In the UK, the latest post-Sandler Treasury proposals on the simplification of investment products f...
In the UK, the latest post-Sandler Treasury proposals on the simplification of investment products further extends the UK Government's determined attempts to encourage more saving within the UK population who are not currently making sufficient provision for themselves. However, the prescriptive nature of the proposed new stakeholder products risks creating cloned products that investors will be encouraged to buy.
It is understandable that pragmatic compromises need to be made in the design of the products. However these compromises serve to highlight the differences between these simplified products and the tailored service which IFAs can provide.
Clearly this gives IFAs a boost as they will have the opportunity to show how their advice adds real value. The proposals for prescribing the asset mix for the medium term (five to 10 years) and prescribing products with 100% equity content (albeit with 'lifestyling') for longer-term equity investment (over 10 years) originates from a simplistic rule of thumb that the risk of equities decreases with the length of the investment term.
However, it is clear the Treasury has had to compromise on one of the most important points from a recent FSA report Rates of return for FSA prescribed projections (produced by PriceWaterhouseCoopers) ' that the volatility of the value of the investment most definitely does not [fall over time]. The FSA report, supports further research that there is no reduction in the risk of the stock market with the length of term. The Treasury proposals have had to compromise in offering one-size-fits-all products. A simple glance at the Treasury proposals will lead many to believe that investors would be safer investing in the stock market for terms greater than 10 years.
Recent history has brought attitudes to the stock market back to reality. Investors, since the turn of the Millennium, have experienced a savage bear market with the FTSE 100 at one point halving in value from its December 1999 peak. Despite recent stock market gains, it is possible to contemplate the FTSE 100 going through a Japanese style bear market ' one which does not recover to its former high for a decade. For the FTSE 100 to avoid spending ten years going nowhere it will have to better than its December 1999 high by December 2009.
This means it will take more than a 100% increase in the market (from its low earlier this year) to recoup the 50% loss. 100% growth in seven years may not seem impossible but putting it into the context of an annual average return, the market will have to grow by more than 10.4% each year just to recoup the losses!
The 'buy and hold' myth emerged largely as a result of the bull market which began in 1984. As stocks started an inexorable long-term rise investors stood by as their money (despite some short-term shocks) grew and grew.
Every fall in the market was soon replaced by a return to normality and the upward trend continued.
Certainly for those investors following that advice in 1987 and got out by 1998, this proved a profitable strategy. But if we look at Japan in the 1990s, or the US in the inter-war years over those periods, the 'buy and hold' philosophy did not serve investors well.
Do investors feel lucky today?
Paul Bruns and Elaine Parkes
3,000 left to transfer
Record numbers of people aged 90 plus
From 3 to 10 October