The Generation Game
According to the bean counters at the ONS (Office for National Statistics), we are not saving enough. Apparently it’s the worst UK savings ratio in 50 years. The savings ratio fell to a measly 1.7% from the first quarter of 2017, down from 3.3% in the final quarter of 2016 – and all the way down from around 10% at the time of the Financial Crisis. And “experts” think it’s got something to do with the Millennials spending too much. Shame on them.
Before you start panicking, this is the same ONS who a couple of years back conceded that their UK GDP quarterly reports had been wrong for the last 15 years thanks to a calculation error. Mind you, skewed economic reporting happens elsewhere. Last month the US equivalent of the ONS admitted their original calculations of 2017’s first quarter GDP growth had just been re-examined and was initially reported as 50% too low. Actually that’s not what they said. They just said it should have been +1.4% instead of +0.7% and hoped we wouldn’t notice the difference.
As to the UK savings ratio, when I was at secondary school a ratio was something divided by something else. So how do ONS calculate their ratio? According to the Gods of All Knowledge (Google) it goes something like this…
“The Savings Ratio is expressed as a percentage and is computed by dividing average household savings by average household disposable income. Both are calculated by governmental statistical organisations. Average household savings reflect the portion of average household income not spent on average current consumption and is instead invested in capital markets or used to buy assets."
So what's an asset or investment according to the ONS? Investments include stocks, bonds, bank accounts and hiding money under the mattress. Capital gains are not included. Eh? Bank deposits suddenly qualify as investments as do bitcoins stuffed under the mattress? And they don't measure increases? Really? Are they being serious?
So the low savings rate is the fault of the generation cohort now known as “Millennials,” who allegedly have been short-changed by us “lucky Baby Boomers?” They say that, unlike Baby Boomers at the same age, Millennials have no money left to save. It's also reported that Millennials (formerly known as Generation Y or Echo Boomers if you're wondering where they disappeared to) were traumatised by the 2008 Great Financial Crisis. (And we weren't by the risk of being vaporised during the Cuban Crisis when we were only 15?!)
Not to put too fine a point on it, at their age us Baby Boomers suffered decades of high taxes, double digit inflation up to 26% a year, scary stockmarket crashes in 1973 and 1987, mortgage rates up to 16% and repeated recessions, not to mention constant threats of a third world war. Our university education might have been free to some, but by Jove we've paid for it big time ever since. But still some of us managed to save despite constant broken pension promises.
The generation game
When I started secondary school a good six years before “The Who” recorded their stammering defence of younger g-generations, my teachers said we were the worst class they had ever c-come across. Unruly, lazy, badly behaved, and thick as mince we were. And we believed them. Until our lovely Latin teacher let us into the big secret. Every new intake was told they were the worst ever. Sound familiar?
And he also assured us that the practice of older generations criticising their immediate successors went back at least to Ancient Greek times. And apparently it was the norm for the young to blame their elders at the same time. Nature's way, I suppose.
I have become convinced that understanding demographics is the be-all and end-all of investment success, simply on the basis that if demand exceeds supply the prices of assets will rise. And secondly, because every generation behaves the same financially at different stages of their lives – as Harry Dent showed, despite what others wrote about alleged generational differences.
Some twenty years ago I had a long conversation with a Personal Finance editor who acknowledged my beliefs about the financial impact on economies by 47-year-olds, as first wave Boomers were then. He wanted to ask how folks in their twenties should invest. I asked him what he invested in when he was their age. Nothing, he replied. He was too busy enjoying himself. Why did he think anything had changed? OK, he said, what about thirty-year-olds then?
Same thing of course. When you're thirty-odd there's even more demands and distractions for your after-tax income. So our conclusion was that no matter what generation we belong to, human nature never changes. We behave financially exactly the same at different times in our lives. Go check. And we only think about saving for retirement when we hit our forties when we wake up to the realisation that our dream of retiring at 55 is just a pipedream. Nothing changes.
The fact remains though that those Baby Boomers who saved for a decent retirement income have done it the hard way. They've started saving early, forcing themselves to save first then spend what's left, and made use of all the tax breaks available with pension contributions doubled up by employers, not to mention tax free roll-up plans investing in stockmarket assets. As Yogi Berra said, “It's not rocket surgery.”
Where to start?
Warren Buffett's right-hand man, Charlie Munger, said the best way to invest is to start young and instead of hoping to invest what's left after your monthly spend, first decide how much you'll save, then spend what remains. That's what I did when I was 28 and I've never looked back.
