How Wall Street Has Failed the Individual Investor

by: Tim Iacono December 01, 2008    

Tim Iacono

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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.

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This article has 58 comments:

  •  
    Nov 30 08:22 AM
    The financial services industry has not failed us. These criminal pigs, through fraud and manipulation have robbed us of our security and welfare. Unfortunately, Congress, the Fed and Treasury have allowed them, through bailouts and guarantees, to come back to the trough for another meal and again at our expense.

    Reply | Link to Comment
  •  
    Nov 30 08:39 AM
    Good article, but the list of entities that have failed us did not include the worst ones of all: the federal government and its illegitimate creation, the Fed. Why don't we demand that the Fed stop watering down the lemonade by halting the creation of fiat money? In fact, why don't we demand that the Fed be abolished altogether. And it's about time we started letting unprofitable corporate giants fail instead of foisting their problems off on the already overburdened taxpayers.
    Reply | Link to Comment
  •  
    Nov 30 08:44 AM
    That's the "ownership society" we've been sold, aka yoyo (you're on your own).
    Reply | Link to Comment
  •  
    Nov 30 08:46 AM
    All we need for the next bull market to begin is for more weak hands to say "Yeah, I sold everything in <fill in the blank>. I couldn't take it anymore". If people wait until Dow 14,000 to get back in, they will have missed 80-100% of the next bull market (assuming we don't go below Dow 7,000)

    That said, Wall Street has failed us. Our money managers should (and I think will in the future) insist on a far greater payoff to investors.

    The new statistic I'm watching is the Exec Comp / Dividend ratio. Too many companies have been paying hundreds of millions to its executives while paying no dividends to its owners. Heck, the dividend yield on the S&P 500 (supposedly Blue Chip stocks) got down to, what, 1%?

    Wall Street money managers should've been demanding more.
    Reply | Link to Comment
  •  
    Nov 30 09:09 AM
    Truer words have never been written. In the wall street Ponzi scheme, those with access & know-how are able to manipulate the individual investors. The government has sold its people to the street with 401ks, Roths etc... - one way pumping of money from individuals to the street.
    Reply | Link to Comment
  •  
    Nov 30 09:20 AM
    Crooked and corrupt Wall Street manipulators and Washington Politicians (also crooked and corrupt) have soured me permanently on investing in stocks and my trust of Politician's can go no lower. If, the biggest two letter word in the world, I could E V E R even break even (extremely unlikely) I will pull all my money out of the market, never to return. The individual investor has been had!!
    Reply | Link to Comment
  •  
    Nov 30 09:31 AM
    The financial services industry DID fail us. Do NOT trust your money with these crooks. Do your own homework – even if takes you hundreds of hours to learn how to invest. Otherwise, they will rob you again at the next opportunity.
    Reply | Link to Comment
  •  
    Nov 30 09:59 AM
    wall street couldn't care less about the individual investor.
    > jack
    Reply | Link to Comment
  •  
    Nov 30 10:11 AM
    Reread the article. The two guys who were held up as examples of how Wall Street failed them was an IT guy and a leadership and communications trainer. I don't believe there is a lot of job security in either of those fields, in fact, I would think that both men welcomed the high turnover rate when the economy was competitive, and now that we are in a recession they are having second thoughts. All they needed to put in the article was a real estate broker and you have the vulnerable livelihood network trifecta. As long as the WSJ keeps writing articles whipping the fearful up in a frenzy, then the market will keep going down, no matter what the government does to prop it up, because this recession is not driven by a credit crisis, lack of liquidity but a lack of trust in the market. This is the Rupert Murdoch effect. If you read the New York Post every day, you are used to it.
    Reply | Link to Comment
  •  
    Nov 30 10:13 AM
    "If you hold a diversified portfolio for the long term you'll be fine"
    "Long term you're looking at 9 to 11% pa "
    " Cash and equivalents will leave you far behind in the race against inflation"
    " A mutual fund is the best bet for the average investor and is bound to beat the limited skills and resources of any individual"

    I have been a good dog and listened to all the bs.

    I am now retiring with about 40% of the money I earned 1 hour at a time with my hands and head.
    Mad ? I have never been so enraged.
    People like me must stay clear of this game.
    The will milk you throughout your working life and then till you die.
    Reply | Link to Comment
  •  
    Nov 30 10:27 AM
    I share the cynicism of the many readers here who are just plain sick and tired of the obfuscation and manipulation of the Wall Street elite and their corrupt mignons in Washington.

