Just as the German’s are in talks to buy the NYSE, the very symbol of American capitalism, to become the world’s biggest financial exchange, the average investor is faced with confusing issues about where to invest and what to buy.
Who hasn’t been there. Time for dinner and too many choices from the fast, frozen or take-out food aisle. Finally you end up opening a can of something, eating a bowl of cereal over the sink or calling for the local pizza delivery. That’s what happened to the investment business. With all the talk of regulators ensuring full disclosure and transparency for the small investor it’s more confusing than ever.
Want a mutual fund? By the time you research, review, grade and decide which to invest in it’s time to retire. In 1945 there were 73 mutual funds. I am sure there were about 50 too many even back then but wait…in 1990 there were over 3,000 with over 3,100 number of share classes. By the time 2000 rolled around there were over 8,000 funds with 16, 738 share classes. Today we’re still around that number of funds but the number of share classes, due to regulations, has swelled to over 21,000. (According to some about 1400 of those funds will be rolled into other funds or simply closed by this time next year.)
Let’s not forget how many stocks there are available on the legitimate exchanges. Commodities, you ask? You can bet on cotton, soy, gold, corn, sugar,wheat or just about anything that grows, moos, baas, oinks or is mined. Then there is the currency market. Even though most of us have a tough time making change (take a peek at the cash registers at Wal-Mart or McDonalds they do the thinking for us), the big thing this past year for the average investor is the currency markets. Want to bet the yen versus the dollar or ruble, someone will take that bet, leverage it and charge you for the privilege. Several firms went public this year that specialize in currency trades and more, you bet, are coming.
Did I forget the Exchange Traded Funds and Exchange Traded Note markets? From only a handful ten years ago to over 1,000 today and a lot of them cover the same territory. You can buy an S&P-500 index fund from a variety of vendors. The difference may be pennies in costs but with billions at stake management firms keep rolling out the product for your investment dollar.
Wait. Then there are the annuities being issued. There are fixed, variable, indexed and a combination of two or three. With thousands of insurance companies and each offering a full menu of annuity product I’d guess another 1,000, at least available to review and examine. Forty years ago if you went shopping for a guaranteed product there was fixed annuities, period.
Not satisfied the investment factories are working overtime creating new and complex products from the wild world of derivatives. Some of these hybrids are so exotic that a mere handful of people understand them; which doesn't stop the brokers from selling them to Joe & Judy Mainstreet. Remember CDOs? Those collateralized debt obligations that few understood but sold to every bank in every corner of the world, their back.
I forgot to mention penny stocks, hedge funds, private investments, limited and general partnerships. Did I include closed-end mutual funds? The biggest market is still the bond market with corporate, government and municipal offerings in all manner of grade, yield and maturity.
Then there is the foreign markets with some of the biggest overseas companies listed on our domestic exchanges as ADRs.
If that doesn’t catch your attention there is the IPO or Initial Public Offering market of new stocks or old companies taken private gussied up a bit and brought back as new companies (GM, Dole to name two).
On top of that you cannot turn on your computer without an ad from Joe Blow selling you on a chance to become a millionaire by buying his investment news letter. Which if you do you won’t.
Getting cross-eyed? I’m in the business and this is getting nuts. I cannot imagine what this business will look like in another decade. I bet it’ll be bigger, more complicated and expensive for the average investor. It’s the way it is heading.
But, no matter if the business dials itself down or grows to a giant pumpkin the one thing that will never change is risk. As long as the average investor understands that all the products and concepts are there to attract saving dollars and make money for banks and Wall Street and are not created to guarantee return of or on principal; you will be just fine.
I thought I’d remind you one more time.
Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.
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