Mar
2023
Rainy day funds under water and the need for better financial education
DIY Investor
20 March 2023
In the editorial for DIY Investor Magazine 35 (What the Dickens!) I looked back fondly at the relationship my dear old dad had with money, and the maxims he used to drip feed us, to try to get us to stay on the right path in pursuit of any number of different objectives – by Stephen Haysom.
I’m not going to do the one about having a slot in it, but Dad had a good head for money.
He grew up on a pretty rough estate, where the path from leaving school at 14 with no qualifications, to a job in a factory and a council flat was well trodden; but he wanted something different.
He was the only one of his ‘gang’ to aspire to buy a house, and when he paid off his mortgage in under five years, it was a major achievement.
I appreciate that things are different now, but he single-mindedly pursued that sole objective of being debt-free; plenty of overtime, no furniture, no holidays and the deferred patter of tiny feet.
With financial stability, he set about securing his family’s financial future; people like him didn’t have financial advisers, his achievements were founded on hard work and a healthy dose of common sense.
When the Thatcher government set about its programme of privatisation, Dad embraced share ownership; Mum recalls him feverishly clipping coupons, attaching cheques, and even though she didn’t really know what she was doing, encouraging her to ‘just sign here’.
The scale and impact of the sell-off was huge; £60bn of assets in 40 state-owned companies were sold, and over the course of the administration, the number of people owning shares soared from 3m to 12/15m.
Most of the floats were at a price that pretty much guaranteed instant returns, and that bubble of wealth inflated house prices to the point where the generation that once ‘had nothing’ became probably the wealthiest there will ever be.
Sadly, Dad left us all too soon, but he left Mum financially secure for life; in common with many of her contemporaries, she has lived relatively modestly, never forgetting what it was like growing up in, what today, would be considered poverty.
A few years ago, I undertook the not inconsiderable task of trying to consolidate all of the various accounts, statements and share certificates she could find, along with a couple of workplace pensions; it made me realise that this was a job only half done.
After an initial fillip to the share price, often caused by an over-subscribed offer showering windfall cash on the fortunate, many of the newly privatised companies became steady-Eddies.
In the twenty years between float, and the point at which I got stuck in, many of these companies had faithfully delivered cheques to the doormat; not setting the world alight, but a valuable source of additional, passive income.
However, technology has advanced dramatically in the interim, delivering education, information and access to markets, that were previously the preserve of those in the City.
It also delivers masses of historical data to allow ‘what if’ scenarios to be compared, and this is where it can look a little scary; that 4% ‘divvy’ may have come in handy at the time, but the results that could have been achieved by selling up and, for example, buying a tracker could have been spectacular.
By way of an illustration, £10,000 invested in 1985 in one of the many funds that track the MSCI World Index would now be worth £206,000.
I’m not going to say that he wouldn’t have got to grips with it, but nobody told Sid (sadly not his real name) that MSCI World included 1513 companies across 23 countries; or that it has delivered an average annual return of 10.94% since December 1978.
He would probably have thought he’d ‘done the right thing’, and that was that.
And there must be millions of people up and down the country in exactly the same boat; they are ‘investors’ by dint of the fact that they hold some shares, but in reality, it was closer to saving, because those privatisation shares, or shares emanating from a company scheme, were rarely seen as a stepping stone to the creation of a diversified portfolio underpinning a long-term investment strategy.
DIY Investor was conceived in the belief that people would necessarily have to take more personal financial control, and the black swan events in the few short years since DIY Investor Magazine launched in 2014, has seen a massive acceleration in that regard.
The number of accounts opened by DIY investors leapt by 28% last year, but the early experience of those recently new to investing with markets falling, is almost certainly different to the experience back in the mid-80s when to clip a coupon was to bag a profit.
However, the challenge is the same – to embark upon a long-term investment strategy in pursuit of your financial objectives.
And wherever you fit, financial education is absolutely key; the biggest winners in the 80s sell off were almost certainly those ‘in the know’. Take the profits and move on.
By the same token, designed to give less-advantaged children a hand up, the biggest Child Trust Fund pots have been accrued by experienced investors, glad for the opportunity to grow free cash.
With no attempt to educate and engage parents in the process of building a nest egg for their children, more than 1m CTFs have been ‘lost’, and with them a great, and well-intentioned opportunity.
These two screen shots are what prompted me to dip my quill today.
After we’d consolidated and re-jigged mum’s holdings into what could loosely be described as a ‘portfolio’ she had wide exposure to global markets and diverse sectors; set to reinvest dividends, things pretty much looked after themselves, and she had a basket of retail bonds to deliver steady income.
What she also had was her rainy-day fund, which was spread over a number of different accounts; whilst going through some correspondence, I found a Santander ‘Easy ISA’ and a Barclays ‘Everyday Saver’.
In the former, her £13,046 had earned £1.31 (tax free) in a year, and the £18781.67 in her Barclays account, had been swollen by 14p with interest paid at 0.01%.
With inflation as measured by CPI currently standing at 10.1%, the combined loss of buying power of those two reasonably modest accounts is £3,183 in a year.
With his ‘return of my money’ head on, Mark Twain might have reluctantly worn it, but that’s a pretty savage blow to those that have done the right thing.
Having said that, it’s a pretty tall order to ‘have’ to achieve a 10% return in falling markets just to stand still, which highlights the absolute requirement to take a long-term view.
Admittedly, with a further interest rate hike expected, it may be that rates on savings accounts start to creep up, and hopefully some of the supply-side inflation caused by the war in Ukraine and the aftermath of Covid, will start to abate, but there is a powerful argument to be made for transitioning from being a saver to an investor.
DIY Investor is pledged to deliver the education to those that have ‘done the right thing’ and are either sitting on shares or cash, to help them become confident and competent long-term investors.
This is not a cohort that is necessarily easy to access, but DIY Investor will be working with its share registration partners and the administers of corporate SAYE, sharesave and share incentive plans to improve levels of education and ensure those that engage are able to make informed investment decisions on their way to financial independence.
In addition to opinion from industry commentators and experts, DIY Investor is pledged to bring you case studies from ‘someone like you’.
This article could barely be more personal in that it reflects my lived experience and the realisation that improved financial education and engagement could have delivered better outcomes.
That requirement is something that is absolutely to the fore in the latest EQ Shareholder Voice Report. The survey of 3,000 retail investors highlights the need for better education, particularly for new investors who may have entered the market at a time of great turbulence.
At a time when a Boring Money survey reports ‘low risk’ portfolios losing an average of 12.7% in a year this is a time to make sure that investors understand, and fully embrace the importance of investing for the long term.
See the full report here >
If you are embarking on your own journey to financial freedom, or are an existing investor with a story to share, we’d love to hear from you at ask@diyinvestor.net
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