Saving Our Savings
A FOOL AND HIS MONEY Amongst all the adverts for unit trusts, bonds and all sorts of other investments in the Money sections of our weekend newspapers, there are frequently encouraging articles by financial journalists with helpful charts showing the high returns that can be earned by following the latest investment fad.
But as we contemplate the main savings options - shares, bonds or cash - a key question is whether we can trust those who claim they can help us save and invest, or whether they are mostly in the business of lucratively separating fools from their money.
THE 'MAGIC' OF THE MARKETS For many years it's been accepted wisdom that investments in stock markets always outperform cash held in a bank.
Actually you can prove anything depending on which stock market index you use and the starting and end periods you select.
But it does seem that in general, unless you are particularly unlucky when you buy and sell your investments, three quarters of the time, you will get considerably better returns from having invested in shares rather than a bank savings account.
Though, if you'd buried money in your garden rather than investing in shares just after this government came to power, you'd have been better off by about fourteen per cent (provided you remembered where you'd hidden your cash) and over thirty per cent richer if you'd just left it in a bank.
Leaky pipes and disappearing money But even if stock market investments do mostly outperform cash, it is only worth investing if you can ensure that you personally are the one who pockets most of the benefits from rising share prices and annual dividend payments.
Unfortunately for many investors, much of the value from their forays into stock markets leaks out to other players, leaving us with little to show for our efforts.
There are many reasons why value leaks out.
These include punters being encouraged into buying at the wrong time; commissions and fees eating up unexpectedly large amounts of people's investments; investors being sold inappropriate products; and market insiders taking the gains from inflating rising markets and then again through shorting falling markets.
Buy buy baby, baby buy buy Common sense would say that if a trader or broker was certain a share was going to rise, then they would borrow millions from their bank, buy tons of shares and then retire in luxury, perhaps to a multi-million pound villa in the South of France.
But if a stockbroker or bank investment manager hadn't much of a clue about whether stock values would rise or fall or flatline from now to eternity, but relied on their commissions to make a reasonable living, have a few holidays and send their kids to a decent school, then they'd be pushing us to invest, whatever the market conditions.
In fact, listening to most investment experts, it always seems to be the right time to buy stocks.
If the market's going up, we're told to buy quickly to make money fast.
If stock value are collapsing, advisors assure us that the market is cheap so we should jump in while we have the chance.
And if the market is stagnant, advisors will insist that stocks always outperform cash held in a bank.
Your pain, their gain Investment advisers tend not to mention that many of the potential gains from stock market movements are captured by insiders rather than by the ordinary investor.
Insiders have a wide range of techniques for extracting money.
- With 'pump and dump' a trader buys into a share, spreads rumours or makes buy recommendations based on misleading or greatly exaggerated information.
When others rush in and the price rises, the pump-and-dumpers sell making a nice profit.
With 'churn and burn' traders increase their commissions by excessive selling and buying of their clients' portfolios.
Churn rates for stocks (the percentage of stocks sold in a year) have increased from just thirty per cent in 2007 to fifty per cent in 2008 to almost ninety per cent by 2009.
This may be due to diligent fund managers working much harder to increase our investments.
Or this might be telling us that that churning and burning is alive and well and is siphoning off an awful lot of our money.
- 'Poop and scoop' is the opposite of 'pump and dump'.
The poop-and-scooper tries to push down the value of a stock by spreading false information or issuing a 'sell' recommendation.
Once the stock falls, they can buy it at a low price and then cash in when the stock goes back up to its original level.
'Short and distort' is similar with the difference that the trader actually shorts a stock before spreading stories intended to drive the value down.
Then there are other methods like circular trading, Jitney, dividend pumping, double dipping, bucketing, portfolio pumping and dividend selling, all of which give value to insiders and deprive outsiders of potential returns.
Traders often call these and many other stock manipulation techniques as trading in 'guilt-edged stocks'.
DON'T BANK ON IT However, plonking your cash in a bank is not so rewarding either.
Borrowers' blues Overall, interest rates for borrowers seem to have fallen by around half the Bank of England's reduction in interest rates, considerably boosting lenders' profit margins.
In total, assuming total UK mortgage lending of just over a trillion pounds, if lenders manage to increase their margins over all this lending by just one per cent, this will give them an extra £10 billion or so of our money a year.
Savers' sorrow As for savers, unfortunately for them most of their accounts have energetically kept pace with reductions in interest rates and some have even comfortably exceeded the Bank of England's interest rate cuts.
A particularly worrying feature of the historically low interest rates is that savers in search of higher returns will start withdrawing their money from deposit accounts and be tempted into riskier financial products where they're not told about, or do not fully understand, the degree of risk and potential for losing money.
Particularly vulnerable are older people who might be relying on their savings to provide them with much of their income.
In mid 2009, there were a whole series of shocking stories of pensioners who had lost significant amounts of their savings after being advised by their banks to move them from risk-free deposit accounts into more speculative investments.
Selling machines Most of us have now understood that bank staff are no longer careful custodians of our money.
Instead they have become commission-hungry salespeople, constantly pushed by their management to flog us products we may not want or need and many of which may seriously harm our financial health, whilst always improving our banks' economic wellbeing.
It's vitally important that people realise that we seldom if ever get real advice any more.
