‘UK households

24th May 2012

But shouldn't readers take this figure – designed to grab attention – with a pinch of salt?

The Daily Telegraph adds that the total value of UK assets has dropped by 5.5% in real terms in the last year, losing £470 billion. These are eye-watering sums that will instil fear into investors.

The Capital Economics report adds that borrowing costs were up while the value of shares and homes fell. "The euro-zone crisis has already had an adverse impact on the consumer sector in various ways, including higher borrowing costs and a possible dent to confidence. More recently, falling equity prices have added to the pain.

"We estimate that the total value of household assets has fallen by around 2.5%, or £200 billion, over the last year. In real terms, the drop has been around 5.5%."

However, it's swings and roundabouts, and it doesn't pay to get caught up in negativity. For example, if you're one of the millions of people with a hefty mortgage and no savings, you'll probably have seen your repayments significantly slashed in recent years. This may have more than made up for the fact that wages aren't keeping pace with inflation.

Mindful Money economist Shaun Richards' cautions care with headline-grabbing figures, such as that from Capital Economics.

He comments: "Using marginal prices to give total and average concepts like £470 billion and £18,000 per head is not the best use of mathematics. Whilst the Euro has it faults it is a bit much to blame it for everything that has happened!"

But what is sound, he says, is the conclusion buried in reports that: "…borrowing costs were up while the value of shares and homes fell."

Rods adds a comment: "I think they (Capital Economics) make a good point that depreciating equities for people with ISAs and pension funds are taking a hit, whether it is just short term and they will recover or a much longer term problem remains to be seen. And low interest rates on savings."

He adds that he doubts there will be being any growth for some time for the following reasons: Eurozone crisis; companies and people paying down debts and keeping a savings buffer; no supply side reform to make us more competitive; excessive taxation and government spending; poor education system; banks lending less to SMEs; low interest rates; QE causing oil and commodity inflation; and finally – stagflation.

So with this long list of problems to overcome, according to some, it'll be a long time before we see a plethora of positive headlines – but it's important for investors not to be swayed by the pessimistic language and shocking headline figures as a result of this.

Emotional rollercoaster headlines

Nick Kirrage, manager of the Schroders Recovery Fund, says on his Mindful Money blog: "Over the years this has led to the increasing use of more sensationalist or emotive language – and this has inevitably spilled over into the coverage of business and finance.

"To take one simple example, consider share prices, which a few years back tended to ‘rise' or ‘fall' but these days are just as likely to ‘soar' or ‘plummet'. Such instances only add to the ‘noise' that, as we have discussed before in articles such as Flight to quality, makes it so hard for people to look at global events and concretely use this information to work out how best to invest.

"According to the behavioural finance concept of ‘loss aversion', people feel the pain of loss far more acutely than they enjoy the pleasure of gain – and that perception is only heightened by the emotional language increasingly being used in investment today."

But how can you avoid feeling frozen with fear, wondering – what if my investments disappear? What if I lose and just how much loss can I take?

We are dealing with a time of ‘super stress' to the financial system, with a wide array of commentators predicting gloom and investors' nerves fluttering as we're told the average household has lost tens of thousands of pounds.

But there remain ways to protect capital and make money – even if not stellar returns. Plenty of companies remain robust and aim to maintain the upward momentum. To take advantage of this, proactively positioning and diversifying portfolios has been key. International exposure and dividend yields continue to offer attractive opportunities.

 

More on Mindful Money:

3 Ways we can stop the UK Pension meltdown

Is the stage set for a UK Downgrade?

Why do our world leaders cling to the dismal politics of economic austerity?

To receive our free daily newsletter sign up here.

The Financialist

Leave a Reply

Your email address will not be published. Required fields are marked *