The Government is desperate to get more people investing. It’s certainly true that as a nation, investing outside of a pension is the preserve of a minority. This lies in contrast with America, where everyone tends to own a few shares – and discussion about stock tips is common down the local bar.
This seems to be the world that Chancellor Rachel Reeves wants to build over here. And across the last few weeks, rumours have been abound that the Treasury was going to cut or scrap the cash Isa limits to encourage more people to put their money into the stock market.
Although this plan has been put on hold, the Treasury did push ahead with a raft of bold policy announcements this week which they hope will get more people investing over the years ahead.
Let me start by saying that I’ve not got a massive problem with the idea that more people are supported to invest in the stock market. It probably is true that some consumers are a little too risk averse, or don’t understand the potential of long-term investment.
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But the press release from the Treasury on Tuesday was bizarre – applying maximum top spin to the potential returns you might make from the markets.
It asserted that consumers can earn an impressive 9 per cent a year by investing in stock markets compared to just 1.5 per cent in cash savings – the kind of claims that any fund manager would be fined by the FCA (Financial Conduct Authority) for making in their financial promotions.
It’s not controversial to assert that equity returns are better than cash over the long run. But equity markets are volatile – and while some markets have hit that magic 9 per cent a year figure over the last few decades– some (most notably the UK) have not.
Over the last 20 years, the annualised return of the FTSE 100 is about 6.8 per cent – some way short of the Treasury’s big number. Cash saving returns have admittedly been much lower over that period because we have had an extended period of very low interest rates following the financial crisis.
But in the 20 years running to 2023, the average Bank of England interest rate was 3.1 per cent – and in the 50 years to 2023, the average Bank interest rate was 9.1 per cent.
Plus, there are still cash accounts out there today offering returns of close to 5 per cent.
Don’t get me wrong – I’m not advocating for long-term investing in cash over equities. But it’s irresponsible of the Government to use these kind of numbers to suggest equity investment is a no-brainer. Most people are not investing for over 20 years outside of a pension. For the majority of households, savings projects are shorter term – and are not suitable for market investment.
Amongst the raft of announcements in the Mansion House speech was a promise to work with industry to launch a new public advertising campaign to promote investing. Let’s hope it is not as gung ho as the Treasury has been with its projections this week.
The main question on my mind is why are the government so obsessed with this idea? Yes, there are a minority of people with a bunch of cash savings swilling around earning not much interest. But the majority of people don’t have enough cash to cover even a few months of expenses if they lost their job.
There seems to be some insinuation that by getting people investing, everyone will have more. But there won’t be the money for most households to save, let alone invest, unless real incomes start to rise again.
If you’re feeling cynical, you might think this is all part of the government’s charm offensive on the financial services industry – which it has been flirting with ever since it arrived in Downing Street 12 months ago.
The Government wants asset managers and pension funds to invest more of their money into the UK – which most big providers agreed to do in the Mansion House Accord signed earlier this year.
These industries have long wanted a bigger pie to feast from – more customers investing in their funds, rather than keeping their cash in the bank. And banks are happy too if they can drive up their profit margins by starting to sell investments again (an area which most have stayed away from since the mis-selling scandals of the noughties). So is this drive for investing all part of the quid pro quo that the Treasury has agreed with industry? Quite possibly.
And what about you? Should you be investing if you have some cash to spare? Well, sure. As long as you have enough cash savings to cover three months of expenses. And as long as you’re making adequate contributions to your pensions. And as long as what you’re saving for is at least 5 and preferably 10 years away, so you can ride out any market volatility.
That simply is not going to be most people. If that is you – then jump right in. For the rest of us, keep grafting and working to earn a bit more so you can build up the cash buffer.
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