Our banks are just selling machines, so we need to be better prepared to understand what we are being sold and how this might actually be very different indeed to what we think we may be buying.
But as we contemplate the main savings options - shares, bonds or cash - a key question is whether we can trust those who claim they can help us save and invest, or whether they are mostly in the business of lucratively separating fools from their money.
THE 'MAGIC' OF THE MARKETS For many years it's been accepted wisdom that investments in stock markets always outperform cash held in a bank.
Actually you can prove anything depending on which stock market index you use and the starting and end periods you select.
But it does seem that in general, unless you are particularly unlucky when you buy and sell your investments, three quarters of the time, you will get considerably better returns from having invested in shares rather than a bank savings account.
Though, if you'd buried money in your garden rather than investing in shares just after this government came to power, you'd have been better off by about fourteen per cent (provided you remembered where you'd hidden your cash) and over thirty per cent richer if you'd just left it in a bank.
Leaky pipes and disappearing money But even if stock market investments do mostly outperform cash, it is only worth investing if you can ensure that you personally are the one who pockets most of the benefits from rising share prices and annual dividend payments.
Unfortunately for many investors, much of the value from their forays into stock markets leaks out to other players, leaving us with little to show for our efforts.
There are many reasons why value leaks out.
These include punters being encouraged into buying at the wrong time; commissions and fees eating up unexpectedly large amounts of people's investments; investors being sold inappropriate products; and market insiders taking the gains from inflating rising markets and then again through shorting falling markets.
Buy buy baby, baby buy buy Common sense would say that if a trader or broker was certain a share was going to rise, then they would borrow millions from their bank, buy tons of shares and then retire in luxury, perhaps to a multi-million pound villa in the South of France.
But if a stockbroker or bank investment manager hadn't much of a clue about whether stock values would rise or fall or flatline from now to eternity, but relied on their commissions to make a reasonable living, have a few holidays and send their kids to a decent school, then they'd be pushing us to invest, whatever the market conditions.
In fact, listening to most investment experts, it always seems to be the right time to buy stocks.
If the market's going up, we're told to buy quickly to make money fast.
If stock value are collapsing, advisors assure us that the market is cheap so we should jump in while we have the chance.
And if the market is stagnant, advisors will insist that stocks always outperform cash held in a bank.
Your pain, their gain Investment advisers tend not to mention that many of the potential gains from stock market movements are captured by insiders rather than by the ordinary investor.
Insiders have a wide range of techniques for extracting money.
- With 'pump and dump' a trader buys into a share, spreads rumours or makes buy recommendations based on misleading or greatly exaggerated information.
When others rush in and the price rises, the pump-and-dumpers sell making a nice profit.
With 'churn and burn' traders increase their commissions by excessive selling and buying of their clients' portfolios.
Churn rates for stocks (the percentage of stocks sold in a year) have increased from just thirty per cent in 2007 to fifty per cent in 2008 to almost ninety per cent by 2009.
This may be due to diligent fund managers working much harder to increase our investments.
Or this might be telling us that that churning and burning is alive and well and is siphoning off an awful lot of our money.
- 'Poop and scoop' is the opposite of 'pump and dump'.
The poop-and-scooper tries to push down the value of a stock by spreading false information or issuing a 'sell' recommendation.
Once the stock falls, they can buy it at a low price and then cash in when the stock goes back up to its original level.
'Short and distort' is similar with the difference that the trader actually shorts a stock before spreading stories intended to drive the value down.
Then there are other methods like circular trading, Jitney, dividend pumping, double dipping, bucketing, portfolio pumping and dividend selling, all of which give value to insiders and deprive outsiders of potential returns.
Traders often call these and many other stock manipulation techniques as trading in 'guilt-edged stocks'.
DON'T BANK ON IT However, plonking your cash in a bank is not so rewarding either.
Borrowers' blues Overall, interest rates for borrowers seem to have fallen by around half the Bank of England's reduction in interest rates, considerably boosting lenders' profit margins.
In total, assuming total UK mortgage lending of just over a trillion pounds, if lenders manage to increase their margins over all this lending by just one per cent, this will give them an extra £10 billion or so of our money a year.
Savers' sorrow As for savers, unfortunately for them most of their accounts have energetically kept pace with reductions in interest rates and some have even comfortably exceeded the Bank of England's interest rate cuts.
A particularly worrying feature of the historically low interest rates is that savers in search of higher returns will start withdrawing their money from deposit accounts and be tempted into riskier financial products where they're not told about, or do not fully understand, the degree of risk and potential for losing money.
Particularly vulnerable are older people who might be relying on their savings to provide them with much of their income.
In mid 2009, there were a whole series of shocking stories of pensioners who had lost significant amounts of their savings after being advised by their banks to move them from risk-free deposit accounts into more speculative investments.
Selling machines Most of us have now understood that bank staff are no longer careful custodians of our money.
Instead they have become commission-hungry salespeople, constantly pushed by their management to flog us products we may not want or need and many of which may seriously harm our financial health, whilst always improving our banks' economic wellbeing.
It's vitally important that people realise that we seldom if ever get real advice any more.
Our banks are just selling machines, so we need to be better prepared to understand what we are being sold and how this might actually be very different indeed to what we think we may be buying.