Here's a tip. Go learn The Rule of 72… now! That's the easiest way to understand the Power of Compound Interest. Albert Einstein called compound interest mankind's most important discovery. Take an investment return net of tax and divide it into 72. That's how long it will take to double your money. 0.25% per annum in a Cash ISA? 288 years to double. 10% pa? Seven years. 14%? Only five years. You choose.
According to various demographic survey definitions, Millennials are now aged between 20 and 40. Some will have student debt. To handle this well I suggest you check out Martin Lewis's excellent “Student Loans Mythbusting” post on MoneySavingsExpert.com.
As to saving, once you've decided to follow Charlie Munger's advice to start early, and got to grips with the simplicity of the Rule of 72, what next?
Keeping it simple; some things don’t change
First, a lesson from Jeff Bezos, the CEO of Amazon.com. Amazon was 22 in July, which makes it a classic Millennial Company. Bezos says he's often asked what's going to change in the next 10 years, but never asked what's not going to change. And he says the second question is the more relevant of the two. I'd suggest it's even more relevant when it comes to investing. Despite being battered from all sides with “new” products and “services,” the best way to invest for Millennials is to copy what worked for us Baby Boomers and for those even older than us. And keep it simple.
The earlier you start the better. Save it monthly. And keep it going. Don't stop. And how about getting others to add to your savings? Employed? Get your employer to stick away funds for you too. They'll pick up tax relief anyway – and so will you. What other investment can add up to an extra 67% a year on top of your net contribution and grows without any tax on capital profits? It's called a Pension plan. But don't let that put you off. Get an IFA to help you make sense of it all.
By the way it's reckoned some Millennials have access to up to four parents and even more grandparents thanks to the increasing divorces endured by large numbers of Baby Boomers. Go chat them up and encourage them to stick away extra contributions into your pension pots. They can put away much more than you'd think, and have their contribution for you increased by a friendly taxman. If you're paying higher rate tax you can even get some extra tax back too.
Given the generous annual allowances now available from ISAs, your generous Boomer relatives could help you stick away an extra £20,000 a year to make up for the worrying years of student debt. But be sure to have that invested properly into stockmarket funds. What about cash ISAs? I hear you ask. They're pretty useless as a long-term wealth-building vehicle these days, unless you fancy living for a couple of hundred years or more to benefit.
And what about the Help to Buy ISA? The trouble is that these are designed by academics with more complicated rules than a game of Quidditch. Best of luck if you can find a way to use it to your advantage in saving for a property purchase. I'd stick to the stockmarket ISA, and if you can get the oldies to cough up more, either buy a place now with a mortgage, or rent and invest even more.
But where to invest? What have I learned since 1973 as an IFA? First set up your pension plan, ISA, and other tax effective growth investments, all of which can invest in the same places and funds if you want. Dripping in monthly is better for various reasons – but mind the charges! And thirdly, when you're younger you can afford to take more risk and buy funds/investments more exposed to volatility. A rough rule of thumb is that they'll grow far more over time if you let them be. But do take advice!
Having said that, it's true it's worth having exposure to investments which roll up “income” such as dividends. Over the past 20 years the total return of the FT All Share Index was 240%. Without dividends being rolled up (i.e. the price performance alone) that falls to 77%. That means that more than two thirds of the total return is from reinvested income. Mind you, to show the benefit of contrarian fund management, Invesco Perpetual High Income net of all costs over 20 years is up almost 600% (source: Lipper stats).
Mixing equity income funds with a couple of Technology funds for Millennials could be even better. The US S&P500 Index is over 20% exposed to the Technology sector. The FTSE 100 Index, however, has Tech exposure of less than 1%. Considering world demographics, the long-term technology wave and the probability of exponential growth over the next 20 years, tucking away some AXA Framlington Tech, or Baillie Gifford Global Discovery (to mention a couple I hold myself) wouldn't be a bad idea.
Lately there's a growing majority of investors and commentators saying you're better just sticking your savings into “cheap” Index trackers and ETFs. But “passive” investors would do well to remember the words of US expert investor Wade Slome: “If you follow the herd you will be led to the slaughterhouse.”
Finally, unless you have a special gift for successful investment, and a surgically
removed amygdala to stop you panic buying and selling at the wrong times, I'd find a mentor to help you along the long and winding road to true financial independence. And in years to come, I hope people will b-be talkin' 'bout your wealth c-creation.
Article courtesy of Investor Magazine