Why do we take risks?
The common answer is that you have to speculate to accumulate.
I met a young man at Wincanton racecourse yesterday afternoon and he’d had a good day making more than £1,000 on his betting. I asked him what he would do with the money, he told me he would invest it in his SIPP (self-invested personal Pension). I asked him what his SIPP invested in, he told me he had one stock, an investment in an African emeralds d mine. I asked him how it was going, he said he expected to see emeralds in the next quarter, in which case he would be rich. I suggested he was taking a risk, he said “I know, but if I get it wrong this time, there will be plenty of time to get it right the next”.
I know that racecourses tend to harbour speculators, but this young man is not alone. In an FT article depressingly titled
The great speculative era on markets is hard to kill
Philip Coggan tells us
“it does not seem as if the boom in tech stocks and crypto is being driven by the use of large amounts of leverage”.
People are using their savings, or in the young man’s case, his winnings, to take risk.
So the current and continued desire of ordinary people to speculate to accumulate holds good despite the roller coaster ride of interest rates.
However Coggan is determined to see buffers at the end of the tunnel.
A more general collapse in risk appetite may require a really dramatic geopolitical event, such as war between the US and China over Taiwan, or a central bank miscalculation in monetary policy, either by failing to contain inflation or being too tight for too long and causing a deep recession. These may seem like extreme outcomes but it usually takes an explosion to kill a movie monster.
It is of course perfectly possible for Governments to screw up an economy, it happens all the time in poorly governed countries which is why “emerging markets” are considered risky. Even in the UK we can have moments of economic madness , but for every Truss there is a Sunak and a Hunt to restore order. The Government tends to restore order through mechanisms such as the Bank of England – one of the reasons more people should invest in the UK.
So people look at the markets and see a safety net which is partly there capacity to do it again (if it all goes wrong) and partly the reckoning that so long as they are betting with their own money, it’s ok.
Where people tend to get nervous is when they are betting with other people’s money, which is why the current falls in house prices are disturbing to house-owners and to renters. House owners have taken low interest rates and rising house prices for granted tor a decade and they have also taken their tenant’s capacity to pay as near certain. They have even got no-fault evictions on their side making speculation on housing the near certain bet.
But unless you live in a Robbie Fowler house, the cost of living in your dwelling is shooting up with borrowing costs – which are being passed on to those who rent.
My impression of people’s speculative behaviour is that it is based on a capacity for loss. The biggest worry is that people lose that capacity to lose and lock-down their savings.
This matters for private investors but it also matters at an institutional level. Those of us who save into retirement pots have diminishing capacity to lose , if the security of other assets fall. This is why the LDI fiasco was so abhorrent to many of us, people were betting on our behalf with money they had borrowed (on our behalf). When things went wrong we had to be bailed out by institutional equivalent of the bank of Mum and Dad (the Bank of England)
The young man I met at Wincanton Racecourse turned out to be living with Mum and Dad with the carefree finances of a 25 year old with a lively imagination. I hope that the emeralds are out the ground by April and his pension does well. He is not the worry, it’s the people whose pensions are now their main source of equity that are the worry. The people whose pensions fell away in 2022 and whose houses are turning sour on them.
These are the people who need to be convinced about the value of long-term investing. Sadly for those of us over 55, the investment horizon is limited by our perceived capacity to take risk. It is here where the crisis of saving bites and it is for those entering the retirement zone that we must devote our attention and our products. We are rather less care-free than my chum at the races.
