How Governments and Banks Transferred Investment Risk to You

In the early 1980’s the great boom began. It started when governments around the world realise they would not be able to pay the social welfare and pension and health needs of the Baby Boomers once they retired.

Then began the great train robbery. The train was the wealth management train and the money was yours. DOW goes from 1,000 to 10,000 since 1982

It became the mantra of government to tell Baby Boomers they would have to save for their own retirement. But have we got a deal for you they said!

Governments set about making it attractive for you to give your money to wealth managers who would invest it for you for 30-40 years so you would have plenty to retire on.

With tax concessions and in some cases like Australia mandatory superannuation contributions taken out of your salary before you got it, the great self funding retirement experiment had begun.

Governments licensed financial planners and fund managers so billions of dollars was funnelled into fund managers and the greatest Ponzi scheme of the last 30 years had begun.

Just look at the chart (click on it to go to the web page for a pig picture) to see how the DOW went up 10 times from 1,000 to 10,000 since 1982. It was flat from about 1960 until 1982. Then money started pouring into mutual funds for the first time. This was the funds gambling with your money. To be fair they were probably getting so much that they had to find ways to get rid of it.

What a business to be in! Governments forcing its citizens to give their money to someone else for 40 years at the rate of 6-9% a year. I’ll have some of that please.

In Australia all working people were forced to eventually contribute  9% of their salary into retirement funds, mainly controlled by fund managers and then the banks. Tax relief on contributions was the carrot. Even using a balanced portfolio up to 70% of that money could be “invested” in equities.

Using the buy and hold strategy, come rain or come shine 6.3% of the nations total salary was being pumped into the stock market. Any wonder it went up like it did?

That money is still accumulating. If we fail to learn from history we are doomed to repeat it. If the weight of money in enforced savings is pumped into the markets once again by fund managers chasing bonuses before genuine returns for their clients, we may well get a massive bull market move. So you may get the chance of a life-time to get your money back and get out of the markets. Or protect what you have with proper strategies to minimise losses and not just buying and holding once you recover your nest egg.

Back to how it all came about. Things all came together well over the next few years. Computers were appearing on desks and the Internet allowed for on line trading. Fund Managers were able to select the investment assets that made it easy for them to computerise everything and charge fees. Equities, Property, Fixed Interest and Cash became the primary assets in the risk profiles of most fund members.

This is not diversification of assets, its concentration of assets. Everyone investing in the same things in exactly the same way.

Funds were able to get their costs down and maximise their profits using this strategy. Over the years they were able to optimise their fund manager computer system to maximise profits for themselves. Westpac reported it made more money from its Wealth Management Arm in 2007 than it did from its Core banking. That can’t be right.

Until the 1980’s the only real way to save for most people was through term deposits in banks. But deposits dwindled as more money went into tax advantaged funds management under the plan for baby boomers to fund their own retirement.

In the early days buy and hold worked because not too many people were doing it. After that it became a Ponzi scheme. Too much money chasing too few assets meant funds were churning stocks by buying and selling to each other.

Banks saw what was happening and began buying up all the fund managers and made them part of their banks. Price was unimportant. Getting control of all that guaranteed money flow was.

It was easy because everything was booming. The Efficient Market Hypothesis and Buy and Hold Strategies had been marketed so well they were never questioned. When the markets did drop significantly in 2000 you were told to hang in there as the market always comes back. You were told to just look at the charts and you will see.

Now in 2007-2009 the great Ponzi scheme has crashed. Fund Managers cannot keep making exceptions to support their flawed buy and hold theories when people have lost their shirt and more besides.

But many countries like Australia are still forcing 9% of the nations salaries into funds which are preparing once again to gamble your money to get their bonuses back. They want things to get back to “normal” again – their normal.

The banks are also now awash with cash in bank accounts and term deposits. This is mainly due to government guarantees on deposits and fear of investing in equities at present. They are going to have one hell of a job getting people to put that money back into funds for some time to come.

So expect to see all sorts of charges being levied by banks to push you to move your money back into funds they can take a fee on and where the risk is all yours.

I know in Australia the banks want the government to remove the 3 year guarantee on deposits they gave at the height of the credit crisis. I wonder why?

Funny though they used that same guarantee to grab as much money as they could using the government’s triple A rating and were able to get that money cheaper than if they only used their own AA rating.

I believe there is an incredible conflict of interest with banks having control of wealth management funds. Having bank deposits and fund management means they control most of your wealth. Wealth Fund Managers need to be broken away from banks and become stand alone entities.

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