There’s good reason to put much greater stock in the equity market

A client made me aware of this article in Times from last week and I thought I would share it with you.

“Is it time to buy stocks? Every day seems to bring warnings that the market has peaked, and there have been jitters among investors this month over the risks of a trade war and a US recession. Yet an important actor in the world financial system has been building its equity holdings. This is Norway’s oil fund, which, with assets of well over £800 billion as at the end of June, is the world’s biggest sovereign wealth fund. Its investment in equities has risen this year and stands at just under 70 per cent of its assets, compared with 66.3 per cent at the end of 2018 and 61.2 per cent three years ago.

I don’t know what will happen to global stock markets over the medium term. But it seems to me completely sensible that not just a huge institutional investor but retail investors too, of any age, should be raising exposure to equities. Moreover, it’s a choice that almost all employees, not just high earners, now need to make. Most people don’t have anything like enough of their money invested in the stock market, and they have the ability to increase it.

I don’t urge this course because I have predictive powers or even because I believe the short-term outlook for the stock market is bright. On the contrary, I’m worried that the risk of a US recession is high, that it will be severe if it does happen (as the room for additional monetary and fiscal stimulus is limited), that this will be damaging for emerging economies whose external debt is largely dollar-denominated, and that domestically a no-deal Brexit is increasingly likely and would be harmful for living standards.

Look through all this, though. Short-term economic forecasts are rarely a reliable guide to future returns from financial markets. The reason is that other investors are privy to the same information and market prices will therefore incorporate their expectations. The most important decision — in fact, the only really important one — is how much risk you’re willing to take with your money. It’s a decision that most of us of working age, and indeed those in retirement too, need to face, because of changes to the rules on pensions.

All employers are now required to enrol their staff in a workplace pension scheme if they are at least 22 years old but below the state pension age, and if they earn more than £10,000 in the 2019-20 financial year. This is an important legislative step, to get people to save for the long term.

It’s conventional wisdom that young people should take on more risk than older people, and thus allocate more of their savings to equities than to bonds and cash. I don’t disagree but I think that people in middle age and indeed old age should also hold the overwhelming bulk of their pension pots and any other investments in equities. Because most workers select a default investment option for their pensions, rather than choose their own funds, they’re likely to have too much in bonds as early as their 40s. That’s the way these commingled funds typically operate.

I have good authority for believing that any worker or retiree of any age should put money in the stock market. Warren Buffett, the great value investor, advises a retirement strategy of allocating 90 per cent of assets to an equity index fund — that is, replicating the market’s performance rather than trying to beat it — and 10 per cent to a short-term government bond fund. It’s what I do. On average, people tend to underestimate their life expectancy. They can afford to ride out periods of market volatility. Given how damaging inflation is to living standards, they ought to be bold and put money into the stock market — yes, even now.”