – October 2011 (
October 2011 Newsletter
Identity Theft Protection and Prevention
As a threat to your financial security, you should take the potential for identity theft very seriously. Identity theft sometimes entails a loss of your money. However, whether or not you lose money, identity theft usually takes a very large amount of your time to rectify. To prevent an [...])
- Always Completely Diversify Your Investment Portfolio (Complete portfolio diversification is always a better idea.
On average, the securities markets will not pay you to hold any skewed subset of the overall market. Doing so is just a gamble that may or may not pay off. You should not expect to be paid any more for the added risk and anxiety.
A previous article, [...])
- Efficient Market Pricing in the Investment Securities Markets (
Efficient market pricing is the theory that all known information is already reflected in current securities prices.
Efficient securities market pricing has become very widely accepted within the investment community. The preponderance of evidence is that securities markets are efficient and tend to reflect available information. Whether you believe markets are efficient is very important to [...])