Cash rich and bored? Be careful what you do with your money

Back in 2016 I suggested that you consider buying a small stake in the Iranian stock market. I don’t suppose anyone did. It wasn’t exactly easy to get in at the time and my optimism about the economy was pretty misplaced. But if you found a way, you would have bought in with the index on about 50,000. You could then have sold on 8 August with it at 2,000,000. You’d have run into a little bother with the currency, of course. The rial has been in inflation-driven collapse since 2017. But perhaps you were clever enough to hedge that a little.

I’m not going to worry about you. I am, however, going to worry about the many inexperienced savers who poured their money into the market a bit too late in the day. Some three million of them have put more than 40 trillion rials (£740m) into stocks this year alone.

Earlier this year the FT reported on one of these people; a young woman who, thanks to the pandemic, had more time but less income than usual and put the money she had been saving for a washing machine into the stockmarket. When the collapse began (3 August) she stayed in. The market is down nearly 30% and she’s lost 80% of the cash – while, due to the tanking rial, the washing machine is more expensive than it was.

She won’t be the only one going without as a result of Iran’s burst bubble. But young Iranians are also not the only ones who found themselves attracted to stockmarkets for the first time this year. Look over to the West and you will see a similar (if less extreme) dynamic.

Investment mania has been very profitable for some

This week, BlackRock announced its results. In the third quarter of this year the asset manager saw net inflows (of cash to be invested via its products) of $129bn. At the same time, the value of the already invested assets soared – don’t forget the S&P 500 is up 60% from its lows – and so then did the fees (charged as a percentage) on them. The result was an operating margin of 47% and net income up 27% to $1.42bn in the third quarter compared with last year. How’s that for real money?

There are lots of interesting things to note about this. I wonder, for example, how Larry Fink, Blackrock’s chief executive, squares the idea that the past few months have been, as he says, “incredibly hard for everyone” with being the highest-paid chief executive in the sector ($24.3m last year).

But for now let’s stick with the drivers of the BlackRock money-making machine. The Federal Reserve, America’s central bank, is a big buyer of BlackRock exchange-traded funds and so is the institutional investment sector. But on top of this, the firm is seeing, says Fink, “a record amount of retail participation in the marketplace”.

That the pandemic has driven small and new investors into the market makes sense – people have had more opportunity to sort out their finances. According to one survey in the UK, 14% of people who are trading more than they did before are doing so because they now have the time.

They are also bored: 11% say they are trading because they can’t bet on live sports like they used to. Anyone unconvinced about this should look up Dave Portnoy on Google immediately. The founder of Barstool Sports is the poster boy for sport fans-turned-day-traders in the US.

More importantly, the crisis has alerted us all to the fact that we must make ourselves more financially resilient. We can’t take our future finances for granted – in terms of either our incomes or the returns on our savings.

Faced with the strong possibility of ongoing paranoia-driven economic stagnation, we are cutting our lifetime income expectations and increasing our savings accordingly. Fink has “a strong conviction that the average investor still is under-invested, and they’re going to have to be putting more and more money to work over the coming months and maybe even years”.

Beware: markets can and do go down as well as up

Finally, while the future feels iffy, many people have more cash in their hands now than they did pre-pandemic. Some have actually seen their incomes rise. In the US, for example, many poorer people who lost their jobs received emergency pandemic welfare payments higher than their previous wages. In the UK, the earnings of about 8% of households have gone up during the pandemic.

More importantly, our spending fell sharply from March this year and, over the three months to the end of August, was still slightly down on the same period last year. As a result, the household savings ratio in the UK hit a record high of 29.1% in the three months to June (it was 6.8% in the same quarter last year).

Much of that money will be knocking around in cash – but a large amount of it will also have found its way into the stockmarket. Ask the senior management of the UK’s biggest trading platforms and they will all tell you the same thing: it’s been hectic.

This seems like a good thing. Is it a good thing? That rather depends on what your expectations are. “I had no clue how risky the bourse was,” said the washing machine woman. So here is this week’s worry: many of the other investors new to markets know how risky they are, either. So far, this year has told them that when stocks go down they go up again pretty quickly.

The impression that stocks are the obvious and only place to be – for now at least – is backed up by the talk that interest rates might go to zero or below in the UK. After all, if you are getting no return on cash, why would you not shift your money into something that, the odd dip aside, only goes up? There is no obvious alternative.

It’s hard to argue with this take at the moment, given government and central bank behaviour. But it is worth remembering that there is never anything safe about stockmarkets in the short term. If you know any young people in need of a washing machine in the next six months and they’re wondering if they’d be better investing and using the proceeds to get a tumble dryer too, dispatch them to John Lewis immediately.

• This article was first published in the Financial Times