    Until the criminals are rooted out, prosecuted and punished, no one should return to the stock market. Until investors are protected through meaningful and reasonable regulation under a watchful SEC armed with criminal sanctions against violaters, we should stay the hell out.
    Reply | Link to Comment
  •  
    Nov 30 10:35 AM
    When people were at cocktail parties bragging about owing POT the word criminal never entered into the conversation. Blamers blame. Investors invest.
    Reply | Link to Comment
  •  
    Nov 30 10:45 AM
    Regulation failed us. This caused the sub prime collapse and on going
    depreciaton of home values. Lack of oversite in financial markets caused derivitive cave ins hedge fund melt downs and collapsed finance companies,
    Blame the congress that voted on all these regulations. Learn how the system does not work anymore. It is over run with lobbists and action groups with their own agenda. We can't afford to let the country fall off
    a cliff because of greed and stupidity.
    Our credibilty is now weakened and global financial companies don't trust our "base/bonus pay Mr fuld 500 million to run Lehman into the ground" mentality. The lending markets have frozen.
    OUR FAULT
    Reply | Link to Comment
  •  
    Nov 30 11:17 AM
    Like most "individual investors" I started with a full service broker, who advised me to buy the funds that made HIM the biggest commissions. The longer I stayed with him, the "broker" I got. When I complained to management, the Asst Mgr took over my account and sold me proprietary funds that the Brokerage was selling off because they knew the bottom was about to fall out. I again got "broker".

    When I told a friend my story I discovered that he had been trading for decades, making money all along. I listened and learned and now trade with a discount broker - IB - and make all my own decisions other than the ones I pay for.with advisory services.

    Full service brokerages and 401k managers are in it for THEIR profit, not the customer's. Anyone who's not in charge of his own accounts is a gambler, not an investor.
    Reply | Link to Comment
  •  
    Nov 30 11:53 AM
    I regard the situation as the natural outcome of a total lack of regulatory oversight, a laissez faire ideology carried to its logical extreme. CDS were exempt from regulation. The credit rating agencies received no meaningful oversight, yet the impact of their findings was hardwired into swaths of the financial system. Mark to market accounting was endorsed as gospel and has had a destructive effect on regulatory capital. Marth Stewart and Mark Cuban were pilloried for insider trading, but naked short-sellers and CDS manipulators were coddled.

    The logical extension of this course of conduct was Paulson running around like a chicken with its head cut off, nationalizing and/or seizing and dismembering some businesses, propping others up, picking the winners and the losers, totally destabilizing the finacial system.

    Wall Street operated with their normal efficiency and greed, what else is new?
    Reply | Link to Comment
  •  
    Nov 30 12:23 PM
    Jimmy, what sort of jobs do bring with them job security? You say IT, HR, and real estate sales don't, but what careers do? When Citi is peeling off 53,000 employees and every other corporation is doing the same, what is secure? Even government employees are being laid off!
    Reply | Link to Comment
  •  
    Nov 30 12:34 PM
    welcome to the wake up.the dumb - dumbs are finally waking up.i got out @ 14,000 dj not because im smart but because i got scared. this country exists on small print. the smaller the print the worse the deal.nobody is in your corner.think for yourself. the anal sts dont know anything & all have an agenda.the new motto on our monopoly money should be "too big to fail,too many to jail". i started to say that wall st was turning into vegas years ago.you lose slower & nobody brings you a drink. dumb- dumbs learned nothing from the s&l fiasco,the tech bubble,enron & world com.even now the scoundrels have their hands in your pocket.but the beer swillers are still filling the stadium(like rome long ago) & havent a clue. they cant name 3 supreme cout judges but know all the sport scores.soon they will be eating their granite counters.no accountability,ethics,... ceo's.selfserving boards, & papering the world with phony AAA worthless paper.sadly,this country is in decline.
    Reply | Link to Comment
  •  
    Nov 30 12:39 PM
    The lesson learned from this "total liquidation" crash is FDIC insured CD's and gold have a place that every portfolio, an advice wallstreet financial advisors are not trained to impart. Another lesson learned is that all bonds went down in value and they are not same as CD's.
    Reply | Link to Comment
  •  
    Nov 30 01:13 PM
    I am a modest investor that has just about lost everything.I am holding on with a wish and a prayer.Don't worry people the rich will suffer .With this kind of economy, which is in free fall its just a matter of time.The rich and powerful in this country made one great mistake they pump themselfs up that they don't need regular people ,that they are better.Well surprize if we the regular people don't spend you go broke.The power in this country is truly the people.We must stop being suckers to goverment and the rich.I am keeping enough money just in case I need a gun.Be prepared,I was a Boy Scout.Ha,Ha.
    Reply | Link to Comment
  •  
    Nov 30 01:17 PM
    Most people have recently used leverage to make gains that are unreasonable and they feel cheated if they can't double their money every few years.

