The Biggest Personal Finance Story of the Past 30 Years – Part 1
What could the biggest personal finance story of three decades be?
The growth of mutual funds and ETFs? Nope.
The dot com boom and bust? Nope.
Vanishing pensions? Nope.
The not-so-high quality of mortgage bonds? Nope.
A 0% personal savings rate nationally? Nope. (But, that is a strong contender.)
To break the suspense, the biggest personal finance story of the past 30 years has been the dramatic growth of the market capitalization of financial services firms within the U.S. equity markets!
Huh? Why is this so important to personal finance? Why should I care, if the market capitalization of the financial services sector has grown dramatically? That certainly does not sound as cool as trading to beat the markets, craving hedge funds, betting on commodities futures, or even tossing Paris Hilton and Lindsey Lohan into the slammer.
Well, the reason that this is so important to your personal finances is pretty straightforward. Simply put, most individuals pay far too much for financial products and services. Their continuing overpayments show up in the increasing value of financial services company stocks. People have paid far too much for years, and the industry’s excessive charges have been increasing for years. (See these related articles on The Skilled Investor website: Controlling Investment Costs )
In return, individuals receive far too little. Exorbitant and increasing investment costs, high banking fees, predatory credit card charges, excessive insurance costs, etc. simply represent a massive wealth transfer from the personal pocket books of average individuals into the coffers of the financial services industry and into the high paychecks of their employees.
Name the one industry that has a reputation for high salaries and bonuses, which the media trumpets to you like this is somehow good news and worthy of envy. That one industry is the financial services industry and, particularly, the securities segment of the financial services industry. Yet, even after financial services companies have paid these huge personnel expenses and even after they have paid for all those high end commercial office buildings with shiny brass, plate glass, and mahogany furnishings, the financial industry is still highly profitable. Financial services sector profits and earnings growth rates have made this the largest sector of the S&P 500 stock market index!
I hope that by now I have your attention. Understanding this situation is very important to you. Taking action to reduce the costs of financial products and services that you buy is critical to your pocketbook over your lifetime.
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.” [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.]
The next part of this series of articles will discuss the meaning of this Figure 4 graphic in the Siegel and Schwartz paper. Stay tuned via the RSS links in the right-hand column.
A helpful word from our sponsor:
DO YOUR OWN LIFETIME FINANCIAL PLANNING — easily in your own home!
VeriPlan lets you focus on your own particular financial needs, circumstances, and goals. VeriPlan is the most powerful and sophisticated do-it-yourself financial planning software available to you.
As a fully integrated lifetime personal financial planner, VeriPlan automatically and instantly projects annual values over your lifetime for your family’s income, living expenses, debts, taxes, taxable and tax-deferred assets, and property. Every VeriPlan lifetime projection presents your personalized financial information net of your federal, state, and local taxes and your investment costs.
Tags: financial planner
Personal Financial Planning
- You are a financial industry profit center (Why allow the financial industry to help itself to your money?
This blog provides you with objective information that could solidify a lifelong commitment on our part to low cost investing. Low cost investing is how you keep more of your own investments for your family, instead of naively giving your money to the financial industry.
- American Funds – The Investment Company of America – Class A Shares (AIVSX) net a +3 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 [...])
- Screening Index Mutual Funds with IndexUniverse.com (Screening index mutual funds on-line with IndexUniverse.com
In this article, The Skilled Investor discusses how to screen index mutual funds on-line. This article focuses on using the free index mutual fund screener and database available at IndexUniverse.com.
We also discuss how to apply our seven scientifically based mutual fund screening criteria.
In a previous article, The Skilled Investor [...])
- The Financial Services Industry is Still the Largest S&P 500 Sector – Even after the Collapse of its Stock Values (For three decades, the market value of the financial services industry segment within the Standard and Poors 500 composite index rose steadily to reach 21% in the middle of 2007.
This article updates an August 2007 article, "The Biggest Personal Finance Story of the Past 30 Years," which was published just as the real estate bubble [...])
- Vanguard Institutional Index Fund (VINIX) captures the Best +10 Fund Authority Score (The table below in this article presents The Skilled Investor's Fund Authority Score and other information for the Vanguard Institutional Index Fund.
The diversified investment fund strategy of the Vanguard Institutional Index mutual fund (VINIX)
According to its prospectus filing on the U.S. Securities and Exchange Commission EDGAR system, the investment strategy of the Vanguard Institutional Index [...])
- When to Take Social Security Retirement Benefits (When to Take Social Security Retirement Benefits?
Concerning when to take Social Security retirement benefits, the Boston College Center for Retirement Research has some research in their publications section that addresses this subject. In particular, see "SHOULD WE RAISE SOCIAL SECURITY’S EARLIEST ELIGIBILITY AGE" by Alicia H. Munnell, Kevin B. Meme, Natalia A. Jivan, and Kevin [...])
- How Investment Securities Are Valued – Snapshots in Time (
Snapshots in time - How investment securities are valued
Every securities market transaction requires a buyer and seller with differing viewpoints.
Markets can operate, because there are differences between investors in their assessments of the intrinsic value and risk of securities.
Current investment values vary in the eyes of the many beholders of investment market securities. Knowledgeable participants [...])
- Schwab S&P 500 Index Fund – Select Shares (SWPIX) achieve a +8 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, objective, and realistic summaries of mutual funds and ETFs for comparisons within [...])
- 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." [...])
- 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 [...])
- 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 [...])
- The Economics of the Financial Investment Advisory Industry (Everyone has similar, yet distinct, financial planning needs regarding their families' financial futures.
While more wealthy people (think millions of dollars) have greater complexity to their financial affairs (caused largely by our incredibly convoluted U.S. personal tax codes), everyone needs sophisticated financial lifecycle planning. Whether wealthy or not yet wealthy, families need a personalized way to [...])
- 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 [...])
- Fund Authority Scores for Stock ETFs and Mutual Funds – Fund maturity and operating efficiency (
Fund Authority Scores rate mutual funds and ETFs on the most important economic factors affecting long term diversified stock or equity investment fund performance. This article explains the investment fund maturity and operating efficiency factors.
<<-- Go to Part 2
Parts 1 and 2 of this article discussed the first three, most heavily weighted factors used in [...])
- 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 [...])