Why is it so few Brits embrace the benefits of personal investing?

Investing in stocks and shares is something that less than one-quarter (23%) of UK citizens do, whereas the equivalent for US citizens is two-thirds (63%). These are the findings of research carried out by Bristol based Hargreaves Lansdown (HL).

Why the disparity? Well, the investment platform HL puts this down to Americans being much more comfortable with risk.

Twenty per cent of Brits surveyed believe that property as an investment is safer than the stock market, and twenty-one per cent feel the incentives to invest are much better in the US.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, adds:

“The Labour party says it wants to make it as easy as possible for people to feel the benefits of saving and investing their money. It’s also been big on the Conservatives agenda too.

“The tricky part is getting people to take a first step on their investing journey and dipping their toe into the market. It’s clear that millions of British people are failing to boost their financial resilience by not making a move while the stock market holds much more allure for Americans.”

The US stock market reached record highs in recent years, boosted by the famous “tech” stocks – many of which we all use daily – the so called “magnificent seven”, Apple, Microsoft, Google parent Alphabet, Amazon.com, Nvidia, Meta Platforms and Tesla, while the UK market has languished: the FTSE 100 was trading at a 43.5% discount in May compared to the US, and it is still considered to be undervalued and unloved by many investors today.

Starting early gives you a big advantage

The earlier you start investing the more you will accumulate over a lifetime. That’s because of the compounding effect: even a modest growth rate of 7% compounded year after year will result in impressive growth in your wealth. But that’s a meagre rate compared to investing in something like Terry Smith’s UK FundSmith Equity, a fund that has returned an average of 14.8% over the last 10 years.

Terry Smith has turned an initial investment of £10,000 into £39,758 over that time. But America’s now legendary Warren Buffett has done even better, achieving an average compound annual growth rate of 19.8% since 1965. If you’d had the foresight to invest

£10,000 with Buffet’s Berkshire Hathaway in 1965 you would have over £83 million today.

Given the relatively high level of pension participation in the UK, compared to the US, many of us are investors and don’t realise it. It’s just that someone else is doing it for you, and not always successfully. They still charge their fees win or lose and fees make a big difference to your overall returns. If you can select your own stocks, you can often do a whole lot better.

Is age a barrier?

Absolutely it’s not. At 60 you could have many years ahead of you and when you retire you have more time to investigate companies and funds worth investing in. As the Office for National Statistics (ONS) points out, the average life expectancy for men who are 60 years old today is 85. There is a 25 per cent chance of living to 92, and a 10 per cent chance of reaching 97, plenty of time to benefit from DIY investing.

As Rachel Winter of Killick & Co points out, it’s important to set aside enough cash to cover emergencies. Unplanned expenses can throw you, and you don’t want to have to sell your investments once you have got them in a tax shelter like an ISA or a SIPP. You can currently get nearly 5 per cent in a cash savings account, so easily covering inflation while it sits there.

Asset allocations

When investing in the stock market you have a whole range of possibilities to choose from. The least risky are government or corporate bonds. They are one way of lending money to governments or companies in return for fixed rates of interest, sometimes tax free. Bonds are for people who want a safe investment producing a regular income stream.

The next level up, you are looking at so-called “passive investments” or market trackers. These are generally safe as they are investing across the whole stock market or a certain segment of it, the amounts invested in proportion to the companies in an index.

The next rung of the “risk ladder” takes you into managed funds, controlled by individual managers liken Terry Smith. Their performance depends on the skill and, dare I say it, the luck, of the managers. You can do very well if you pick the right one.

Finally, we’re looking at individual equities, anything from blue chips (leading companies) like Shell or BP, through to small and medium size companies. Generally, the smaller the company the greater the risk, but also the greater the potential to grow. Equities offer capital growth and many of them pay regular dividends.

Investing today is easier

Investing is easier than it used to be. With lots of online platforms such as the HL one, you can buy and sell shares at the click of a mouse, or even use a smartphone. You can also invest abroad such as in the EU or the US. When you do commit your hard-earned cash to investments though, think carefully about your risk profile, what proportion you may want in bonds, trackers, funds and equities and when you may need your capital back.

Tax efficient

Investing in the stock market can be more tax efficient than cash savings accounts. The interest received on cash is taxed as income, whereas dividends on shares are taxed at a lower rate. If you invest through a tax shelter like an ISA or a SIPP you will shelter your investment from tax entirely, including capital gains tax. Another consideration is inheritance tax, but that’s a bit more complicated, so as with all tax matters, you should seek professional advice if you are not sure.

Tom Entwistle is a private investor who runs the Taunton branch of SIGnet – the Serious Investors’ Groups, a nationwide network. If you would like to join a local investors’ discussion group, contact tom.entwistle@gmail.com