Three years is a long time in investment. It has taken that long to bring about a total change in at...
Three years is a long time in investment. It has taken that long to bring about a total change in attitude by investors to what they consider to be a 'safe' asset. But what is the definition of safe? Cash was considered a risk in the bull run, as it was a risk to be out of the market since the expected reward for cash was considered too small for that risk.
Zeros have become notorious as a financial instrument that went from 'safe' to 'unsafe' in an incredibly short space of time. As the market hotted up the fact 'no zero has ever defaulted' led to many marketing them as low risk. Unfortunately for many the way in which zeros were used in highly geared portfolios combined with extreme falls in the market, caused this 'safe' investment to rocket its way to the top of the speculative investment list. Of course when they were apparently promising to outperform most other mainstream investments in the market, few people paid attention or even realised the risks, which now seem obvious to all.
It is this lack of reward for an unperceived risk that has been highlighted the most in the current demand for compensation.
With the debate circling over mis-selling claims, emphasis on products going forward needs not just to be placed on 'risk' but the risk/reward ratio. Everyone, especially the Government and regulator, keeps talking about improving investor education but little evidence has been seen of its attempts to explain risk/reward dynamics. Perhaps it is because of the belief it is a straightforward concept. If that is the case, then the severe fall in equity markets has definitely proved that assumption wrong. The knee jerk reaction to such losses has been 'how can this happen ' no one told me I could lose so much, I must have been mis-sold.'
Now that the regulator is trying to produce a useful definition of mis-selling, what should it take into account?
The key fact is that falling equity markets have made many financial products look unhealthy whereas had equities continued to rise they might well have looked brilliant buys. It is not beyond the bounds of possibility that equity and bond markets could have moved in such a way that with-profits bonus declarations could be a cause for celebration and split cap investors would now be looking canny and wealthy to boot.
The problem has not so much been the products themselves, it has been the unrealistic expectation of equity returns long term by investors and the financial services industry.
If the FSA wants to prevent future mis-selling and build up its reputation for thinking ahead rather than acting in retrospect, it could do a lot worse than help provide information on the risk and reward trade offs available from equities, bonds, cash and property.
First mentioned in Cridland Report
Second acquisition of 2019
Guy Opperman has rejected calls to speed up changes to auto-enrolment (AE) despite increasing pressure to boost contribution rates and overall savings pots.
Four key areas to focus on
And 94% for critical illness