Why Are Brits Shunning Equities? Wealth Week Episode 30
For more than a decade now I’ve been on a mission to stamp out the financial illiteracy that is evident in every corner of
our society. We are not taught about money management or investing at school, at university or in the workplace. The result is that even successful professionals and business owners often lack the most basic appreciation of how to create and protect long term wealth.
A cynic might say that the government wants us to be dependent on handouts so the last thing they need is for people to achieve genuine financial independence. But I don’t buy that – we can’t blame our political leaders for our own lack of interest in our financial future. We can’t keep saying ‘they ought to do something about this’. We need to rediscover the lost art of personal responsibility and accountability. And, while we’re at it, we should teach our millennial and Gen Z children about this concept of making our own way in life and dealing with the ups and downs as a family rather than waiting for our adopted governmental parents to take care of it for us.
Brits are clearly in love with bricks and mortar, many believing that property is the best and only way to long term financial security. It’s taken a decade of bombardment from successive ‘Tory’ chancellors for the majority of Buy-To-Let landlords to start looking at alternative asset classes. I don’t deny that real estate has an important role to play in every portfolio, and it can be a good store of value in times of high inflation. My battle has always been to get UK Investors to give at least some thought to diversifying their portfolio into other equally attractive investments.
Which brings us to the asset class that has the best track record of all over the last century – stocks and shares. Think about what the world went through between the beginning of 1923 and the end of 2022. A depression, a world war, a Cold War, a global pandemic on the downside. Talking movies, radio, television, the democratization of road and air travel plus a moon landing on the upside. Across that entire century the S&P500 of American stocks and shares grew by 10.3% a year gross, 7.25% adjusted for inflation. Nothing else comes close in terms of predictable, long-term above inflation real returns.
Unless you were even braver and took a punt on smaller companies which, by definition, have more room for growth than the firms who are already the biggest in the world. If, back in 1955, the year before I was born, you’d invested in the Numis index of the 1,000 smallest companies on the UK stock market, you would have grossed 16.4% per annum for the next 66 years. Allow for inflation and you would still be in double figures at 11.3% real growth every year. Which is four times the return on UK property over the same period.
As if these outstanding returns were not exciting enough, the UK also offers one of the best investment wrappers in the world (at least until Rachel Reeves gets her hands on it) – the Individual Savings Account. You can save £20,000 a year, £40,000 for a couple, and have the entire proceeds tax free when you decide to realise your gains. With so many people now being dragged into higher rate tax this adds an effective 40% to the returns already available, the nearest thing to free money we’re likely to see in our lifetime.
So how many Brits are taking advantage of this exceptional opportunity? Barely 5%. Yes I know we are in a cost of living crisis but these figures were just as bad in the heady days of zero interest rates and two per cent inflation. They were just as bad in the liar mortgage days of the early 2000s and even worse after the 2008 Financial Crisis. Why do we regard property as being ‘as safe as houses’ while stock markets are casinos where you’re guaranteed to lose all your money?