When most peoples’ retirement accounts increase at a good pace, few people care that huge profits are being made by a few investment wizards. (Note that in the five years from January 2003 to December 2007 the S&P 500 returned an average of over 12.8%.)
When you can turn $1,000 into $1,826 in five years, you probably aren’t going to complain much that the person who made this possible pocketed $40 or $50 (assuming you invested one time in a low-cost S&P 500 index fund).
A few reasons seem to account for the ire toward investment companies.
- First, even though $1,000 invested in 2003 could have increased by 82 percent over the following five years, in the sixth year, that would have fallen to $1,189, an amount that doesn’t quite keep up with inflation.
- Second, most people didn’t simply invest $1,000 in 2003 and wait. Most investors continued to invest all the way until the middle of 2008. If a person invested $1,000 at the beginning of each year between 2003 and 2008, they would have invested a total of $6,000, but at the end of 2008 they would have only $4,777 in their investment account. When taxes, commissions, and other expenses are taken into account, this number could be much lower.
- Third, this decrease of investments of about 20% hurts quite a bit more when the CEOs of the investment companies pocketed hundreds of millions of dollars over the same period.
I recently read an interview with Moha ed El-Erian, the CEO of bond giant PIMCO in Kiplinger’s Personal Finance (3/09). In talking about the call by many for increased regulation of financial markets, he says,
“After what we’ve seen recently, society will not leave unchanged a system that privatizes huge gains and socializes huge losses.”
This is one of the clearest things I’ve read about why we’re seeing a rush to regulate the financial markets. El-Erian’s quote sheds light on the value Americans place on fairness and equality.
On the one hand, Americans love rooting for the underdog. We love knowing that someone from a troubled background can rise to the top. But equally important to many of us is our belief that once the underdog rises to the top, he should remember his roots.
As we look at the executives at many financial companies, we feel they have looked out after their own interests while neglecting those of their customers. This sense of unfairness is magnified as we see tax dollars go to the companies that we perceive as putting us in this spot.
It can also be difficult to see the difference between money going to save the financial institutions vs. the people running the institutions.
The efficacy of the government’s response to our financial situation will only be known in time, but the impact of the government’s response has been felt by the psyche of the average American with investments. As we move forward, hopefully the response will ease the emotional impact as companies become healthier, home prices stabilize, and the unemployed begin to find work.
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Like this VERY much, especially the quote from El-Erian – really, really wise.
Overall, really like what you’re saying – and it needs to be said!