Wikinvest Wire

The ownership society takes another hit

Saturday, November 29, 2008

It is not at all clear how (or if) the investing public is going to recover from the 2008 plunge in equity markets following the ongoing plunge in home prices that began in 2006. Many were led to believe that, in a worst case scenario, stock appreciation and real estate appreciation would alternate indefinitely into the future.

If one went down, the other would go up.

If they both went up, well, that was a bonus.

No one thought too much about what it would feel like if they both went down.

About every other day now, another story comes my way about a friend or relative who says, "Yeah, I sold everything in October. I couldn't take it anymore".

It's not difficult to understand that decision making process. There are enough things in life for ordinary citizens to worry about that overcoming the "fight or flight" instinct that makes us all such lousy investors doesn't rise very high on the list.

You have to wonder how they're handling it over at Money Magazine. The perma-bull staff has toned down their rhetoric in recent months as it became clear that no quick reversal was forthcoming. Last month's cover story was about keeping your money "safe" while you're waiting for the rebound.

Unless somehow we see Dow 14,000 again sometime soon (or at least Dow 10,000), the mainstream financial media and Wall Street firms are going to have a lot to answer for as it becomes increasingly clear that the ownership society that has been thrust upon Americans has not produced the results that were expected.

This well-done piece in the Wall Street Journal tells the story of how Wall Street has failed the individual investor, a concept that more and more people are beginning to realize.

With retirement accounts tumbling and millions of homeowners struggling to pay their mortgages, a realization is dawning on many Americans: The banks, brokerage firms, insurance companies and other players in the financial-services industry have failed them.

Thirty years ago, a typical consumer had a fixed-rate mortgage, a life-insurance policy, a bank account and an employer-paid pension plan. Nowadays, that same consumer may have a payment option adjustable-rate mortgage, a 401(k) retirement-savings plan, a home-equity line of credit and perhaps even a health-savings account instead of traditional employer-sponsored health insurance.

In the process, risks previously borne by big banks and employers have been placed squarely on the shoulders of consumers. Individuals increasingly bear the risk of interest-rate fluctuations, rising health-care costs, stock-market gyrations and outliving their retirement savings.
IMAGE Adam Gamradt, 31 years old, of Bloomington, Minn., believes the market slide has created a great opportunity to buy stocks, but he contributes only enough to his employer's retirement-savings plan to get the full company match. That's because he is dismayed by the plan's pricey investment options and lack of information on total plan costs.

"If I'm going to buy a BMW for anybody, it should be me," says Mr. Gamradt, an information-technology worker. "I wouldn't exactly say the financial-services industry is at war with your average American consumer, but it's d- close."
Adam is not alone. There are a lot of really mad people out there.


Anthony J. Alfidi said...

Wall Street likes to calculate 50-70 year return periods for its brokerage force to use, but most investors really only have a 30-40 year working life during which they can afford to invest heavily in stocks.

Lifecycle funds may be of some help here. Most people probably shouldn't control the timing of their market moves.

dearieme said...

A few years ago the editor of Personal Finance at the FT moved off to another job. In her valedictory column she opined that the (British) Financial Services industry did a lousy job and advised that people invest in property or, when property was too expensive, they should go to the Post Office and invest in National Savings inflation-linked Savings Certificates. For anyone capable of assessing when property is too expensive that will have proved excellent advice.

Al Czervik said...

"Most people probably shouldn't control the timing of their market moves."

Perhaps, but it's a pet-peeve of mine that the paternalists who run my 401-K plan don't give me as many investment options as I have in my IRA accounts. A lot of companies offer a brokerage window, but not mine.

Wall Street has been selling the "buy and hold" philosophy to the public for decades, now. Nowhere is that more evident than in the 401-K industry. Buy and hold is great in a secular bull market. It hasn't worked well over the past 10 years and it may be a long time before that is a workable strategy.

I'd like to see brokerage window options widely available to those employees with the know-how and desire to use them. And the employees who use them should be required to pay any reasonable additional costs for providing that service.

