What caught my eye this week.
A new study from The Centre for Policy Research reckons the UK citizenry has £1.8 trillion (yes, that’s with a ‘t’) tucked away in cash and National Savings and Investments accounts.
That’s comparable to the total market capitalization of the entire UK stock market.
With inflation near-9% and even the best cash accounts still paying only 5-6%, cash is hardly a bankable strategy to solve all our savings needs. Especially when most of it won’t be earning anything like Best Buy interest rates.
What’s more, the implication that the British public could swap all their cash savings to become the collective owners of Great Britain PLC – as listed, anyway – is beguiling.
As a card-carrying capitalist, that’s the kind of taking back control I could get behind.
Opportunity cost
To quote from the report’s executive summary:
Britain’s neglect of retail investing is surprising in both practical and ideological terms.
In practical terms, incentivising more retail investors, and encouraging more retail investment, should increase the amount of deployable capital available across the UK economy. It should help individual companies achieve their full potential, support economic growth at a national level and, in turn and in time, reward those who have made those investments.
In a 2017 paper for the Centre for Policy Studies (CPS) on the retail bond market, Rishi Sunak pointed out that 55% of the US population was then invested in the stock market, vs just 19% of Britons. ‘That division,’ he said, ‘represents a vast store of underworked capital.’
Little has changed since then; recent statistics from UK Finance suggest that 10.6% of UK household financial assets are currently held in equity, compared to 36.2% of US households.
Moreover, thanks to modern technology and the growth of investment apps the barriers to entry are historically low – certainly when compared to buying property. The ideological arguments are equally strong. Retail investing can be rewarding on an individual level, in terms of self-actualisation and self-worth. But it also gives people an opportunity to shape the companies they invest in – to literally become an owner, which includes the right to vote on corporate pay, environmental issues and governance. More retail investment gives people a stake in the society and the economy of which they are part.
All music to my ears. Obviously we’re champions for long-term investing in equities and other assets, and for people taking charge of their own finances.
The report’s recommendation to scrap the distinction between cash and shares ISAs seems especially overdue.
And encouraging a stronger connection between people’s thinking about capitalism and the bounty we enjoy would be an almighty win.
I’ve long-lamented how so many prosper under our market system and free trade while simultaneously moaning about and decrying it – blaming corporations for everything rotten on the left, or turning to nationalism and protectionism on the right.
A true shareholder democracy could be run more for the many than the few(er).
Reality returns
However even as the site’s resident (naughty) active investor, I do wonder about some of the report’s other proposed solutions to getting more people invested.
Deliberately trying to involve more everyday punters in IPOs, say. Or curbing the risk disclaimers around investment products.
These things are only a panacea in an ideal world, where people do even half as much research about investing as they put into planning their holidays – and where the typical financial advisor is more like a doctor than an estate agent, or worse.
Two decades of writing and talking about investing at Monevator leads me to suspect that a dash for retail’s cash would cause as many problems for everyday investors as it would solve.
If we could get several million more people investing more in low-cost index funds then sure, that’d be great.
If millions more people learned about and followed a sensible path to financial independence, the only downside from my perspective would that this website would be out of a job.
But you hardly need to be Martin Scorsese to picture what directing £1.8 trillion in cash towards far-riskier assets gate-kept by a freshly-deregulated financial services sector could look like.
Not so much The Wolf of Wall Street as The Silencing of the Lambs.
Tell Sid to leave the fantasy stockpicking-for-all stuff back in the 1980s.
Have a great weekend!
From Monevator
The Slow and Steady Passive Portfolio update: Q2 2023 – Monevator
More rooting around in the rubble of the bond market crash – Monevator
From the archive-ator: Personal time management for fun and profit – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
UK house prices post biggest annual drop since 2011, says Halifax – Reuters
70% of properties sold in Central London this year bought with cash – Guardian
‘Crippling duty hikes’ to raise prices for 90% of wines sold in UK – Yahoo Finance
Brian Winterflood, champion of small listed companies, 1937-2023 [Search result] – FT
Older workers who retired early in the pandemic were ‘forced into poverty’ – Guardian
Reviving the Imperial units push [On-brand for Brexit: total PITA and pointless] – Politics Home
Renewables go gangbusters, but the transition does also needs more nuclear – Gregor Letter
Products and services
Martin Lewis issues a deep fake scam alert, pretty unnerving [Video] – via Twitter
Which was the cheapest UK supermarket in June? – Which
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
The odds of winning with Premium Bonds are now near a 15-year high – This Is Money
Amazon Prime: is it worth it? – Be Clever With Your Cash
The five cheapest cities in which to be a first-time buyer – Which
Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
Why the first Bitcoin ETF that is approved will probably win – The Block
Former rectories in the UK for sale, in pictures – Guardian
Comment and opinion
Bond bull markets: lessons from the past [Search result] – FT
What’s your funded ratio? – Oblivious Investor
Numbers on a screen – The Belle Curve
Andrew Bailey versus the renters [Search result] – FT
Contrarians are usually wrong – A Wealth of Common Sense
The (Jimmy) Buffett portfolio – Fortunes & Frictions
There’s no magic pill for creating wealth – A Teachable Moment
Remembering the Japanese market’s multi-decade boom and bust – Econ Soapbox
Why I retired – Humble Dollar
Reflections on the inventor of modern portfolio theory – Morningstar
Understanding the modern monetary system [PDF] – Cullen Roche
Podcast mini-special
Do UK property prices really double every 10 years? [Podcast] – The Property Podcast
The spectrum of wealth [Podcast] – Morgan Housel
Key ingredients for a good retirement [Podcast] – Creative Planning
Andrew Lo on finding the perfect portfolio [Podcast] – Morningstar
Naughty corner: Active antics
Against Cassandras: on interest rate normalization – Klement on Investing
How to read an S-1 – Capital Gains
Guide to the markets: Q3 2023 [PDF] – JP Morgan
11 ways market cynics argue that any news is bad news – TKer
Building a fortress: finding companies with moats – Ensemble Capital
What do the best investors do that the rest don’t? – Behavioral Value Investor
Chart-watching market timers fail again… – Mathematical Investor
…and a bullish take from some chart-watching market timers – Carson Group
Kindle book bargains
The Ride of a Lifetime by Bob Iger – £0.99 on Kindle
How to Own the World by Andrew Craig – £0.99 on Kindle
Environmental factors
How bad is CO2? – Uncharted Territories
Learning to be an eco warrior, one step at a time – Guardian
Robot overlord roundup
AI and the automation of work – Benedict Evans
Off our beat
Don’t forget to swim now and then – Raptitude
Lessons from the catastrophic failure of the Metaverse – The Nation
An interview about ‘mimetic desire’ and why it matters – Investment Talk
Threads: let’s just call them tweets – The Verge
Sitcoms reveal culture that led to Brexit vote, says historian – Guardian
How to do great work [Long, was forwarded to me multiple times] – Paul Graham
And finally…
“Basically, when you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually do love you.”
