How to invest in uncertain times

With the world deep in recession, you'd have to be mad to put your cash into shares. Wouldn't you? In fact, argues, Hamish McRae, there's rarely been a better time to dive into the markets

Britons are saving again. Amid the clamour about the G20 meeting, the fiscal stimulus, "qualitative easing" and all that, something radical has been taking place. The household savings ratio shot up to nearly 6 per cent in the last quarter of 2008 – a fraction under its long-term average. The previous quarter it was less than 2 per cent.

Often ordinary people are more sensible than their political leaders, or indeed their bankers. During the long boom, individuals, like the Government, borrowed big to maintain their spending. But they started to cut back on credit card debt some months ago and now have been using the cut that many have started to receive in their monthly mortgage bills to rebuild their savings.

Part of the motive, presumably, is fear of unemployment, and the social and human costs of the economic slowdown are shattering. But part is perhaps a return to what you might call pre-boom values. The idea that people should put something aside for the future is just as embedded in our human psyche as the I-want-it-now attitude of the past few years. Pity it took a recession to bring us back to earth.

But how to save effectively in a world where returns on cash are so low, where house prices are still falling and where the stock market has had the most catastrophic decade since the 1970s?

There is no easy answer to that question, no "get rich quick" solution. But there are pointers towards a "get rich slow" outcome, some of which are explained here. The good news is that for people with savings and a longer time horizon, it is, at worst, an OK time to acquire assets and at best, a once-in-a-generation opportunity to do so.

There are two basic rules to all investment. One is that tax advantages are almost always worth taking; the other is to spread risk. The tax point is easy to make. A higher-rate taxpayer puts an extra £1,000 into his or her pension pot. That costs, after tax relief, £600. Most of it goes into equities – and the stock market promptly falls by another 40 per cent. That would be at the outer limits of the possible, given that the falls of the past year have been worse than anything that happened in UK finance – even in the 1930s and 1940s. But the pot would still be worth at least the £600 and the taxpayer would be square – actually probably better than square because there would be some dividends, and employers will sometimes add to the payment. There are disadvantages of putting money into pensions, because it is locked up, but the tax advantages are such that it is nearly always worthwhile.

The spreading risk point comes in two halves. The first is obvious. No one should have all their eggs in one basket. If we all had 20-20 hindsight we would have sold any shares we had at the end of 1999 and bought property with the money. Then we would have sold the property in the summer of 2007 and put the money into US government securities. And then now... well, that is the problem, we don't know what to do now. You can only play the game backwards. But if, back in 2000, we had held one third of our money in shares, one third in property and one third in US treasuries, we would still be decently ahead. One pot would be down but the other two still up.

The other spreading risk point is time. Take a single investment category, UK shares, and take the awful period from the end of 1999 to today. Assume you invested steadily throughout the period, putting something in each month. You might have put some in when the FTSE 100 index was around its peak, at 6950, but some would have gone in below 4000 during 2003, and some more in the past few months. And – the key point – you would have bought more shares when the price was low than when it was high. You would still have lost money because this has been a very bad period, but if you reinvested your dividends, on my quick tally, the index only needs to get back to about 4700 for you to be ahead. We are not there, of course, but that is not an implausible target for the next couple of years.

There are two further points to bear in mind. One is that over a long period, asset values revert to a mean. UK house prices have historically traded at around 3.5 times average earnings. Apply that rule and it is clear that prices were cheap in the 1990s, as that ratio dipped below three times, that they were expensive in the late 1980s when they reached nearly four times earnings and terribly expensive in 2007, when they reached nearly six times earnings. Now they are heading back to four times earnings, so are still a bit high, but no longer absurdly so. Given the rate at which house prices are still falling, in another year they will start to look cheap. You can apply the same logic to share prices, using the measure of the price/earnings ratio, and conclude that they were far too high in 2000, and rather too high last year, but now are again pretty cheap.

This does not say what will happen to prices in the future; all it says is that there are probably rather good times to buy any particular asset and probably rather bad ones.

