Risk aversion has been a bad strategy for investors, but they need to be cautious about reversing it now.
- The Bank of England suggests that around £303bn sits in zero interest accounts
- The MSCI World index has returned 11.7% per year over the last five years.
- Private investors have seen the value of their gilt holdings fall by 38%
In the many options open to Chancellor John Healey in his upcoming budget, few are suggesting doing away with the cash ISA altogether. But drastic action may be needed to prise investors away from their love of cash savings. The safety-first attitude of many savers isn’t doing them any good.
The Bank of England suggests that around £303bn sits in zero interest accounts. This represents a 60% increase since the onset of the pandemic. This week, Quilter sought to highlight the problem by installing a mattress at Kings Cross station with money stuffed beneath it. The MSCI World index has returned 11.7% per year over the last five years.
Holding money in cash has come with a significant opportunity cost, but other safe haven options have been even worse. Research from Bowmore Asset Management shows that private investors have seen the value of their gilt holdings fall by £2.8billion - 38% - since prices started to fall in summer 2020.
While the first port of call should be higher interest cash accounts, the long-term goal would be to get these savers into the stock market. That should create capital for the UK companies to grow, with all the ensuing economic benefits. Risk aversion not only has consequences for individuals, but for the country as a whole.
The problem is what happens next. There are now a series of well-meaning campaigns to encourage people to invest and recent history makes a strong case for doing so. But the clouds are gathering. An enormous amount rests on the continuation of the AI trade. Beyond that, economic growth is anaemic. The consumer is weighed down by high inflation and interest rates and this is likely to depress growth over the next 12 months.
This is not an auspicious backdrop for stock markets. Higher borrowing costs are often a trigger for the end of a bull market. After three years when markets have grown around 20% a year, a pullback would be unsurprising.
How to square this circle? People need to invest, but the risk is that investing on the cusp of a bear market deters another generation of investors. It is perhaps more important than ever to observe basic good practice when investing – regular savings, strong diversification and valuation sensitivity. Safety-first hasn’t done savers any good, but replacing it with bullish optimism may not be the answer either.
