Daily Archives: March 12, 2011

Most people cannot make provision for the future

Cameron’s  Big Society is predicated on the idea that people are generally able to provide for  themselves.  This is clearly not the case in vital  areas such as healthcare, education and pensions, not least because most people do not earn enough to pay for such things for themselves and their dependants.  Nor, particularly in the case of saving for old age, is it reasonable to expect most people to do so wisely even if they can afford to invest.

To expect the vast majority of human beings to be expert enough in financial matters to make wise private investment decisions is absurd,as absurd as expecting every man to be his own lawyer. Therefore, all but a few of us will turn to supposedly expert advisors for advice. The problem with such people is twofold: they often have a vested interest  in selling or promoting a particular product and even when they do not, they are frequently bad judges of the financial future. (If investing was easy and certain for the so-called experts, all financial institutions would be permanently hugely successful).

When someone sells you a private pension plan or insurance, he does not do it out of the goodness of his heart. He does it because he earns a commission or fee from it. As the pensions mis-selling scandal of the Thatcher years showed, that incentive drives many, probably most, financial service consultants to sell the product most beneficial to their income rather than to the customer.

The customer can also get misled if he takes reputedly independent advice, whether this be from a self-described independent financial adviser or out of the financial pages of newspapers and magazines or investment newsletters. The advice given may be anything but independent. Unbeknown to the client, an advisor may get a commission for recommending an investment and media share tipsters often have no scruples about recommending shares which they know to be poor performers, either because of direct inducements from the companies or because they work for a company which gets business from the sharetipped. Share tipsters can also make a profit by “ramping up” a price in shares they hold by recommending it or depress a share by criticising it and then buying at the depressed price.

Those recommending shares or financial products are in a wonderful position: they can tip to their heart’s content without taking any responsibility for their tips. No tipster has a consistent record of predicting successful investments. Quite a few have utterly dismal records over years. Indeed, so poor is their general performance that one might ask whether it is any worse than randomly selecting investments. It may even be worse. As Woody Allen once remarked, “A stockbroker is someone who invests your money until it is gone”.

The Daily Telegraph put the matter of share tipping to a sort of test in 2001. It employed a professional tipster, an astrologer and a four year old child to notionally invest £5000 in the stock market. The professional tipster applied his supposed expertise. The astrologer selected her shares using her star charts. The four year old child chose by repeatedly tossing (at the same time) a number of pieces of

paper in the air with the names of shares written on them. At each toss she caught one. After a year all the investments had lost money, but the four-year-old-child lost least, followed by the astrologer with the supposed financial expert bringing up the rear quite some way behind.

A rational examination of the actual performance of tipsters and advisors could only lead to the conclusion that predicting the future economy is a mug’s game. Why would an expert do worse than a four-year-old child and an astrologer? Well, it could have been a fluke, but an unlikely one as both the child and the astrologer did better. More probably the financial advisor’s knowledge is a positive hindrance. A parallel is with the football pools. Many people have a very considerable knowledge of the form and general state of professional football clubs. Yet these people do not appear to be any better at predicting results than the punter who knows nothing about football and does the pools by putting a pin in the matches or has fixed numbers.

The truth is that no one can guarantee investment for a secure future or even come anywhere near to it. All calls for private provision replacing public in whole or part should be placed in that context.  Not only that but account has to be taken of the great variety of abilities found in a population.   IQ is distributed so that around ten per cent of the British population have IQs of 80 or less.  An IQ of 80 is the level which most psychologists working in the field of intelligence testing judge that a person will struggle to live an independent life in a sophisticated modern society.  Add in the differences in education, social status and wealth and the idea that most people can make their own provision for a pension becomes unreasonable. Take into account the high cost of living, especially the ever rising cost of housing and raising children, and falling pay and  it becomes farcical. 

As for the broader  idea that  individuals should, if they have the means,   pay for their healthcare, education and   insurance to cover periods when they are not working,  to expect all but a small part of the population to do is clearly nonsense when the average annual pre-tax UK  income is around £26,000 with many earning below £15,000.

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