The final point is that we are human beings and our strange and wonderful species has a strong group identity. We tend to think alike, and as a result get carried away with bouts of excessive enthusiasm and excessive pessimism that are hard to escape. Back in the days of the dotcom boom, everyone was carried away by the notion that the new communications technologies would change our lives and make our fortunes. They did the first but failed to do the second.

In 2007, everyone thought the housing boom would continue – or at least many people did. Our then-chancellor certainly thought growth would continue, though a few of us warned there would be some sort of downturn.

Now the reverse is true; the fashion is to claim this is the worst economic catastrophe since whenever. Those of us who think there will be a recovery at the latest by 2010 and that this downturn will be no worse than the 1970s or early 1980s are criticised for our supposed optimism. Try and hang on to that as the gloom-mongers of the G20 have their moment in the sun this week.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Suggested Topics
News
Bobbi Kristina Brown with her mother Whitney Houston in 2011
people
News
The actress Geraldine McEwan was perhaps best known for playing Agatha Christie's detective, Miss Marple (Rex)
peopleShe won a Bafta in 1991 for her role in Oranges Are Not The Only Fruit
News
The guide, since withdrawn, used illustrations and text to help people understand the court process (Getty)
Ministry of Justice gets law 'terribly wrong' in its guide to courts
News
Starting the day with a three-egg omelette could make people more charitable, according to new research
scienceFeed someone a big omelette, and they may give twice as much, thanks to a compound in the eggs
PROMOTED VIDEO
News
newsPatrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
News
Robert Fraser, aka Groovy Bob
peopleA new show honours Robert Fraser, one of the era's forgotten players
Life and Style
Torsten Sherwood's Noook is a simple construction toy for creating mini-architecture
tech
News
Top Gun actor Val Kilmer lost his small claims court battle in Van Nuys with the landlord of his Malibu mansion to get back his deposit after wallpapering over the kitchen cabinets
people
Sport
David Silva celebrates with Sergio Aguero after equalising against Chelsea
footballChelsea 1 Manchester City 1
News
i100
News
peopleHere's what Stephen Fry would say
Arts and Entertainment
tv
News
Richard Dawkins is known for his outspoken views
people
Life and Style
L’Auberge du pont de Collonges (AFP)
food + drinkFury at British best restaurants survey sees French magazine produce a rival list
Arts and Entertainment
Bourne's New Adventures dance company worked with 27 young Londoners to devise a curtain-raiser staged before New Adventures' performance of Edward Scissorhands
theatreStar choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Software Development Manager

    £40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

    Ashdown Group: Product Manager - (Product Marketing, Financial Services)

    £30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Day In a Page

    As in 1942, Germany must show restraint over Greece

    As in 1942, Germany must show restraint over Greece

    Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
    Britain's widening poverty gap should be causing outrage at the start of the election campaign

    The short stroll that should be our walk of shame

    Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
    Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

    Homeless Veterans appeal

    The rise of the working poor: when having a job cannot prevent poverty
    Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

    Prince Charles the saviour of the nation?

    A new book highlights concerns about how political he will be when he eventually becomes king
    How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

    How books can defeat Isis

    Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
    Judith Hackitt: The myths of elf 'n' safety

    Judith Hackitt: The myths of elf 'n' safety

    She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
    The open loathing between Barack Obama and Benjamin Netanyahu just got worse

    The open loathing between Obama and Netanyahu just got worse

    The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
    French chefs get 'le huff' as nation slips down global cuisine rankings

    French chefs get 'le huff' as nation slips down global cuisine rankings

    Fury at British best restaurants survey sees French magazine produce a rival list
    Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

    Young carers to make dance debut

    What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
    Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

    Design Council's 70th anniversary

    Four of the most intriguing prototypes from Ones to Watch
    Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

    Dame Harriet Walter interview

    The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
    Art should not be a slave to the ideas driving it

    Art should not be a slave to the ideas driving it

    Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
    Bill Granger recipes: Our chef's winter salads will make you feel energised through February

    Bill Granger's winter salads

    Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
    England vs Wales: Cool head George Ford ready to put out dragon fire

    George Ford: Cool head ready to put out dragon fire

    No 10’s calmness under pressure will be key for England in Cardiff
    Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

    Michael Calvin's Last Word

    Time for Old Firm to put aside bigotry and forge new links