– Warren Buffett, The Snowball
Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.
You have to wonder whose £2trn that is
In IFS research (who I would trust more) 40% of working age households had less than £2,000 each of wealth
https://ifs.org.uk/publications/characteristics-and-consequences-families-low-levels-financial-wealth
The bulk of capital available for long term investment is held by a relatively small percentage of households. The figures are a bit misleading. The last time I looked at the ons dataset the median household had just enough cash for liquidity not for long term investment.
“With inflation near-9% and even the best cash accounts still paying only 5-6%, cash is hardly a bankable strategy to solve all our savings needs”
Welllll……I don’t know. Inflation looks backwards, those rates are forwards. Come July 2024, will a 6% return have beaten inflation? Will it beat a global tracker? I suspect it might do with the former, and have no idea re: the latter, but it’s certainly conceivable.
Also many younger people are saving explicitly for a house. A guaranteed 6% return for a year or two in a falling house price market sounds great to me versus the inherent uncertainty of the stockmarket.
Above said, if you pay higher rates of tax, yeah that’s less good. And needless to say, if we look over a longer term horizon (say 5 years) then cash is unlikely to triumph.
In my personal, admittedly niche, circumstances as a FIRE’ee with no other income, those 6% rates are very appealing to me right now. Struggling to motivate myself to allocate more to equities I have to admit, though I of course remain substantially invested.
@far_wide. I agree it’s important not to look at current spot inflation, which by the best measure, CPIH, is 7.9%. Against consensus forecasts, current 1y gilts are offering flat to positive real yields. The issue is that CPIH q/q is currently averaging 10% in annual terms. All those forecasts for end 23 and into 24 are looking quite optimistic. Things can quickly change though.
The idea of getting rid of all the silly ISAs, like Lifetime, cash etc, and having a single one would be a win. Regulation of retail has gone too far. It’s too prohibitive, too expensive and, if we are still a capitalist country, people need to be allowed to fail. I’d really like see the ability for retail to be able to elect for professional status and waive those protections.
The bottomline though is that much of that £2tn sits as a liquidity buffer and is not really available for long-term investment. Total net worth for households is over £12tn. At most you might free £1tn from the HNW individuals. Most will go into property (never goes down right?), some to bonds/other assets. Realistically, of the few hundred million left, how much of that goes into UK equity investments? We’ve all been told to buy global trackers right? Reckon you’d be lucky to get £50 million into UK equities!
@ZXSpectum48k #4 final paragraph: Agreed. According to Max King (Money Week 18 May 23) UK listed equities now just 3.8% cap of MSCI ACWI. Why would GB investors with cash to deploy into shares want to overweight 26x and go all in on the UK? Sure, we’ve a slightly lower CAPE than average, but frankly, so what?
> “you hardly need to be Martin Scorsese to picture what directing £1.8 trillion in cash towards far-riskier assets gate-kept by a freshly-deregulated financial services sector could look like”
Indeed. The CPS that published this “study” is one of the highly opaque Tufton Street lobby groups. They refuse to disclose who their donors are, and for that reason alone any opinion they utter should be summarily dismissed.
The investment industry’s profits are declining because of passive, so they are looking for new suckers. The prize is not too shabby (say, a percent of a trillion per year), worth buying a PR campaign for. They need to push it through before their mates are kicked out of government.
Whenever this comes up I just point out that ISAs should just be abolished
They fail to make the people who need to save actually save anything
They are just an expensive exercise in state welfare for the richest decile in the uk
Then, invariably, I get slagged off by people with 000,000s in ISAs
Looking at Morningstar funds performance data,
UK 250 index (via HSBC) has not broken even over 5 years.
Wine price hike is going to hit the stock-up-at-Tesco-for-25%-off demographic (to which, to be clear, I belong) which is the last remnant of the tory core vote. Never let a teetotal chandellor near the levers of power.
I mean, this is pretty simple for me.
FTSE100 in 1998: 6,000
FTSE 100 in 2020: 6,000
So basically, you had dividends & nothing else for 22 years.
It’s… extraordinary. And not going to persuade anyone who got a mortgage & a buy-to-let (before they changed the rules).
Now, of course, if you do MSCI World, or the S&P500, then it’s a slightly different picture. But many investors still have a strong home bias.
AND… many people will have forgotten that even the amazing S&P500:
S&P500 in 1999: 140
S&P500 in 2012: 140
£1.8 trillion / 68m people = ~£26k per person
I noticed that Martin Lewis’ MSE site was always very timid about investing in anything other than cash. His articles would mention shares now and then, but veered hard towards just trying to grab the best interest rates, going as far as to say the Icelandic banks were a rock solid safe place to leave your money (I thought their advice seemed a bit green around the gills there, they acknowledged the risk of bank failure but wrote it off as so negligible that nobody should worry)
@rmy
It’s a much higher balance than you calculate
There are 28m households in the uk. 21m have someone of working age in them. 40% of working age households have less than £2000 in savings (ifs).
So that just leaves 20m households and £1.8 trn or nearly £100k each
Yes, mine is just a rough average per person, nothing more.
I did start thinking there must be a lot of households with cash balances of £500k+ and I’d expect a lot of those are retirees. Some will have a large cash balance but also a multiple of that in equities too. But £1.8 trillion in cash is still far more than I would have guessed.