    But using ordinary rates of return above inflation (safe rate 3%, speculative rate 10%) it takes much longer than a few years to double your money.

    With a 3% rate of return it takes about 23 years.
    With a 10% rate of return it takes about 7 years.
    With a 20% rate of return it takes about 4 years.

    www.lazymanandmoney.co.../

    Very few sane financial advisers think it is possible to make 20% per year (above inflation) without a lot of risk. Even 10% a year is considered risky.

    And yet Treasury Bonds have not provided the safe, risk-free 3% return ABOVE inflation for many years so there has not even been a risk-free 3% above inflation rate available for years.

    (In a well functioning economy you are supposed to be able to make no more or LESS than 3% RISK FREE above inflation according to Security Analysis by Graham and Dodd and other technical analysts.)

    However, if you started by depositing $12,000 and SAVED $1000 per month for 20 years, at 3% compound monthly, you would have $350,000 at the end of the twenty years.

    www.math.com/students/...

    If you started with $12,000 and invested $1000 a month at only 6% compounded monthly you would have $500,000 at the end of 20 years.

    The fact that for THIRTY YEARS there have NOT been any SAFE yields of 3% above inflation might be a major reason for the lack of savings in America and for the speculative bubbles of the last thirty years.

    Americans have forgotten how to save and learned how to speculate for a reason.

    If we enter a deflationary period which accompanies a historical decline of the American Empire, long standing habits will have to change but they will probably change slowly and with a lot of pain.
    Reply | Link to Comment
  •  
    Nov 30 02:08 PM
    Wish I had written this post, I can only say


    On Nov 30 12:34 PM notsosmart wrote:

    > welcome to the wake up.the dumb - dumbs are finally waking up.i got
    > out @ 14,000 dj not because im smart but because i got scared. this
    > country exists on small print. the smaller the print the worse the
    > deal.nobody is in your corner.think for yourself. the anal sts dont
    > know anything &amp; all have an agenda.the new motto on our monopoly
    > money should be "too big to fail,too many to jail". i started to
    > say that wall st was turning into vegas years ago.you lose slower
    > &amp; nobody brings you a drink. dumb- dumbs learned nothing from
    > the s&amp;l fiasco,the tech bubble,enron &amp; world com.even now
    > the scoundrels have their hands in your pocket.but the beer swillers
    > are still filling the stadium(like rome long ago) &amp; havent a
    > clue. they cant name 3 supreme cout judges but know all the sport
    > scores.soon they will be eating their granite counters.no accountability,ethics,...
    > ceo's.selfserving boards, &amp; papering the world with phony AAA
    > worthless paper.sadly,this country is in decline.
    Reply | Link to Comment
  •  
    Nov 30 02:27 PM
    actually i listened to cramer or someone else on the steet.com, and as long as you are active in getting news in the industry, not passive but active.

    nevertheless i did not diversify from pc related stocks, i never understood the financials. nor ibm/orcl well my p/f has only fallen 15-20 percent as a result.

    i listened to Robert Kiyosaki's and made my money active and I listened to the Motley Fool NPR broadcast many times over to learn what was not taught in school

    can we fight city hall?
    Reply | Link to Comment
  •  
    Nov 30 03:46 PM
    Before the "Fed" was established, the economy had frequent deep declines followed by recoveries. Many companies, of all sizes, went broke during the declines. After the "Fed" was established, there were still losses and gains, but they were less frequent and not so extreme.

    The "Fed" does, to a considerable, stabilize the money supply. Even with no government action, the money supply can shrink and expand, thereby exacerbating changes in the economy.

    As for permitting corporate giants to fail, that is an issue which I do not wish to tackle. There are valid arguments on both sides of the issue.

    I, for one, would not like to see the "Fed" abolished, even though it is far from perfect.


    On Nov 30 08:39 AM Vigilance wrote:

    > Good article, but the list of entities that have failed us did not
    > include the worst ones of all: the federal government and its illegitimate
    > creation, the Fed. Why don't we demand that the Fed stop watering
    > down the lemonade by halting the creation of fiat money? In fact,
    > why don't we demand that the Fed be abolished altogether. And it's
    > about time we started letting unprofitable corporate giants fail
    > instead of foisting their problems off on the already overburdened
    > taxpayers.
    Reply | Link to Comment
  •  
    Nov 30 04:05 PM
    Boohoo - No one is going to change human nature. Period. Going forward, the best we can hope for is a better educated and aware citizenry. Be it the individual investor or the Wall Street banker; there were far too many individuals chasing high returns, and if that meant gaming the system, so be it.