It's only fair since no one is guaranteeing me a comfortable retirement. It's my money. I earned it, I saved it and I'm going to be spending it.

Anonymous said...

Bailout 2008, a poem by David Jeffrey from Canada

Like a bloodied warrior,
laying broken and torn.

Like a dying soldier, hopeless and forlorn.

But the blood, it be green,
the color of money.

And the soldier is an economy,
and it is anything but funny.

Broken are it's people and shattered are their dreams.

Thanks to the ultra rich and their full proof schemes.

It is a tragedy with more pain to come.

Finance will be Hell, and their wills will be done.

tj and the bear said...

It's not just losses in home equity & stocks. A lot of people will lose their jobs, pensions, healthcare benefits, etc. They'll be slammed from every possible direction.

p.s.: Bummed I missed out on the latest contest.

John S said...

We could see Dow 10,000 by the end of the year in this "hope 'n change" rally. But it will make the inevitable drop to Dow 5,000 look that much worse next year.

Blissex said...

In America there are winners and losers. Few are the winners and many the losers.

Most voters have been voting enthusiastically for the policies described above, to deny fixed rate mortgages, final salary pensions, health care and so on to the losers, as they thought they would be winners. The real winners are laughing on their way to the bank.

«Wall Street has been selling the "buy and hold" philosophy to the public for decades, now.»

That strategy is meant to make people hoard stocks and thus to engineer an ever increasing rise in prices. Just in the same way that De Beers keeps the illusion of the scarcity of diamonds by making most buyer feel that "diamonds are forever".

Anonymous said...

While there is some merit to the point that we've shifted risk, etc, there is also the problem that in American one thing is missing that used to be here 30 years ago. That thing is RESPONSIBILITY!

1. Nobody MADE people get ARMs instead of fixed rate mortgages
2. Term life insurance is cheaper than ever, and only a completely irresponsible idiot would go w/o it.
3. Nobody MADE people spend their money on fluff and faux symbols of affulence instead of saving it in a "safe" bank account.
4. "Typical" Pension plans would not guard against inflation and even 30 years ago would not provide more than a modest retirement. My grandmother collected a teacher's pension and her husband's social security and her version of that and even with all three combined lived out her days in a 1 br apt, drove a 25 y/o car, and barely got by in a period of low inflation. Unless you worked for IBM, a pension was not that hot. My wife's pension at a large corporation was top notch and even with her high income level that paid just about $4000/year towards retirement. If she worked 30 years there that means she'd have enough to equal about 20 percent of her income at retirement. Big whoop!

This gets to the REAL crux of our problem. There is a victim mentality and "blame game" being played, where instead of encouraging financial education and personal growth, we encourage and reward seeing yourself as a victim. Instead of hiring some sociopathic sales type calling himself an "advisor", why not get off your lazy rear end and LEARN about investing? Use the time you spend watching American Idol if you must.

Anyone who doesn't understand economics and can't read company financial statements yet invests in the stock market is a fool.

So now we've come to blaming stupidity and self-imposed ignorance on "the man". Becuase it's easier to blame "the man" who has it in for us than to admit we've become a nation of idiots.

philip said...

@11:25 Anonymous,
Great comment. Take the true financial criminals and jail them, but for the rest who think that they have been victimized and that someone else ought to be looking after the future, you get what you get. You hoped to get something for nothing and instead you got nothing for nothing. If someone came door-to-door and said "give me 30% of your income and I'll give you this paper that may or may not make you wealthy in 30 years, no promises" you would think it stupid to agree. But change "door-to-door" into "at the brokerage" and those "papers" are stock certificates and suddenly people think it is perfectly normal. Now they have found the salesman ran off with the money. Surprise. But it was those who stopped caring if the stocks paid dividends, and those who will buy stock in companies without transparent financials that got us here. If you wouldn't buy the stock they'd have to be more honest. And I tell my family the same thing "if you can't do proper due diligence on an investment then you shouldn't invest". Taking business people (or pretty much anyone) at further than the legal minimum of their word is sure to get you fleeced.

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