The spread of equities and cash ISAs on their chart on page 7 titled “ISA type as percentage of total, by income bracket (2021)” looks eminently rational to me, people at the widows and orphans end don’t invest in risky assets because they can’t afford the downside risk. There are genuine questions to be asked as to why the hell people earning £150k+ are about half in Cash ISAs but as for the rest, looks fine to me. If Sid is still in equities, hopefully most of it is in his pension, and ideally not in individual UK stocks.
I start to wonder if AI has written this report given the lack of domain knowledge
Does your CPU have any conception of why this apparently puzzling state of affairs might be the case, Mr Computer? Or was it written by the intern, buffered from the tides of economic reality by BOMAD?
I have only S&S ISAs, but do these good people count my VWRL, or even, given their remit, ISF holdings as retail or institutional? Do they have an inkling of just how small the UK stock market is of the whole?
It’s kind of worrying the number of financial blowhards who seem to be trying to revive the UK equity markets by getting other people, usually small fry, to invest in it. First it was the pension funds following orders to derisk their portfolios that aren’t Buying British, and now it’s the Great British Public whose mortgage payments are tripling in a general cost of living squeeze.
Hopefully the idea won’t fly, but it isn’t going to end well if it does get off the ground. Silence of the Lambs indeed.
@RMY – Martin Lewis currently can do no wrong in helping folk find the best bank/utility/mortgage deals. However, it’s possible that because he hasn’t mentioned that investing is a good option, his biggest fans don’t even consider it (those with cash to invest that is).
The problem I guess is that when he mentions something, his fans do it/follow in droves – imagine if he were to mention investing and they jumped on board just at the ‘wrong time’.
@ermine
The report in question comes from the centre for policy studies one of the two two free market think tanks responsible for incubating the swivel eyed lunatic liz truss
So of course it reads like it was written by an alien
https://cps.org.uk/events/post/2020/speech-by-the-rt-hon-elizabeth-truss-mp-the-new-fight-for-fairness/
“With inflation near-9% and even the best cash accounts still paying only 5-6%, cash is hardly a bankable strategy to solve all our savings needs.”
Agreed. However… for people investing now, 5% on cash sounds good. I got my wife to open a Vanguard S&S ISA last year. £20k in 3 funds, to ensure no UK bias. Results in 15 months: 1.23% return. I’m not in the good books.
@RMY Martin Lewis has built his fortune from affiliate income which he gets via mortgage comparison, changing bank accounts, price comparison, savings accounts etc. I believe most stock platforms don’t have an affiliate scheme.
As much as he helps the day to day consumer he stays in his lane as he knows that’s what makes him money. Hence why he’s taken the job on GMB. It essentially gives him a platform for his target audience.
Yep, agreed, that report is horrendously pretentious. A few reasonable statements surrounded by utter drivel. This bit being particularly vomit inducing,
‘The ideological arguments are equally strong. Retail investing can be rewarding on an individual level, in terms of self-actualisation and self-worth. But it also gives people an opportunity to shape the companies they invest in – to literally become an owner, which includes the right to vote on corporate pay, environmental issues and governance. More retail investment gives people a stake in the society and the economy of which they are part.’
That is in no way the reality for 99.9% of investors. So I buy a few k of vwrl and next up I’m voting on corporate pay and net zero targets at Apple am I? Don’t make me laugh.
It’s easy for Martin Lewis to collate and advise the best savings and mortgage deals, he can’t go wrong.
Since 2009, he should have been highlighting the benefits of world passive funds, and comparing them to the less than 1% savings rates at the time. Then again, if finance was included in the school curriculum instead of trigonometry and finding “the angle of the dangle”, Mr Lewis wouldn’t matter so much.
@Sparschwein #6, @Neverland #7 & #16, @ermine #14 & @Rhino #19: Tufton Street deserve much scepticism. They’re wrong in this instance (as so v. often), but I’d not dismiss all their ideas summarily. Agree ISAs are top decile tax break. A tax shelter with state matching contrib up to £4k p.a. limited to non-taxpayers & BR payers would be both more just & economically effective. But realistically, not happening.
@weenie #15 & @Ryan #18: MSE stand-up consumer rights champion IMO. They’re very clear (as is this website too) on their affiliated links, and who gets what (split always seemed fair to me). Bills have to be paid somehow. When no one else willing to, MSE/ML took on banks & ultimately got them to cough up £48 bn to customers for PPI scandal. ML, @TI & @TA are trinity of (respectively) PF & FIRE superheroes.
I wouldn’t say protectionism is a right wing thing – it’s against libertarianism – any form of control in the economy goes against free markets, apart from what military and police a society needs to maintain that – stopping other more economically controlling forces possibly threatening what free market we have like gangs or monopolies or other countries.
I think the left tends to project anything “nasty” as right wing, and that’s got into our labelling of things, but libertarianism is anti-protectionism
The Tories honoured Brexit because 1-they promised to, and promises are important in capitalism, and 2- generally both parties are expected to do different things, in order to oppose each other
@Time To Infinity
“When no one else willing to, MSE/ML took on banks & ultimately got them to cough up £48 bn to customers for PPI scandal.”
Except thats not what actually happened.
Organisations as diverse as the Guardian, Which and the CAB were on the case about PPI since the start of this century.
The FSA (rip) started investigating PPI in 2005.
MSE was only got involved in 2006 after the FSA found the practice unfair.
It was one of many template letters they had on their site like how to change your council tax band or how to deal with a debt collection agency letter.
Fair points @Neverland #23. Some gaps in various online PPI timelines for 1998 to 2005, but all agree Which 1st raised the issue and several newspapers, from the Guardian to Telegraph, claim credit for covering during that time. Not entirely clear when CAB and MSE 1st involved, but by 2005/6 both (with FSA) were on case. Max respect to CAB for their involvement. Back in 1997 volunteered with them for a year, & they do amazing work. As for FSA, they could only act after FSMA 2000, and it was then their job to. In fairness to MSE, it only came into being on 22 Feb 2003, so it couldn’t have campaigned before then. But it was leading on issue from 2005/6, and very effectively.
@Time Like Infinity
“But it was leading on issue from 2005/6”
By 2005 all the hard work had been done: https://www.citizensadvice.org.uk/Global/Public/Advice%20trends/A%20decade%20of%20PPI%20complaints_%20barometer.pdf
Martin Lewis’ main talent is for publicity, often for good causes but also for himself.
