< — 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: securities market
Personal Financial Planning
- 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 [...])
- Use Caution with Classical Investment Books (Use Caution with Classical Investment Books - A Tip from The Skilled Investor
Individual investors should exercise caution when applying the tactics of classical investment books to current markets. The more handcrafted, seat-of-the-pants, and individual actor approach to the securities markets in the pre-computer, pre-networking era has given way to different practices. What might have worked [...])
- Investment Valuation and Securities Risk for Individual Investors (
The securities markets provide an evolving consensus of the risk-adjusted value of particular securities.
By understanding how the markets value securities, individual investors can chose more durable investment strategies
Judging the potential usefulness of different investment strategies requires some understanding of what the public securities markets really do. This article discusses how the markets price financial securities [...])
- The Most Important Determinants of Your Lifetime Wealth (
Your personal earnings, expenditures, and savings are the most important determinants of your family’s long-term financial wealth
Summary: How much you earn, spend, and save are by far the most dominant determinants of your long-term financial well-being. Self-control in your decision-making regarding consumption is far more important than clever investing. Expenditure control works, while attempts [...])
- Can you really beat the stock market? (
You are not likely to beat the stock market, despite all the cheer leading from the securities industry and the financial media.
When you try to beat the public securities markets, unfortunately you are more likely to trail the market’s return, because of extra costs, taxes, and investment mistakes.
The idea that investors can beat the market [...])
- I Want My Treasure Back Please (PIRATES OF THE CREDIT SEA - Part 3: I want my treasure back!! (Please)
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 [...])
- Diversify To Avoid Investment Fraud (Another kind of investment diversification that individual investors should consider important relates to the failure or corruption of the financial industry intermediaries and fiduciaries that hold individual investors’ securities.
This meaning of diversification has nothing to do with scientific investment principles related to optimal portfolio diversification. However, it is still very important. Prudent investment practices would [...])
- Two Examples of the Tax Assets Graphic in VeriPlan (Two examples of the Tax Assets graphic in VeriPlan
TAX ASSETS: Taxable and Tax-Advantaged Financial Assets (real $/yr)
Below are two examples of the blue-tabbed TAX ASSETS graphic, which come from VeriPlan's "Sue and Sam Saver" tutorial. This graphic separates their cash, bond, and stock assets by account taxability throughout their lifetime projections. Assets are separated [...])
- 10 Personal Financial and Investment Planning Steps in the Right Direction (Increase your knowledge and accelerate your ability to take leadership in the management of your own personal finances and lifetime investing.
This ten-step personal financial planning process will help you optimize the management of your financial planning and investment management affairs over your lifetime, while greatly reducing the unnecessary waste of your money and your time.
- Nationwide S&P 500 Index Fund – Class A Shares (GRMAX) fetch a +2 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])
- Earned Income Drives the Personal Finances of Most People (Do-It-Yourself Financial Planning - Earned income drives the personal finances of most people
The ability to project your various income sources automatically over your lifetime is one of the first steps in creating a useful do-it-yourself personal financial plan. Whether from wages and salary or from self-employment, personal earned income drives the lifetime finances of most [...])
- American Funds – Growth Fund of America – Class A Shares (AGTHX) collect a +2 Fund Authority Score (
The investment fund objective of American Funds' Growth Fund of America
With 4.4 million shareholder accounts, the Growth Fund of America (AGTHX) is the largest actively managed stock mutual fund in the United States. According to American Funds prospectus, the investment objective of the Growth Fund of America "is to provide you with growth of capital."
- Avoid Mutual Fund and ETF Sales Commissions and Fees (Avoid mutual funds and ETFs with sales commissions and marketing fees
Summary: There is no convincing evidence that sales loads and other sales fees charged to investors result in higher mutual fund and ETF performance.
In fact, the opposite has repeatedly been proven true with mutual funds, which have a long performance history to evaluate. Paying a [...])
- Risk-Free Investment Money Is Fantasy Money (
For Individual Investors Risk-Free Investment Money Is Fantasy Money
Securities with low investment risk and high investment returns are just fantasies.
No "risk-free" investment money is consistently and reliably available to individuals. Luck dominates skill in the securities markets. Clever investment selection is vastly over-hyped, and only the promoters tend to benefit. On average over long periods, [...])
- The most effective strategy to increase your mutual fund and ETF investment returns (
What is the most effective strategy you have to increase your long-term mutual fund and ETF investment returns?
Just reduce your investment fees to rock bottom and buy directly to eliminate all sales loads. This strategy is both simple and entirely within your control. You do not have to be smarter than all those other smart [...])