As many rediscover the benefits of frugality, small investors are lamenting the "lost decade" where the money they have put aside over the last 10 years have hardly given them the returns they expected. With the adequacy of the present pensions system becoming ever more tenuous, many people in or near retirement are increasingly relying on their investments income to shore them up for their living needs.
Understandably, there are many local investors who shy away from the local investment scene. The lack of liquidity of the local stock market, the scarcity of sufficient objective information on the performance of some of the companies listed on the stock exchange, the proliferation of unrated bonds that few people really know what risk they involve, and the lack of diversification in the opportunities available for small local investors are just some of the reasons that keep many from touching the local investments market.
Over the last five years we have also seen some very aggressive selling of investment products to retail investors by local financial services operators. We hear about stories of small investors who have been sold shares or debt of RBS, Lehman Brothers, HBOS and other fallen angels. Similarly many have been convinced to put their money in overseas property funds that have now been frozen for quite some time. Whether these unfortunate investors were just greedy or have been deceived by aggressive personal selling is difficult to establish unless one has all the facts at hand.
But even smarter individuals who are more capable of deciding on their own the best investment strategy that suits their particular needs have generally not been very happy with the returns they managed to gain over the past ten years. The blue chip equities quoted in the FTSE started the decade with the index at 6,930 while it ended the decade at around 5,400. So, apart from dividends paid, money invested in this market actually shrank by 22 per cent in the decade that has ended - and this without taking into account the effect of inflation!
In the last decade European and US exchanges did not perform much better. The Dow Jones in the US has seen the value of shares quoted in it fall by nine per cent. In Germany the DAX declined by 14 per cent and the CAC-40 was the worst performer with a fall of 34 per cent.
Those who invested in gold will surely not regret their decision. Gold prices went up by 281 per cent in the last decade. Similarly, 10-year US Treasury bonds have risen more than 80 per cent.
What about investment in property? Once again the local property market lacks transparency. There is no one single property price index that is reliable enough to be of value for those who want to invest in property in an informed way.
Moreover, the local property market is so swamped with excess supply that any valuation of property held as an investment is bound to be inaccurate at best and misleading at worst.
Add to this the patches of illiquidity that at times affects parts of this market and one can understand that investment in local property is not really for small investors who typically have a low risk tolerance.
Investment in overseas property is quite a different story. Whether one buys a single property in a foreign country, or invests in a property fund, the fluctuations in international property prices have been substantial. Those who invested in residential property in the UK would have seen the value of their investment rise by 68 per cent over the last 10 years, with inflation also taken into account. Yet in the 1990s the appreciation of such an investment amounted to only 14 per cent.
As more baby boomers are in or nearing retirement, there is a distinct risk that many of them will find that their quality of life will not be as they had imagined it just a few years ago. This has serious social and economic implications that have to be addressed both at the personal level and at national level to avoid a serious deterioration in our social fabric.
More needs to be done to protect investors with a low risk tolerance from aggressive selling. The trend to offload unsecured corporate debt from banks to small retail investors, without a proper risk grading mechanism in place, is indeed asking for a crisis that may shake investors' confidence in our financial system at some time in the future.
Now is the time to act to prevent this second decade from again being a lost decade for investors and pensioners.
jcassarwhite@yahoo.com