Invest and beware: you are on your own

How much are you prepared to risk? For, whatever you do, risk is involved

Is it likely that a body whose objective is to improve the public's understanding of pensions, life assurance and other financial products will be sufficiently cynical about the City? The Government is to back a new initiative, the Personal Finance Education Group. This is what it ought to teach, but probably won't.

You are there to be fleeced. Insurance companies, building societies, banks, unit trust groups, investment managers and the like see you, the customer, as sheep to which they will regularly take the shears. Because in the past all building societies and many insurance companies were mutual societies, consumers assume that a notion of co-operation for a common end still exists. Unfortunately, this 19th-century tradition has become attenuated as societies convert themselves into shareholder-owned companies. The truth is that the directors of financial institutions are much more concerned with what their company gets out of each trans- action than with what is appropriate for you. Likewise, the executives with whom you do business are largely if not wholly motivated by commission. That is why the big insurance companies cheerfully persuaded thousands of individuals to leave occupational pensions schemes and to buy personal pensions when it was unwise to do so. That is why unit trust groups urge you to invest in the stock market at the very moment when the professionals expect it to boil over. The financial institutions put their own interests first.

You are on your own. In a perfect market you would use a broker, or other qualified adviser, whom you pay, to find the most suitable investment plan at the best price. In this hypothetical situation, the market would be transparent, in the sense that you would know exactly what you were buying and what the cost was. Too little of this is true to life. In fact, insurance brokers live off the commissions that they receive from the companies to which they direct business. They are not really working for you, the consumer; they are in business for the convenience of the insurance companies. Nor is it easy to discern in any given transaction, although you are given the numbers, what part of your investment is being taken by the financial institution concerned, and how much is being properly invested on your behalf.

These arrangements are just a further example of the axiom that businessmen are naturally collusive. They will always try to tie up between them, or to fix, a market, if given half a chance. Only government, through law and regulation, with watchdogs and supervisory bodies and, finally, with education, can stop them.

Trust nobody. In earlier periods, there were financial institutions which it was natural to trust. Perhaps their performance wasn't wonderful, but they would never let you down. The Prudential? It is one of the insurance companies that imprudently switched employees out of occupational pension schemes. Flemings? Jardine Matheson? A few months ago it turned out that one of the dealers working for their joint company in Hong Kong had been putting part of the investors' profits into his own pocket.

Barings? Collapsed, owing money to bondholders. Morgan Grenfell? It has employed investment managers who wilfully broke the rules designed to protect investors. The pension scheme of the National Grid, formerly a nationalised industry? The Pensions Ombudsman ruled last week that it must return pounds 44m removed from the Electricity Supply Pension Scheme. The late Robert Maxwell would have smiled.

How much risk are you prepared to tolerate? This is the key decision that savers always have to make. It is a defining assumption. Whatever you do, risk is involved. If you place all your savings in building society deposits, your risk is that inflation will be a serious problem. If you buy a package of high-yielding shares, your risk is that the companies concerned cannot maintain their dividends when the economy next turns down. On the other hand, if you buy low-yielding shares, your risk is that the economy will not be sufficiently robust to allow the underlying companies to raise their dividends. If you invest overseas, you face a foreign exchange risk.

Be cynical about the City, not about the stock market. Over long periods, upwards of five years, the stock market works - modestly, but effectively. There are two trends which seem as reliable as anything in an uncertain world. The UK economy itself, and others like it, do grow steadily, with occasional changes of speed, stops and starts. At the time, booms or slumps are dramatic; afterwards they can be seen merely to have punctuated a long upwards march. The long-term rate of growth is 2 to 3 per cent per annum.

Furthermore, share prices have tended to rise somewhat faster. The fact that part of the working capital of most companies comprises borrowings as well as shareholders' funds enhances the return for shareholders. For periods of years, too, the better investment managers exceed the stock- market averages by two or three percentage points per annum, but none seems capable of maintaining this sort of performance permanently.

Markets always go too far. Because participants in the markets, whether professional or private, are made of flesh and blood, emotion as well as calculation drives business along. The pattern of stock markets is excessive movement up or down, followed by correction. This is precisely where we are now. Most professionals believe that Wall Street prices have been rising for an unusually long period and that a frightening correction will be needed to bring values back to a reasonable level. This regular pattern tempts some people to try clever timing. But not even George Soros, one of the leading exponents of this approach, gets it right all the time.