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The Biggest Personal Finance Story of the Past 30 Years – Conclusion
This article concludes our series on the greatest personal finance story of the past thirty years. In this article, we discuss whether the dramatic growth in equity value of the financial services sector indicates that securities markets are becoming less efficient.
Some might look at the financial services sector’s current 21% share of S&P 500 market capitalization and assume that the securities markets are “not efficient.” This is not necessarily the case. A far more compelling argument is that much of this growth results from a wealth transfer from individuals to the industry.
For a graph of the relative percentage shares of various sectors within the S&P500 index over five decades, see 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.” [Note that this is an Adobe Acrobat document on The Wharton School of Business website at the University of Pennsylvania. Be patient and let it load.]
With the securities markets, excessive costs paid by investors can simply be a wealth transfer to financial securities firms.
The concept of an efficiently priced securities market, does not tell you who will actually get to keep the market’s return. If you agree to pay higher visible costs or you pay higher hidden costs unwittingly, the market’s return simply ends up in someone else’s pocket. Higher costs charged to individual investors just move money from one pocket to another. Retail investors are just another financial industry profit center where the client generally lacks knowledge and sophistication and pays through the nose for this lack of financial skill. (See these related articles on The Skilled Investor website: Controlling Investment Costs )
“Market efficiency” is a concept related to whether the securities markets set appropriate risk-adjusted asset prices given all the uncertainties about future asset market values. If securities market prices are set efficiently, there should not be any investment strategies available that would produce returns that are disproportionate to the risk incurred.
While there is a very large random element associated with the volatility of individual stocks, market segments, and markets overall, the key test is whether these positive and negative statistical pricing “errors” cancel each other out over time. Securities markets are judged to be relatively efficient when [...]