On the Money
Why you should avoid the merchants of menace
I read today that over half of adults don’t know what an ISA is, never mind that it’s in season.
And as far as we can tell, according to the statistics I shared with you a couple of weeks ago, the other half are attracted by ISAs because of freedom from tax panic as we approach the 5 April. They shift money lying dormant in crap cash deposits and stick them into crap tax free cash ISAs.
Official Government figures show that of the £275 billion lying in ISAs the vast majority are in cash ISAs currently earning buttons (0.1% to 1%, if you’re lucky).
And that’s crazy for more than one reason, given the first £1,000 of interest earned from ordinary deposits is tax free nowadays. At 0.1% you could have £1 million in deposit before paying tax on the interest earned. Yes, really.
While it may well be “ISA Season” it also seems to be a time to turn your back on any prospect of rising share prices. Last year most new inflows from investors poured into Absolute Return funds, inspired no doubt by the constant bad news that filled the headlines. Pessimism sells, for some reason.
Optimism stinks and remarkably it looks like it always has. A US report I came across from 1948 – – the year after I was born – contained 120 pages of numbers and charts written by the country’s “best demographic experts” and predicted what America would look like from 1945 to 2000.
There was no forecast of a baby boom, let alone a massive birth explosion lasting 20 years. Their assured projection of US total population wasn’t just a wee bit off it was disastrously wrong. These “experts” predicted a population of 163 million people by 2000. In reality it was 282 million. That difference is the equivalent of missing 14 New York cities.
They also predicted that after 2000, the population would start to decrease. Wrong again. Two years ago it hit 319 million. Imagine the difference such an increase in population has made to US corporate profits and stock market performance.
Legendary economist JK Galbraith warned investors not to pay attention to the consensus of “experts” quoted in the media. He said those quoted were the ones the media wanted to quote to support their stories. And remembering that pessimism sells, stories and headlines they promote catch our attention.
I’ve often posed this question to clients .. “why do the majority of investors come to the same conclusion simultaneously when so many admit to not understanding money issues?”
How is it that by far the popular investment choices this last two years (apart from deposits earning zilch) have been Absolute Return funds with an average gross return last 12 months of 1.1%, or Mixed Asset funds (which include bonds sure to lose money as interest rates rise), while patient equity investors have enjoyed double digit net returns?
More than a year ago some friends asked my colleagues for investment recommendations on a considerable six figure sum bearing in mind a similar amount would lie in deposit and that they were relatively cautious investors. They didn’t go ahead, thanks to fears pumped into them day and night by a negative media over China hard landings, Brexit, Deflation fears, Trump, European populism and other shock horror problems.
They also had read somewhere that the FT All Share had hit an all-time high. Which was time for a sharp exit, they said. Any idea how many all-time highs there have been since March 2009, I asked? No fewer than 52! Thirteen of which have occurred this year so far. Ouch.
And talking about all-time highs, if the index had simply increased from March 2000 to today by inflation it would be over 50% higher right now. Yes, really.
Having listened to the doomsayers my good friends have missed out on a 20.02% net return, having tucked away 01% in deposit. The same portfolio has risen net over five years by 86% (source: Lipper stats) outperforming Absolute Return and Mixed Asset sectors by miles.
Oh, and beating FT Index Trackers too, much to the amazement of the Financial Conduct Authority who were quoted last week by the merchants of menace saying it’s just not possible to beat Index Trackers.
Since this worldwide equity Bull Market started eight years ago there’s been goodness knows how many reasons to chase “safety”.
Five years ago it was commonplace for merchants of menace to dominate the headlines. Since then optimists sticking with favourites of mine such as Terry Smith , Douglas Brodie and Jeremy Gleeson are up by an average of 140% after charges.
But past performance isn’t to be relied upon say the FCA. Odd that they back trackers though, eh?
Alan Steel is chairman of Alan Steel Asset Management
Alan Steel Asset Management is regulated by the Financial Conduct Authority. This article contains the personal views of Alan Steel and should not be construed as advice. Do check your individual circumstances with your advisers.