"Investments are subject to Market Risk. Read the Prospectus Carefully." Whose Capital is it anyway?

June 27, 2016

We hear the statement from banks, retirement stock firms, mutual funds and major financial institutions all the time "Your investments are subject to market risk. Read the prospectus carefully" and all that regulatory required statements every time. We all know that there is a market risk that our investments and savings may not accrue additional rents, interests, or profits due to economic conditions or industry growth or company profits where our investments are committed in the forms of stocks and bonds.  It is understandable.

 

However, when people get to see no further accrual rather erosion, after years of savings, they become easily manic. Often people hear only panicking statements from media, federal financial authorities, and investment companies alternatively every other week or everyday some thing gone wrong with stocks because employment numbers, interest rate, government budget or some financial tycoon was sneezing then immediately  stock indices dive; then suddenly the next week or day, we hear world leaders have reached a consensus "free-market capitalism is the new god in Moon" and that "gold is found in Mars", then markets become exuberant and the stocks jump up 10% at once.  

 

Middle class population - whose retirement savings and their future earnings vested in stock market - are bewildered by this volatile stock indices and the erosion in their retirement value, and are deeply worried not knowing what to do. Can they get glued to the computers day by day, and trade their portfolio like stock traders - which is impossible thing to do.  Can they withdraw all their funds and put it under the pillow? That will result in more taxes, and in the absence of good interest from banks, they still will be under-invested for their retirement. Now the fear of future stalks for ever...

 

Does government have no saying on this predicament? Can it absolve itself from responsibility stating that "these are private investment affairs and the individuals' choice". Don't the retirement investing institutions have the responsibility to guarantee at least the original value of their savings if not additional rents or profits? Can't the regulators, experts innovate methods to eliminate the risk both in short term and long term? 

 

Yes, Indeed. Yes, they can if there is a will. And they should because most of the capital and economic growth of many leading industrial economies and emerging economies are the result of capital flow from the savings of working middle class population. Following is the argument in support of reforming the capital markets. 

 

"Statistical data point to that more than 50% of the stock ownership in fortune 100 companies are that of institutional investors, and more than 50% of the entire stock assets in the United States belong to that of larger population channeled through institutional investors. According to a recent report published in OECD Journal of financial markets (Celik and Isakkson, 2013), within OECD economies, the combined holdings of all institutions as of 2011 was to the tune of USD 84.8 trillion. Out of this, 38% (USD 32 trillion) was held in the form of public equity. The largest by far were investment funds, insurance companies and pension funds. Together they managed assets with a total value of USD 73.4 trillion, of which USD 28 trillion was held in public equity. In 1960s individual investors held 84% of all publicly listed stocks in the United States. Today they hold less than 40%. In Japan, the individual direct shareholdings are even smaller, and in 2011 only 18% of all public equity was held by individual investors and the remaining were held by institutions. Given these statistics, it is not an exaggeration to suggest that the float and liquidity of stocks are primarily rendered by the foundation provided by savings of larger public channeled through institutions (Celik and Issakson, 2013), and this data reinforces the importance of protecting the long-term interests rather than short-term exuberance witnessed in markets. In a broader sense, the OECD economies are middle-class in character, that is: economies of the middle-class, by the middle-class, and for the middle-class primarily supported by the jobs, savings and investments of larger sections of the society." 

 

For full article, read the following posts

 

https://www.linkedin.com/pulse/markets-governance-efficiency-lack-thereof-senthil-kumar-muthusamy

 

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