He brings to mind Michael Hesletine’s quote about Boris Johnson “a man who waits to see the way the crowd is running and then dashes in front and says, ‘Follow me””
Anyone who doesn’t think Martin Lewis is one of the good guys in the media space has extraordinarily high standards. The fact that Lewis made a fortune from his activities is more related to his being five years ahead of anyone else in the UK when he hit his stride rather than any latter-day selling out. We could do with more like him with his level of prominence, IMHO.
Regarding the report, it seems you guys are even more cynical about it than I was! 🙂
Personally I do like the idea of more people self-identifying as capitalists, and from a broader demographic (and more across the spectrum, too) rather than it being a sort of a guilty secret. So that flower-y gumph in the report I actually sort of buy into.
But agreed, engaged shareholder activity will always be a minority sport. It’s been years since even I’ve attended an AGM, for instance. Pre-Covid for sure.
I’ve encountered plenty of young-to-middle aged professionals who aren’t insanely rich with too much in cash. They say things like “I do put £250 a month into my stocks and shares ISA” which they set up two years ago then ask where’s the best savings account for their £50,000.
Cash is great of course, but most people can’t afford to be positioned that sort of way for 30-40 years. They’re not rich enough. They need equities and other assets to take some of the strain.
MSE at the very least was the first *practical* personal finance website. From the early 00’s he was already posting templates and guides on everything from council tax rebanding, opening your first ISA, and even premium bonds. Many people have saved thousands from his advice.
He definitely swerves investment advice on the main site, but does outline the basics (I remember seeing an OU course from ML – not MSE – on equities vs bonds). he’s not an IFA, so I don’t see why people expect him to act like one. He’s a consumer champion for that part of the country that don’t have six figure ISAs and pensions.
I think the problem is, human nature is to be part of a group and seek out people that think the same as they do.People don’t understand compounding.
To invest it means you automatically go against 99% of people.Once you are in the game then you are going against 99% of that small group.
People will not check facts,they create their own.Any company annual report will show that nobody invests.Using Rio Tinto as an example then the annual report tells you that UK shareholders number around 24,000 as at record date ( 3/2/23).The vast majority ( 19,347 ) have an average of 300 shares each.Page 341 of the annual report.
The number of people that own 1,000 shares and up is 4,723.From a population of 68 million that isn’t even miniscule. 1000 shares means you have around £50K tied up in Rio.
Then the Rio web site will show just how you are going against the crowd. I think it is the history calculator,I will check it.They give you history going back to October 2000.
On 27/10/2000 you were up against the entire UK population basically.You did some thinking for yourself and decided to buy 985 shares in RIO at a cost of £9,998.You needed to borrow that money and you were determined to pay that loan back as quickly as possible.
The web site does the calculation for you,if you reinvested all dividends then you have reinvested £64,294.You now have 2,531 shares.
Not reinvesting dividends means you have collected £36,506 to spend, or buy shares in other companies, or do whatever you want.
There is the problem,people will deny that for the whole of their lives.Pointing out reality does not mean I am a disruptor,it is a simple statement of facts that people will deny forever.
Disclaimer author owns shares in RIO.
Just want to add I have no issues with Martin Lewis 🙂 I was just explaining why he stays in his particular lane. He’s actually made an outstanding resource that has helped millions of people across the UK.
He’s also become a tremendous marketeer who has helped build trust with his presenting gigs which in turn has promoted his primary business. Very smart man and from an ethical perspective he’s squeaky clean.
Certainly not a sell-out but somebody who knows how to position himself nicely within the media. A lot could learn from his marketing skills.
In the shareholder section of the company website it is the dividend history and calculator.
The same RIO annual report also gives RIO Ltd ( Rio : ASX )
I take it the compliance rules are slightly different on the ASX as they must give the top 20 shareholders.
As in most companies in Australia the top 2 shareholders are HSBC custody nominees 31.97% of shares,and JP Morgan nominees 14.23% of listed shares.
The usual suspects then are in the substantial shareholders.
Blackrock ( see footnote in report) they usually own 6%.
Then Vanguard with 5% and State street global with 5.34%..
Listing rules mean anybody with 5% of voting shares must provide the company with notice.
I asked the registry why substantial shareholders are different from top 20 shareholders.They explained,and it was some simple legal rules which I did not need to remember so promptly forgot.
Pension funds would normally own 60% at least of Rio Ltd and voting is along the lines of board recommdations. At the AGM it would in general be carried by 98% of votes voting for the resolution.
Australian shareholders number around 189,000 with 22,388 holding 1,000 to 5,000.
John Bogle and his ilk with index funds were the Martin Lewis equivalent in the States to a population that already used the stockmarket for many if not most of their savings
Much to the annoyance of the American financial sector which continues to this day
The cultural difference however between a Brit and an American re financial matters is very wide
Bridging that gap will be well nigh impossible in the short term-even inn the long term?
I certainly never speak about investing to my peers – they are not interested
I am afraid a recession is likely to be the sad outcome in order to steady the ship
xxd09
The article on great work is brilliant and hits deep. Something we should all aspire to in our own way.
Monevator is such great work
Excellent Weekend Reading links, as ever. Highlighting Klement on Investing link to “Against Cassandras”. TL:DR is, whatever happens short to medium, in long term there are structural reasons (re: private sector debt service burden & need to pay for business capital investment) why US rates pretty much have to come down, eventually, to 1%-3% range or the US can permanently wave goodbye to a return of trend (2.3% p.a. in 2010-19) GDP growth. Klement says he’s also run the Eurozone + UK numbers & that he’ll email them upon request to Liberium Research subscribers. But that seems to involve being a client of Liberium Capital, which I’m certainly not. Don’t suppose that any Monevator readers have managed to find out Klement’s long term UK interest rate prediction? I’m guessing the UK range will be higher than for US due to our worse non inflationary rate of growth.
Surprised that Monevator gives even a molecule of the oxygen of publicity to this bonkers, indeed sinister, bunch the CPS of Tufton Street SW1. As another reply says these are the people that brought you Liz Truss.
