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What Happens on Wall Street Does Not Stay on Wall Street

Updated on April 6, 2008

Wall Street and Main Street are more linked than you may think.

With all the recent news of pain and suffering coming from Wall Street the rest of the country isn't exactly floating on Cloud 9 on Main Street. The unfortunate part of all of this is the prevailing belief that Wall Street is full of money-grubbing capitalist swine and they are the reason that your pockets are feeling pinched so far this year. We crave another Enron scandal in the news. We can't to wait riot in the streets with torches and take down the latest investment banker or corrupt CEO who's destroying his employee's pension plans. When these things happen, believe me, I'm right there beside you lighting my torch off of yours.

But while there are certainly the Fat Cat types on Wall Street you wouldn't want to touch with a ten-foot pole, most of this is untrue. I know, I know... it's hard to sit back and watch people with six- and seven-figure incomes and not have feelings of resentment and hatred. When they go down and we're hurting we want to think they must be causing this to make a big buck off of us.

The truth is so many elements lead to a market crash, or a recession, that to blame Wall Street is not even half of it. When economic conditions worsen and the market gets hit all those nice bonuses that make up the real salaries of these people start to disappear. There's not a banker, broker, or beggar on Wall Street willing to throw away their bonus in order to keep the poor poorer. In fact, Wall Street does work for the little guy. Think of all your retirement accounts, mutual fund investments, and perhaps pension plans. When Wall Street does well these things also do well... very well. Your 401(k), for example, is directly linked to market performance. And as I said earlier - when the market is up these guys' bonuses are way up. When the market is up, your 401(k) and pension and IRA accounts and all sorts of neat little piles of forgotten monies you're stashing away for retirement are also way up.

The point of all this is when Wall Street is hurting Main Street feels the pain as well. An unfortunate side effect is the anger, resentment, and hatred for those "in power" who supposedly caused all of this. The general public has little knowledge of how major investment firms or hedge funds work, and the mystery of it all can easily fuel negative emotions. But there is great potential for these institutions to help the middle- and lower-classes.

The potential for Wall Street to help us out.

Let's look at an example. In 1998 the University of Chicago, my Alma Mater, had an endowment of around $2 billion. By last year this endowment was about $6 billion. So in a little over 8 years people gave 4 billion dollars to this schooL? Absolutely not. Take Yale for instance. Last year they posted returns on their endowment of over 20%! Their endowment is massive, it dwarfs University of Chicago's. These endowments grew in part because of Wall Street. Institutional investing means just that: these institutions invest their money in the market, and some Wall Street bankers actualize impressive returns.

Now I know what you're thinking: so what, these are elitist schools and where there's money and power there will always be a glass ceiling. But what does this mean for Main Street? These endowments are what pay for the brunt of financial aid to lower income students. This means that the brilliant kid sitting in an inner-city high school classroom with no hopes of affording college can attend one of these universities for next to nothing. The ability to grant access to the best schools in our country to over-achieving students with little to no financial abilities is incredible. The potential for institutional investing to shatter these types of glass ceilings and help make higher education more affordable for the most deserving students is there. The more returns universities see from investments, the more scholarships go to students in need. So when Wall Street does well these students receive the chance of a lifetime.

What's in store for us in the future?

I have more good news. Market conditions such as this generally signal a bottom,meaning these low levels are temporary. The market usually bounces off these so-called bottoms a couple of times before swinging around and rallying upward for another couple years. The best thing about this is a market bottom should be like a bargain bin for anyone who's not invested, or only partially invested. Now's the time to come in and do a clean sweep of some major companies, excellent mutual funds, and strong ETFs that are at historic low prices.

The next few years should be pretty exciting for the average investor. If you're sick and tired of leaving your financial fate in the hands of Wall Street then do a little research and get your hands dirty. A couple weeks' worth of reading, some free information on the web, and a reassessment of your investments on a monthly or quarterly basis will put you in a much better financial position than most other people in this country. I have another article about investing, mutual funds, and ETFs that should get you started. I warn you, it's not the best writing in the world - it was more or less just a set of notes or guidelines I published in a nifty little link for friends of mine who kept asking me for financial advice. But it should get you started, and I am always open to comments, questions, or requests for more in-depth information.

Good luck, and happy investing.


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      10 years ago

      How Wall Street can save the world: the power of institutional investing! How about a hub all about that? I'd like to get into that more.


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