    On the bright side, by refusing to follow life's lessons, we now have an opportunity to relearn what so many of our ancestors knew:

    <blockquote>You reap what you sow.</blockquote>...

    As Stephen Covey asks us: Can you "forget" to plant in the spring, goof off all summer, and then hit the ground real hard in the fall to bring in the harvest?
    Reply | Link to Comment
  •  
    Nov 30 04:53 PM
    Wall Street = History. All that is uncertain is the duration/extent of the collateral damage - hence all the squabble about nothing.

    If you think this wasn't orchestrated think again. Same old tricks, same old outcome. Rich get richer, poor get poorer -- Ask the French.

    Mark this post, the United States is now flight 93, only this time the pilot's have hijacked the vehicle under the old fashioned premise, "create the itch so that others pay you to scratch it -- the business may be dirty but the money is always clean -- let's roll.
    Reply | Link to Comment
  •  
    Nov 30 05:08 PM
    Hey FRE, you do know that the "Fed" is a private bank don't you?

    You do know that vast sums of "money" is being made by those shareholders don't you?

    You do know that all the "money" you've ever made isn't even yours don't you?

    You do know that those who own the currency own you don't you?

    Put the pieces together my friend, you will soon be bludgeoned by the Fed that you speak so highly about -- last place in the soup line.
    Reply | Link to Comment
  •  
    Nov 30 06:01 PM
    The market is fundamentally rigged to favor the big guys and gamblers against small individual retail investors, who should not be in the market as it exists. The SEC, Treasury, and Fed have all failed. The market favors hedge funds, program traders, short sellers, large institutions, and speculator/gambler short term traders. Short selling and program trading should be outlawed on stock exchanges and confined to the currency and commodity exchanges. Prices should be set by willing buyers and willing sellers. Where else could short sellers be allowed to drive down prices? Buyers do not short used car prices in high volume to drive down prices. Why allow in stock markets?

    As long as the markets continue to be rigged as they are, small investors should stay out of stocks, and let the speculator/gamblers and big guys kill each other.

    This really ends the idea of privatizing social security and the "ownership society."
    Reply | Link to Comment
  •  
    Nov 30 07:18 PM

    What's new is that this is the biggest burn in history for individual investors.

    If things happen to recover, there will be a huge wave of selling and purchase of tangibles; precious metals and land.

    A LOT more money will be leaving Wall Street.

    If they don't fix the wagon, there will be civil unrest for certain.
    Reply | Link to Comment
  •  
    Nov 30 07:19 PM
    There are many denials of reality which automatically disqualify millions or people from joining the ranks of successful speculators. For instance, to moan that “manipulators”, “insiders”, “they”, “the big boys”, “program trading”, “hedge funds”, "the Fed" or "the government" are to blame for one’s losses is a common fault. Anyone who utters such a conviction is doomed before he starts. By my observation, after more than twenty years in the business, the biggest obstacle to successful investing is the failure to merely even recognize and accept the simple fact that losses are part of the game, and they must be accommodated. The perfect trading system does not exist. Expecting, or even hoping, for perfection is a guarantee of failure. Speculation is akin to batting in baseball. A player hitting .300 is good. A player hitting .400 is great. But even the great player fails to hit 60% of the time! He even strikes out often. But he still earns seven figures a year, because although not perfect, he has approached the best that can be achieved. You don’t have to be perfect to win in the markets, either; you “merely” have to be better than almost everyone else, and that’s hard enough. If you don't know what you are going to do in order to be successful on a daily basis, you have no business risking any of your hard-earned money in the markets.

    I know that's difficult to accept, but by now everybody has learned how easy it is to lose when all you are doing is "hopin' and prayin"
    Reply | Link to Comment
  •  
    Nov 30 08:42 PM
    three truths in life--

    1-a house is a place to live[before and after caves]

    2-markets are unpredictable[since bartering began]

    3-change is inevitable


    our ancestors survived, so are we apt to do the same. the human spirit to struggle/survive/impro... has not changed.

    all of this history before newspapers, radio, tv, etc.

    WHO TOLD US HOW TO GET THIS FAR?
    Reply | Link to Comment
  •  
    Nov 30 09:13 PM
    I understand the risks I've been in and out of the market for 20 years.I just can't get passed the lying,thiefing scumbags.Is greed really worth all the pain people suffer?Is it really worth bring down the country and the world?If these scum think it is then there is something truly wrong.The only reason I was involed in the market was to try to have a little extra money for when I turned into a oldman. Older people in this country are walked all over,but with a little extra I thought it mig