Whilst in the vein of slightly grumpy negativity I’m going to call bullshit on the Graham article too – its just an exercise in survivorship bias. Almost all of his articles are like this, he has a spectacularly narrow view of the world. Which is unsurprising as he has experienced enormous success in a very narrow field accessible to very few. The dead giveaway is the ’till at 21 you’re starting to explore unanswered questions in physics’ – get real, how about some advice for everyone else in the world? Humble-bragging dressed up as some sort of deep insightful philosophy.. no thanks Paul.
The Tufton Street Taliban are not to be trusted. They expect the average person on the street to invest in UK equities. Why the hell would they do that? Decades of being brainwashed that property is the only decent investment. Brainwashed to chase income/dividends over capital growth. These are the same people who created the rentier capitalism model that the UK limps along with. Now, they want us to do a 180 turn and all become entrepreneurial. Fat chance.
The Klement article came across as rather one sided. Maybe I missed it, but there seemed to be no consideration of the other side of the coin. Yes higher interest rates means higher costs for borrowers, but it also means higher incomes for those receiving the interest.
How that extra interest income will be used is hard to judge, but assuming some of it will be spent, some invested, there will be offsetting effects on the economy. So higher interest rates shouldn’t necessarily mean a collapse in GDP growth like he is predicting.
The narrative that interest rates ‘must’ come back down to the 0-3% range seems very common, especially amongst the financial services industry. Go back 18 months and the dancing monkeys on CNBC were predicting the end of the world if interest rates ever crossed the 3% mark.
Yet here we are, and apart from lots of moaning in the Groan, most people who look around will see restaurants that are packed, flights and holidays fully booked, trades people with waiting lists which are weeks-months long, etc. In another time this might be called a boom. Perhaps because the real world functions in nominal terms while voodoo economists focus on ‘real’ numbers.
Excellent points @JABA #37, and ones I’d missed when considering Klement’s piece. It’s hard to get current & comparable fig’s online, but Kellogg School of Management at Northwestern University gives cash like holdings of US corporates rising from $1.6 to $5.8 trillion over 2000-2022. That stash of liquidity will now be earning 5% rather than 0-1%. Wonder if Klement meant that cash poor, indebted companies are ones with big capital spend requirements (and so will get whacked by higher rates); and that the deterioration of their plant and equipment will feed into lower output & ultimately into lower GDP. Klement’s piece doesn’t elaborate on exact transmission mechanisms here, so we’re left to guess.
Not visited this site for many months. Came back to this post, some nice links. Tell you what, I will put all my cash in funds/ETFs of someones choosing at a time of that same persons choosing over the next ten years and at the end (1st July 2033), you can take 90% of the gains over and above what would have been obtained by saving the money in rolling fixed rate 1 year savings accounts (currently 6% and if using regular savers too, can save more at even higher rates). This is a grossly simplified trivial thought experiment assuming I ‘need’ the money in july 2033, but other natural extensions and time periods etc would be valid.
BUT, if at the end of the ten years, the value of the funds is lower, you cover the difference ie pay me what would have been the best buy rates cash return and return all my capital as well? (and face prison if you fail?). No? well there is the issue, at the point where every bit of investment advice comes with ‘capital at risk’ and ‘you may get back less than you invested’ and ‘past returns are no guide to the future’, no one can force anyone to get involved in investing and such caveats are just honestly reflecting the volatility of an asset with a greater expected return.
As someone with academic and professional qualifications at the highest levels available for people who estimate risk in a modelled manner (not in the investment industry, though), I also am an example of the set of people who DO understand that the expected returns are greater but choose to be overweight in cash. My position is gradually moving towards higher percentages in equities over time but most of these are in sipps/LISAs as I just don’t *want* the volatility. I’ll take the inflation erosion knowing that short of Argentina like hyperinflation, if I lost my job tomorrow I would be fine for years and years, and my equities in sipps and lisas will probably be fine by the time I retire. The growing bit in the middle in equities I am happy with, but by all intents and purposes, I am one of these people sitting on cash.
Similar thoughts arise when discussing Martin Lewis who people should generally be valuing for his efforts – almost without fail, his advice is concrete, clear and actionable, and invariably, the risk associated with his advice to most consumers is practically negligible. As already pointed out, he would like be in legal trouble if he even delved properly into what looked like investment advice, especially now that people do trust him. The few instances where he could be accused of getting things wrong like encouraging people to consider swapping to saving outside isa’s to get more interest a few years back etc he even had a small section at the end where he made clear those with huge savings might lose out if rates rise etc. The irony is he gives more definitive clear guidance that is caveat free, or light on caveats than compared to any IFA regarding investments.
The joke about IFAs is they can’t give you ANY advice about investing without the disclaimers of capital at risk, past performance no guide to future, etc etc. They basically say, here are some options which might be suitable for you based on your curcumstances but if it all goes bad and your wiped out, or if it turns out you lose 20% in a crash in the next month so my advice as per the information available to me today turns out garbage, or you experience a japan-like lost decade(s) after you have committed large sums, then too bad, but thanks for your money. If it’s a fund manager/ivestment company, they take no hit if things go bad and happily have been salami slicing money from your funds right up until and throughout any bad period.
I do really think this site is great and do agree, on average, more people would do better if they invested more. Personal finance though is not like fund management, and the desire to push people into more variable assets is not acceptable unless those same people are prepared to share the losses more directly and be more accountable the times they do come. Those trying to nudge people into investing need to ask themselves if investing is the panacea sure thing then why the thought experiment I started this post with is not a business model investment professionals would ever agree to. If investing and doing much better than cash savings was a sure thing, where are all the ‘safe’ products like the above that would benefit *everyone*?
Sorry for the tongue in cheek nature of this post, but it was the only way to make my point. Investing and saving are not the same; there are plenty of people who understand they are running an approach of an expected (real terms) loss instead of an expected real terms gain but with high volatility. If someone wants to offer me a product that will guarantee I will make more money at a fixed time point, and you take your (large) cut of that share (but all the risk), lets do it. Currently, all the risk is on the investor, which is one of the main reasons people are in cash. Telling folk what to do with their money at no risk to you is a much easier proposition than when the person giving the advice is taking all the risk.
@Random Coder #39: you’ve described something a bit similar to original Buffett partnership terms (1956-69); no AUM fee, took 25% of gains over 6%, and agreed to personally absorb a percentage of losses. Take all your points about IFAs.
