The dangers of too little market knowledge
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'Mom, Dad, beloved parents and grandparents, you played it safe, you died poor'. Sobering words under a cartoon of a pathetic gravestone. I saw it recently above an article about the perceived safeness of bonds.
It quoted a concerned investment adviser. He discussed the situation of a couple, both aged 52, who invest 80% of their savings in government bonds. Yield: around 1%. 'They urgently need more shares, otherwise they won't be able to enjoy their nest egg later without worrying', he said. 'I realise that they have a low risk tolerance. I don't want them to lie awake at night staring at the ceiling in a panic. But I also know that they will do so anyway when they're 85 and find that their savings are running out.'It's a serious dilemma, with which many wrestle. The article was in an American magazine, but the same story applies in Belgium. The psychological gulf between shares and bonds is and remains as deep as the Mariana Trench here too (especially here). It's toe-curlingly simple: bonds = safe, shares = risky. Dear reader, that's completely wrong. Nowadays, bonds are much riskier than shares on average. It's been like that for years.
That's because bonds are ridiculously cheap for borrowers (companies hardly have to pay any interest) and very expensive for lenders (who hardly receive any interest). People don't realise it, but interest is just the price of money. If you've handed over your money to a company or the government for many years and get a paltry 1% interest in return, that has been an extremely expensive deal for you. Unfair even, because that 1% isn't even sufficient to offset the rising cost of living. You simply become poorer and poorer every year.
Sometimes you don't even get one per cent. Sometimes you pay the government for lending the government your money. That's too crazy for words and untenable. The reason why economic stories are so exciting is that we never know how they're going to end. Well, we do know that with this story. The tide will soon turn, interest rates will rise again and the value of all of those bonds will fall sharply. In the US, the tide has already been turning for some time.
Every saver is trapped in their profile. Most Belgians have a 'defensive' profile. Those savers can't normally invest more than 30% in shares. So, that means that at least 70% will be invested in fixed-income assets, cash or bonds. A topsy-turvy approach: so far, naive risk-averse investors have been palmed off with bonds blown up into bubbles, while the 'dynamic' type was lucky enough to be allowed (!) to invest in safer shares. If I were a saver in Belgium with a defensive profile, I would lie awake at night staring at the ceiling in a panic.
At least, if I realised that my savings were being eaten away. Most savers have no idea. They swallow the spiel their banker feeds them. By the way, these aren't always low-interest bonds. They're not even always products that match their profile. Far from it.
I recently heard the story of an 86-year-old woman who ploughed her savings into a product with a maturity of 12 years, based on a basket of shares: if the value of just one of the fifteen shares halved during that period, she could no longer benefit from any rise in the price of the basket and she would recoup her investment after twelve years – minus the expensive charges. Twelve years! And for someone who wouldn't even be buying any green bananas any more given their age.
Such products are sold as the best of both worlds: capital guarantee and the benefit of any stock market gains. The latter often turns out to be a mirage. And, after the deduction of charges and inflation, the former – the capital guarantee – is a guaranteed small capital loss. No one wants that kind of product, but we still all naively plough our money into them. Because we don't understand the first thing about investing. And that's how Belgians come to make a mess of savings.
However, the solution is simple. No one needs to understand those products, it's enough for everyone to understand that we don't have to buy them. Saving efficiently has nothing to do with shady instruments with an opaque charging structure. Rather, it's all about simplicity and clarity. And above all, it's about the power of compound interest. Young people in particular should know that every euro in a savings account after the age of 42, when they can see the prospect of their pension, will amount to no more than two euros, while the cost of living will have at least doubled by then too. In other words: you don't save with savings accounts!
The same euro, invested wisely on the stock market over the same period, can easily grow to 50, or maybe even 100 euros.
Two euros compared to 100 euros – a big difference! By the way, if you start with 5,000 euros, the difference is much bigger. 10,000 compared to 500,000 euros! What if you start with 10,000 euros? Or 20,000?
Please teach young people that at school – everyone – as a compulsory part of secondary education.
Pierre Huylenbroeck is the author of Onsterfelijk Beursadvies and Iedereen Belegger. He publishes Mister Market Magazine, a biweekly digital journal for curious investors. Please download a free trial issue.