It is a blessing that the first five years of auto-enrolment have seen world stock and bond markets rise. Low interest rates have had a lot to do with it, but we’ve also been in a period of comparative peace, the global risk register has been less to the fore, there has been plenty of money in company coffers, we have all done well.
But 2018 looks like being a poor one for investors and the year is ending in as state of chassis, brought on by a realisation that the phrase “we’ve never had it so good” uses the past tense.
Falling stock markets are historically a rich person’s problem, (the problem’s none the less real for that).
But increasing numbers of those who would not normally consider themselves investors – are investors now. I’m looking forward to the Radio 4 Moneybox Special on Saturday (29th Dec), when we’ll be hearing from the people from Port Talbot who have come into “wealth” by swapping a pension for cash – will be talking about what it’s like to become an investor overnight.
I suspect that many of those who will be on the program will have been learning financial resilience in the same way they have learned to cope with the rigours of working in heavy industry. But some will be struggling with the idea that they can lose more in a week than they take home in a year.
There’s no rationale to risk tolerance.
I have stood on the lawns of Cheltenham and watch Irish farmers blow a year’s savings on a horse that should have won. Value at Risk =100% and they know it- coming back year after year – for the year when they walk away with a fortune.
I’ve sat with people who’s entire savings are in cash, for no better reason than they’ve no appetite for risk and some of these people are those best placed to take it. The FCA report that the self invested personal pension market is awash with reckless conservatism, long-term money sitting in deposit accounts, smug to have got tax-breaks but useless in any economic sense.
People are not rational in their decision making, the national lottery distributes from the poor to worthy causes that include rowing – a past time of the rich. Part of this is moral hazard, as Springsteen sang “Mister one day when my numbers come in, I ain’t ever going to drive a used car” – my financial adviser friend- John Mather will advise me that neither the lottery of buying cars first hand – makes financial sense. That song has however summed up working class aspiration in the States for thirty years.
The impact of falling markets
£36.8 billion was turfed out of defined benefit pension schemes and exposed to market volatility in 2017, the first quarter of 2018 saw over £10 billion follow it.
It’s not a question of whether but how we cope with falling markets. My worry is that many won’t and that those least prepared for the shock of losing money will not be able to cope. But that is the middle class liberal in me. I know that people are tougher than my bleeding heart would have them and that the steel-workers who’ll read this will have thought this through.
I’m not writing this from Tai Bach but from comfortable Shaftesbury in North Dorset. I have no reason to worry for myself and no (economic) reason to worry for others. And yet I do – some would say too much.
I know that there are many in Government who worry too. I have met them. We have promised people the freedom to do as they like but have given them a knife to catch- when markets fall.
If people are drawing down after Christmas to pay for Christmas spending, they will draw down from markets in crisis and at prices that may not reflect the under-lying assets. In short they may be forced to sell low. The impact on the cashflow plans put to them by their advisers may be calamitous as “pound -cost – ravaging” sets in.
In my church we pray for the vulnerable. It is an entirely irrational thing to do, but we’ve always done it and always will.
Being concerned together seems to get results. Practical help arises from collective meditation and our collective articulation of the problem.
This is the way that people cope – by coming together. Ironically it is exactly how occupational pension schemes provide help – they bring people together.
That is why people like Derek Benstead, Hilary Salt and those others I work with at First Actuarial campaign for open collective pension plans. They help people to cope with periods of financial adversity.
As I look forward to 2019 and back on the past five years, I am increasingly convinced that they are right. We do not cope well on our own, we need to do things together