Isn’t there some recent legislation in the US that prevents someone who holds just, say, 1 share, and then showing up at shareholders meeting to tackle the boards on issues ? I seem to recall that a minimum number of shares was required. Stifling of shareholder influence.
For me, Martin Lewis is very much one of the good guys. I’ve lost count of the money that his site has saved me, particularly on stuff like electricity, broadband and sim-only comparisons.
I guess that’s why his site is called MoneySavingExpert, rather than MoneyInvestingExpert.
@random coder. I totally agree re: MSE/ML. He should just focus on easy wins with little/no downside. Recommending equities is just a path to ruining his reputation and a class action.
I also understand your broader point. It’s very easy for those on the internet to tell people to invest. They won’t be the ones suffering if those investments collapse. Investment simply doesn’t suit many people. Most are not risk-neutral. The cheerleaders for large equity investments tend to be those with a higher risk tolerance.
I think though you are being unfair on many in finance. It’s just a service. I’ve paid for many services and been unhappy with what I got. Tradesmen most of the time. Travel agents. Real estate agents. The NHS. At least I don’t have to pay for an IFA. I don’t seem to be able to elect not to pay for the NHS!
Plus most day-t0-day hedge fund managers like myself only get paid on what we make. Compensation is 20-25% of what I make, net of all costs, with a high-watermark. There is no management fee component. Again you don’t have to pay.
@Mick we get it, we really do. You’ve done very well out of individual stock picks and your poster child. I’m not quite sure what you are trying to show other than that compounding growth with dividend reinvestment in the right picks results in substantial returns. I suspect most people reading this article understand all this but many also are humble enough to recognise that they don’t have any specific alpha in picking individual stocks. Plus a desire for diversification of course. That plus a near certainty that half the people/institutions claiming they have superior stock picking skills will underperform the market index for a basket of stock.
@BBBobbins — Quite. Regretfully I’ve deleted @Mick’s most recent post so your comment will only partly make sense to those who didn’t read it. I have previously tried to explain to this reader why their comments don’t work for our blog, but they either don’t or won’t get it. They’re not abusive or anything, so deleting is a difficult decision but it’s really so far off-beam for our discussions here. I am absolutely sure I’d enjoy a pint and a chat with Mick as one active investor to another, so nothing personal. 🙂
@JABA
“most people who look around will see restaurants that are packed, flights and holidays fully booked, trades people with waiting lists which are weeks-months long, etc. In another time this might be called a boom”
Monetary policy operates with like a c. 18 month time lag and the base rate at the start of 2022 was 0.25 – 0.50%
I see lots of people living in mortgaged houses driving leased cars around me who are going to have no money when they have to refinance
@JABA >most people who look around will see restaurants that are packed, flights and holidays fully booked, trades people with waiting lists which are weeks-months long, etc. In another time this might be called a boom.
You are confusing a shortage of staff and the tail of a supply-chain kerfuffle with good times all round. There is destitution in some parts of the UK – even in stinking rich Oxford you see rough sleeping, perhaps if you look hard you may see some of this in London too?
Out in the sticks I see more van living, there is more drugs. I don’t even like cities, but some of the problems are visible elsewhere. But yeah, poor people aren’t competing with you for Easyjet flights or theatre tickets. That’ll be other upper middle class folk and up. The lower middle-class and down, I guess they are being ruined by mortgages and energy prices.
send not to know
For whom the bell tolls
the answer is not always palatable.
The one problem I have with Martin Lewis (other than that he’s slightly annoying) and this a purely selfish thing, is that all the little scams that used to be available no longer are. This is because, as soon as some company introduced some offer which you take advantage of, Martin tells half the UK population about it in his email. The net effect is that these little deals no longer exist.
The is one area that he hasn’t ruined (yet) is the cash bung you can get from periodically moving your SIPP around (for example, I’m transferring from AJ Bell to Hargreaves Lansdown (it’s all in ETFs so I won’t get stung by HL via platform fees) and should get £1,500 as a result. I really hope he doesn’t read this blog because I’ve just tipped him off and this will be final time I can do it!
https://www.theguardian.com/business/2023/jul/10/jeremy-hunt-to-unveil-pension-fund-reform-plan-to-help-uk-startups What could go wrong? As I feared, they see the LGPS as some sort of cash cow to keep the Ponzi scheme of the start up industry afloat, now QE has done. 10% in private equity? That’s literally 10% the fund might never get back.
I always knew they’d come for the safe pension schemes, just not so soon.
@Gizzard — Writ large, that’s a huge (selfish) bugbear I have with the whole modern digital/Instagram era.
Me and some particular friends of mine (them more than me) used to be great at ferreting out what’s on in London and going along to it — special openings to the public, pop-up bars, whatnot — but now there’s always crowds and you need to book in advance.
A great example is London Open House, where various private and public buildings are opened to the public. Many years ago some architect would show you around his loft conversion and chat to you over tea and biscuits in his kitchen. Now it all has to be booked weeks in advance and is very scheduled etc.
I suppose everyone who lives anywhere near an Instagrammable spot (rocky outcrop, special secret pool in the forest, particularly iconic fjord) feels much the same way…
@Bloodonthestreets — Yep, saw this in the mood music a few months ago:
https://monevator.com/weekend-reading-first-they-came-for-our-freedoms-now-what-about-our-pensions/
@The Investor. Yes, I thought this might happen in 10-15 years, but I’m actually horrified. Most people outside the financial geek cocoon won’t understand but it’s pretty clear to me this is a raid on the future income of large sections of society.
@Bloodonthestreets
‘it’s pretty clear to me this is a raid on the future income of large sections of society’
… or just a modest and not mandatory ask in return for the massive tax deferral and NI avoidance perks pensions get in the UK
You really need to get out more before you start complaining
Not long ago Poland and Hungary nationalised their entire private pension systems in order to fund a public spending sprees to keep their populist governments in power
@Bloodonthestreets — It’s a bit more uncertain/complicated for me. In theory I like pension assets invested in more long-term growth assets. Especially when in huge pools, they are in some ways the ultimate long duration liability (perhaps only rivaled by endowments?)
