This may be unsurprising given the uncertain economic performance and the consequent negative impact on the medium-term attractions of equity investments. However, I am concerned that this aversion to risk is becoming more prevalent, with the effect that the public will face more limited choice in products as providers exit the equity-based market.
I agree with the advisory community that equity-based products offer the best option for investing for long-term growth, as long as they are part of an overall savings and investment portfolio which includes lower risk, fixed interest deposit and savings vehicles.
To have any chance of an acceptable standard of living in retirement, consumers need to generate greater returns from their investments than those just offered by cash holdings, which in real terms, at today’s interest rates, are losing value against inflation.
This aversion to risk does make it more difficult for advisers to recommend equity-based products. The challenge, therefore, for the industry is to make them more attractive to consumers and to risk-averse clients.
Advisers have a vital role to undertake comprehensive risk profiling and capacity for loss data gathering to ensure they understand their client’s tolerance levels and ensure investors end up with investments appropriate to their needs.
For those concerned about equity investments, there are options available other than cash, including fixed-term deposits and other accounts that with a modest lock-in can generate higher returns on savings.
Even in difficult markets there are opportunities for growth and equity markets have provided strong returns. For example, mid-cap firms have performed well over the past three years with the FTSE 250 up 13.1% in that period. The high-yield sector also has funds that have grown a similar 13.2% in the same three-year period.
In the current conditions consumers could be reminded that although they might be inclined to pull their money out of long-term investments when it seems that markets are unsteady, it is in fact the opposite of what they should be doing given the average rates of return.
This demonstrates that advice is vital to ensure consumers’ hard earned money is working for them. Of course, investors should not have too much exposure to the equity markets without a fair assessment of risk. But for many, having no exposure will mean the value of their investments fails to meet their growth expectations, particularly if you take account of inflation.
Being in cash you are over-exposed to the effect of inflation. With a current yield of 0.5% and inflation at 3%, the real yield of cash investment is -2.5%, meaning £100 invested today will have a spending power of £97.50 in 12 months’ time.
Although cash may seem a safe option for consumers over the long term, stock market-based investments regularly outperform for consumers facing the danger of inflation eroding away their cash deposits.
