Personal investment is a goldmine for some but a minefield for most. The decade ahead is going to pose tough challenges for both personal investors and the investment professionals who serve them.
Most personal investors have wholly unrealistic expectations of what returns are achievable. Beginning some 40 years ago, there was a long period when high inflation was the norm. As a result, it was possible to earn large nominal returns, even if, in real terms, there was no gain at all. Many investors still expect high nominal increases in asset prices now, even in a world of low inflation.
Moreover, in the period of high inflation, bond yields and interest rates were also high. Accordingly, if investors didn't like the prospects for the equity market, they could at least get attractive rates of return on bonds, or even on cash deposited in the bank. At one point, Bank Rate was 17pc and at one stage gilt yields stood at more than 17pc.
Ironically, the end of this era of high nominal interest rates itself brought a major boost to returns, albeit a temporary one. For the big drop in bond yields conferred large capital gains on the holders of bonds. Moreover, the effects of this fall in yields helped to buoy up the price of other assets, including equities.
Mind you, not all asset markets responded at the same time. Until very recently, investment in housing continued to deliver super returns. Now reality has caught up there as well. The rental yield is now extremely low, and for both investors and owner–occupiers, the prospect for capital gains varies between poor and dire.
Over and above this there is an attitude problem. Many investors remind me of the gamblers I have known who believe that it is readily possible, by luck or by skill, to enjoy decent returns and are over-confident of their abilities to pick the right horse/card/whatever. And, after all, some people did back the Grand National winner and enjoyed wonderful returns. Many of them will have said, after the event, that Ballabriggs was an obvious winner. Some of them may well have said this before the event as well. The trouble is that there are umpteen other people who said the same thing about other horses which did not win.
In the world of equity investment, even if the overall value of the equity market is pretty flat, there will always be some shares which deliver spectacular returns to their shareholders – just as there are always winners of the Grand National. For some gifted – or lucky – investors, it will be possible to be disproportionately invested in those shares. This will not be possible for investors in general. But the chance that you can be one of the successful ones is a powerful draw.
Buoyant investor expectations have had a bruising encounter with reality. Over the past decade, the average investor in UK equities has done very badly. The FTSE peaked at 6,930 in December 1999. Since then the market has fallen by about 14pc – equivalent to just over 1pc per annum on average. Of course, there have been dividends on top of this capital performance, but there have also been the massive charges of the investment management industry, as well as depredations from inflation and taxes.
In a way, the modern investment management industry and the average private investor deserve each other. They are both too greedy. Over the next decade they will both have to learn to be less so. Investors will have to accept that getting 20pc, or even 10pc, returns is distinctly abnormal – unless you are taking huge risks. And the investment professionals will have to learn that earning huge fees from managing investments only makes sense if you add value by delivering above average performance.
I suppose that it is possible that both could enjoy a respite as a result of a surge in the world's investment markets. But I doubt it. Although I don't buy the idea that emerging markets are caught up in a bubble, equally, equity markets there do not look cheap.
You can make a case that the UK equity market is reasonably valued. And even if the market overall does not do very well, it will be possible for the most skilled investors to pick stocks well.
Even these investors, however, will have to face a strong headwind. As and when Western economies fully recover, then interest rates and bond yields will have to go up substantially and this will undermine the value of all sorts of assets, including equities. It will also, of course, bring capital losses for bond holders. When this happens, at least new investors in bonds and bank deposits will be able to get a reasonable return on their money, in contrast to the daylight robbery which they have to endure today. Still, you might not think that this is much of a silver lining.
Roger Bootle is managing director of Capital Economics and economic adviser to Deloitte
In the world of equity investment, even if the overall value of the equity market is pretty flat, there will always be some shares which deliver spectacular returns to their shareholders – just as there are always winners of the Grand National. For some gifted – or lucky – investors, it will be possible to be disproportionately invested in those shares. This will not be possible for investors in general. But the chance that you can be one of the successful ones is a powerful draw.
Buoyant investor expectations have had a bruising encounter with reality. Over the past decade, the average investor in UK equities has done very badly. The FTSE peaked at 6,930 in December 1999. Since then the market has fallen by about 14pc – equivalent to just over 1pc per annum on average. Of course, there have been dividends on top of this capital performance, but there have also been the massive charges of the investment management industry, as well as depredations from inflation and taxes.
In a way, the modern investment management industry and the average private investor deserve each other. They are both too greedy. Over the next decade they will both have to learn to be less so. Investors will have to accept that getting 20pc, or even 10pc, returns is distinctly abnormal – unless you are taking huge risks. And the investment professionals will have to learn that earning huge fees from managing investments only makes sense if you add value by delivering above average performance.
I suppose that it is possible that both could enjoy a respite as a result of a surge in the world's investment markets. But I doubt it. Although I don't buy the idea that emerging markets are caught up in a bubble, equally, equity markets there do not look cheap.
You can make a case that the UK equity market is reasonably valued. And even if the market overall does not do very well, it will be possible for the most skilled investors to pick stocks well.
Even these investors, however, will have to face a strong headwind. As and when Western economies fully recover, then interest rates and bond yields will have to go up substantially and this will undermine the value of all sorts of assets, including equities. It will also, of course, bring capital losses for bond holders. When this happens, at least new investors in bonds and bank deposits will be able to get a reasonable return on their money, in contrast to the daylight robbery which they have to endure today. Still, you might not think that this is much of a silver lining.
Roger Bootle is managing director of Capital Economics and economic adviser to Deloitte