But I don’t trust even this quite-a-bit-better administration with making wholesale changes, similar to your fear I am not confident they’re doing it for the good of future pensioners’ incomes — and I’m not even sure they’re doing it for the good of future UK PLC, versus trying to plaster some sort of salve on their stupid and ill-fated investment-derailing national act of self-sabotage to further hide the costs and consequences (of Brexit).
I also don’t like the timing. Shifting into riskier assets just when much less risky assets are paying real yields again has heavy Gordon Brown Selling Gold in 1999 vibes. 😐
People’s pensions, which they’re asked to trustingly sock money away into for a result in many decades time, should be directed solely according to what’s best for people’s pensions.
On govt pension meddling – I paraphrase from Ronnie Regan that the most dangerous words you can hear are I’m from the govt and I’m here to help.
@Neverland
Fair point, the open question is to what extent those same people may have received inflation adjusted salary increases to offset the higher costs. Something I read recently made the argument that the ultimate arbiter of the ability to fund higher debt, in the economy as a whole, is nominal GDP growth, which thanks to inflation is growing nicely.
@ermine
How dare you sir! To suggest I would set foot on a plane without business class flat beds is to completely misunderstand this particular snowflake :P. Joking aside, completely accept that anecdotal experiences are just that. Though what difference an economic cycle peak would make to people in unfortunate circumstance is also questionable.
The purpose of my comment was just to challenge the view that interest rates must return to low levels. Maybe they will, as the saying goes economic forecasting was invented to make astrology look good. However, it may be prudent to ensure that whatever asset allocation one has, it can survive in a higher-er for longer-er interest rate environment. Something foreign to my generation, and I dare say to a certain generation who have made a lot of paper wealth from property thanks to a 40 year period of falling interest rates.
@JABA
Be careful what you wish for
Mohammed El-Erian and Kate Barker have both been in the FT in the last week saying taxes up the wealth spectrum should rise so the strain of reducing inflation doesn’t just fall on the indebted
I think they have a point
https://www.ft.com/content/4b2063a4-0e43-4552-ba1f-6ab3f259e203
https://www.ft.com/content/18e2aef0-32ce-451c-9256-10116c120bf9
@JABA #55 Touche, my /s detector failed in service 😉
We are in furious agreement. I paid on average ~6.5% over the entire term of my mortgage career. It is about the typical long run interest rate for the UK, and I would say returning to that sort of level would be a mark of overall fiscal health rather than a symptom that we still hadn’t found a way to pay off the GFC of 2007-9.
March to May private sector wage growth came in hot this morning (7.7%, with 7.3% for overall employment). Labour market tight, but beginning to loosen. Quick takes are that rates higher for longer. Problems @ermine #46 and @Neverland #45+56 highlight likely to get worse before they get better in this scenario. If people are getting worked up now about a voluntary scheme for pension fund infrastructure investment, how will they react if & when wealth taxes come in after the general election? It’s looking like either higher taxes on those with broadest shoulders, or more sado austerity (look at the current state of the NHS & tell me that the public will accept this) and/or higher public borrowing at unaffordable rates.
@JABA. The point regarding nominal vs. real is pertinent. The fact economists express theories in terms of non-observable variables is a weakness. It’s an observed issue that when you see a rapid inflation pulse, real growth tends to drop off proportionally. Say inflation 3%, real gdp 5% so nominal growth 8%. Suddenly inflation 8%, real gdp 0%, nominal growth still 8%. You only build bridges/widgets/provide services in nominal, not real, terms. Nominal is a bottleneck in the short-term.
I also wonder whether the cost-of-living crisis, at this instant, is really as bad as portrayed. There is undoubtedly deep polarization. At aggregate level, though, think the damage is overstated.
First, there has been a £400bn+ transfer of wealth from govt to households during the COVID crises. Savings rates went massively higher and have not yet been eroded, at least in nominal terms. Debt conversely was eroded by inflation with real rates in 2022 at deeply negative levels.
Many in the older generation have been insulated by RPI matched increases to state and many DB pensions. They are now seeing increased, nominal, cashflows from savings.
It’s the younger generation that is more vulnerable and took a hit in 2022. Nonetheless, we are now seeing wage inflation of 7%+ with CPIH at 7.9%. Not much actual damage in real terms. By 2024, it’s quite likely wage inflation to be above CPIH.
Of course, there is reason monetary policy operates with a 18-24 month lag. It’s about debt rollover rates. As debt is refinanced, a cashflow recession becomes more likely. Right this instant though, with plentiful jobs and high wage growth it doesn’t feel that bad … at an aggegate level. This is not to say some aren’t suffering badly and many aren’t worried.
@Neverland
Not wishing for any particular outcome. I try to balance for a range of scenarios. However, completely agree that taxation should be a far more effective tool for managing inflation.
As ZX mentioned, the government provided a huge boost to the private sector, which is a contributing factor to inflation, so they could contribute in the opposite direction.
Using tax policy seems to have a lot of benefits vs. monetary policy. Taxes can be applied instantly, can be calibrated and targeted more effectively, and can be reversed quickly if inflation/the economy falls precipitously. The problem is political, with an election in less than a year, much better to be able to blame the BoE for having to take away the punch bowl.
As to calibration, targeting just the highest income / wealthiest sounds fair from the perspective of those who can shoulder the burden most, but I’m not sure would have the desired effect on inflation as their incremental spending is least likely to be affected.
@ermine
Indeed, ZIRP was supposed to be a temporary measure. In the long run, capital should have a cost to ensure it is allocated prudently.
@TLI
Not much there to make things easier for the BoE.
@ZX
Agreed, it’s the nominal aggregate impact that seems to be keeping things afloat. At least for the time being. As well as RPI linked pensions, the minimum wage increased by around 10% in April, if I recall correctly.
@ZXSpectrum48k: On #42: There’s a need to recognise that choosing not to invest in risk assets is a choice to run the risk of lower expected returns; and not to have enough funds to meet future needs and wants. Staying in savings/cash is not risk free. Doesn’t mean that it is the wrong choice/inappropriate for the preferences and priorities of the person concerned. But any advisor worth their salt would be obliged to spell out the risks of not taking on investment risk. Good points you make about finance being just another service, which people don’t have to pay for. But historically (pre RDR+FCA) there’s been issues with IFAs & CoI (i.e. by whom and how were they being paid, and what standards of care did they owe?) Public are still bruised by that, and pariah status of the financial sector post 2008 (e.g. the ‘banksters’ jibe) doesn’t help with trust.
