Rachel Reeves, and the wider UK government, want to encourage and develop what they call the “culture of retail investing” across the country.
Whether through Individual Savings Account (ISA) reform, encouragement through taxation or some other means, it appears the leaders will make a renewed push to get members of the public keen to invest their money once more rather than just saving it – but with dwindling numbers doing so, a lot more is needed than just reducing the limits on Cash Isas.
All the same, even if that particular method is misguided in intending to steer people towards investing over saving, at the very least it has got the conversation started. Right now, members of the public will be being reminded that they can save money tax free – and maybe now they’ll also consider investing tax-free, with its possibility of greater gains over the long term.
Education, education, education
There’s no getting away from the primary reason that many people don’t invest, and thus, the biggest barrier faced: educating would-be retail investors.
Even that sentence alone might be enough to switch some off or think it’s not aimed at them; language, terminology and money misconceptions all frame reasons why people sometimes don’t think investing is for them.
So, back to Ms Reeves words: Retail investors are simply private or individual investors. You and I, essentially, if we make investments at home.
And so while yes, there must be education provided on the concept of investing, on the practicalities of how you go about it and why it’s a long-term process, it’s absolutely vital that it is done in a relatable and understandable way for the masses.
Demystifying money shouldn’t need to be a thing, but it is – and has been for generations.
What’s risk and what’s risky?
More practically speaking, along with education on the hows and whys of investing, there will need to be a clearer picture offered to people about the concept of “risk”.
Speak to many non-investors and they will, very reasonably, say they don’t want to risk losing money. They don’t want the amount they have now to be less than they have in future. By putting money into a savings account, they guarantee that: the bank won’t spend their money, their funds are protected. They can even grow, with good interest rates behind them – and everyone should certainly ensure they have savings to fall back on.
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Get a free fractional share worth up to £100.
Capital at risk.
Terms and conditions apply.
But while the numbers may increase, there are other factors at play when it comes to “growing” money – inflation being a key one.
That’s one area where investing can help out, by seeking better returns over the long term.
It only takes a quick look at headlines this very week for example to see that investing in companies or funds (groups of companies) isn’t always a straight-line win, and that’s where risk comes into play – both the understanding of it, and a person’s tolerance for it.
Alongside an understanding of what risk really entails, therefore, should also include better explanations of what are genuinely risky investments. For example, gold can be an investment. That’s currently sitting at an all time high, at the same moment as an investment made in Tesla stock one month ago is sitting on a 15 per cent loss. What about investing in private companies? Using a fund manager? How about investing in whisky? Or bonds?
“Investing” is a catch-all word, but that doesn’t mean anybody who wants to invest needs to know every single thing about every single one of them.
This shows why it’s vital, therefore, to explain that taking on additional risk with money does not necessarily equate to a person “risking” their hard-earned wealth.
Remember the dark days of the pandemic? Some people had more money because they couldn’t go out and spend it suddenly. Investing suddenly became an option for them. So what became of those lockdown investors?
“Retail investing is one of the few trends that exploded in popularity during Covid but is still here to stay today,” said Dan Moczulski, UK managing director of investing platform eToro, to The Independent.
“This trend is often attributed to meme stocks, but in reality it was down to a confluence of factors. Covid meant people had more time on their hands to learn about investing. The digitisation of investing services with user-friendly apps made this easier for people to try it out and get information easily.
“Stimulus checks meant they also had extra funds to invest. It was a period when people had more time, money and resources to get into capital markets.
“The legacy of Covid has reinforced a few things. The first is education: we need to be there to provide the tools and knowledge to support the growth of new investors. The second is accessibility: it was user-friendly investing apps, rather than incumbent providers, who captured the massive wave of first-time investors during lockdown.”
Many of those same lockdown investors have since clearly looked to diversify into different asset classes, explained Mr Moczulski, backing up the notion that once investors see their returns can be far better than in cash savings, they will naturally look to expand their knowledge base even further.
How else can the government help?
Quite aside from the question of how they get information to people to help explain how and why they can invest, there are clearly some steps the government, the industry and regulatory bodies need to come together on to remove some barriers to everybody being able to invest if they choose.
Not to linger on the Cash Isa question, but an obvious step is to merge the cash and stocks-and-shares Isa, not to split the limits further.
Making one product able to both save and invest cash from the same spot would be a huge advantage: any money in there can earn interest, but people would be able to begin allocating a portion of that to investing and begin to see how it works, what type of investor they want to be and how much they are keen to invest vs save.
It would be a huge barrier reduced against having to withdrawn from one and place into the other if you currently want to use cash Isa money to invest, as that then counts towards an Isa allowance even if the money is initially in one as cash.
Secondly, stamp duty is a clear irritation to many. Currently, most British shares are subject to a 0.5 per cent stamp duty cost. That doesn’t sound a lot, but in investing you try to minimise your costs wherever possible and, on overseas shares for example, you do not pay this fee. It’s an inhibitor, if nothing else – and it would not be expensive for the government to forego.
“While the multi-billion-pound annual cost of scrapping stamp duty across the board might make the chancellor wince, creating a specific carve-out for Isas to support her retail investing drive could be achieved at a fraction of this cost. Michael Summersgill, chief executive of AJ Bell, told The Independent.
“We estimate [it would cost] somewhere in the region of £120m. In government spending terms, that is pretty much a rounding error and would remove a nonsensical barrier to Isa investors buying shares in UK businesses.”
Considering the overall push is indeed for people to buy British shares in greater numbers, it seems such an obvious place to start.
The time to start is now
What typically happens around these government plans is discussion, consultation, a plan emerges, an amount of money is committed and then maybe, eventually, something filters through in real, practical terms to people.
It needs to be quicker this time. It needs to be more effective, and it needs to be delivered in the right way to reassure people this is a positive thing to do with their money for their future wealth, not drive them even further away.
“The single greatest challenge to overcome is people’s fear of investing. For a long time, high fees, regulatory scaremongering and low financial literacy has made investing seem off-limits to ordinary people. Zero-commission platforms have helped remove some of those cost hurdles while helping to educate people on how best to grow their money,” Gabriel May, Trading 212‘s head of treasury, told The Independent.
“Yet many still believe investing is too complex or too risky for them, something reserved for the wealthy, not everyday savers. This largely stems from low financial education and a regulatory culture that reinforces the perception of investing as risky.
“If the government wants to build a genuine ‘investing culture,’ the priority must be clear, accessible financial education and reassuring, user-friendly platforms that show anyone can start investing, empowering them to build their financial future with confidence.”
Still, regardless of which platform people invest on, one thing is certain: among all the other factors spoken about surrounding education and stamp duty and all the rest, some old wisdom still likely holds true: word of mouth has a particular power, and if some people are speaking about their investments, others will eventually want to learn.
There’s an awful lot to do to create a whole-nation culture and, in truth, that is probably a generation-long task. But it has to start somewhere, and it should start now.
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