On #59: The outcome of the cost of living crisis will depend on how long the UK spends in a high inflation, high rates regime. Digg deeper into today’s wage data and there are some encouraging signs for core inflation. Taking May’s figure alone, rather than the quarterly one, annual growth in regular pay slipped 7.8% to 7.4%. My concern remains that reductions in labour availability (due to both long COVID and the near collapse of the NHS in many areas, plus inflationary effects of Brexit) puts a floor on how low core wage-led inflation falls in response to rates that are either less, or end up only slightly higher than, core inflation. If core inflation gets stuck well above 2.5% p.a. then that’s not consistent with the MPC’s remit of CPI at 2% p.a., give or take a little.
Looking at what is published so far on pensions reform it looks simply like many of the biggest pension providers are being coerced into allocating ~5-10% to their default funds to the asset classes the current chancellor prefers. They won’t be unhappy given it will be no loss to them and their fees slice will likely be higher. If the option to change funds from a default fund remains then only those who take the least interest in money/pensions will be shouldering all the extra risk of this proposal – the very people who the pension industry should be taking most care of to encourage pension saving.
Putting the least sophisticated/interested people in higher risk funds by default is not the way to maintain the improving views of the pension industry and encouraging pension saving. Most default pension funds are already large cap equities biased, often with lifestyling type moves only in later life – it isn’t the case that default DC funds are largely in cash/bonds.
The point I am forced to allocate funds at the whim of the current people in government is the point I stop paying anything but the minimum forced by law into pensions. Currently, pensions funds are getting my maximal employer matched contributions, and even as someone who islight on equities outside pensions, I am 100% world index equities in pensions – if UK plc gets its act together and becomes 100% of the world index by market capitalisation, I will be 100% UK equities. I hope whoever modelled these new proposals factored in a proportion of pension savers pulling out of future pension saving altogether or going to minimal, if they basically are forcing certain funds and asset classes on pension investments.
If investing in these UK asset classes in the percentages indicated (5-10%) was an easy risk free guaranteed 12% increase in return over 30 years as is being suggested, money would be piling in from private investors everywhere across the world to these companies already, but alas, it is not because the idea of a 12% improved return is not possible without increased risk. This is an exercise in increasing the risk profile of pension investors who, in most cases, won’t even read the pension documentation and just be accepting of their companies default pension option. This is not the way to up the expected return of pensions and carries a lot of risk to the willingness of people to contribute to pensions in the future in the event anything goes really badly.
@Random Coder #62: But will PFs actually be legally required to do so? Hunt’s big mistake if it turns out such, as it’d then be a policy which UK’s rapidly rightist press might have scare mongered Brown would have brought in as Chancellor.
@JABA #37: on Klement on Investing link in Weekend Reading: now emailed Part 2 covering Governments’ debt burdens and arguing no cause for concern in US re the future path of inflation & rates because of EU/Japan experiences, demographics and invalidity (in his view) of quantity theory of money. Nothing in there though about how exactly servicing elevated long term rates would crowd out firms’ ability to fund investment when so many firms are sitting on cash piles & now earning much more interest on them.
On impacts of raised rates on cost of living crisis in the UK, interesting to read this morning’s BoE Financial Stability report. Says no need to panic: Debt Service Ratio only going to rise from 6.2% to 8% of net post tax household income by 2026. Also says banks stress tested for apocalypse (i.e. 17% inflation, 8.5% unemployment and 31% house price falls) and will still remain solvent. Problem, as I see it, is if, in aggregate, BoE’s predicted rates’ path is going to be benign in it’s aggregate effects, then how will that bear down enough on inflation? If the transmission mechanism is reduced because of longer mortgage fixes and more home equity (including households with no mortgage), plus a less responsive labour market; then surely higher rates will be needed for longer?
Given how generous tax relief is for pensions (esp 40/45% tax payers) I don’t think it’s that unreasonable for a proportion of it to be directed by the govt (for the benefit of the Uk).
Probably an unpopular view. ISAs next!!
My understanding is the proposal relates to DC default funds only, which auto-enrollees can override by choosing their own investment funds. But as indicated above, its those who are not investment aware and complacent who will do nothing and end up with the risks – the worst of all worlds. It would be wrong if pension providers/schemes or employers were not able to choose not to have such a default fund allocation, but the indication is that many of the big players have signed up for this proposal voluntarily. Its not clear what this means for individual schemes and existing default fund investors. Surely they should be informed if there was a change in allocation so at least they could choose to switch funds if they wanted to. I do wonder this whole idea can have buy in from the regulators.
I struggle with thinking tax relief on pensions is excessively generous now than the highest earners have been effectively excluded. Obviously it gets taxed on the way out (although there is possibly a justification of why TFLS might be tapered down).
The key point is I think that without tax relief on contributions most DC pensioners do not have a hope in hell of accruing pots that provide anywhere near the income of the DB generation and thus it feels utterly fractious to society if you have a “poverty gap” around that. Not hard to see why people who have to keep working to state retirement age might start to feel resentful of public sector peers essentially enjoying retirement income from their ongoing taxes.
@TLI
Thanks for the update on Klement part 2. Always have to take these things with a very large pinch of salt and much critical thinking.
Agree with your reasoning about the likely effect of weak monetary policy. To borrow a phrase, if it isn’t hurting it isn’t working. The more benign the policy, the longer it will take to have any effect.
The whole BoE report was a bit of a joke. Inflation peaks at 17% while interest rates only at 6%? Are the MPC planning to piss off to Barbados at the first sign of trouble and hence won’t be around to raise interest rates? There’s a good chance they will be at 6% in September. The other figures also failed to live up to the description of ‘apocalyptic’.
You have to laugh, or more typically cry when politicians suggest something or other as being ‘free market’ friendly. As for think tanks – Grifters and Pseudo-academics…
The talk seldom matches the action, such as this bonkers suggestion that default workplace pensions have 5% invested in unlisted uk start ups.
As if the default choices weren’t bad enough already….