A few years ago, I led an economic study for The Investing and Saving Alliance (Tisa) exploring why more people do not invest some of their cash savings. The project not only deepened my understanding of investing but also made me reflect on my own attitude towards risk and return.
By the end of it, I had become a retail investor myself. I was not investing a large amount of money – but I had started drip-feeding smaller sums that I did not need in the short-term.
The reality is that many people are missing out on the better long-term returns generated by investing. Sure, investing is volatile. But if people plan on holding their cash savings for over seven years, then they might benefit from investing some of their savings. In many cases, boosting consumers’ investments would help enhance their long-term financial resilience.
The opportunity is sizeable. In 2023, 61 per cent of UK adults with at least £10,000 in investable assets held at least three-quarters of their savings in cash. This is almost 12mn people.
Just because you have sizeable cash savings does not mean that investing is right for you. But some of these people could clearly benefit from investing some of their savings.
Overcoming behavioural barriers
Behavioural science offers us clear insights into why many British people hold back from investing. It can be surmised by two key psychological factors: loss aversion and perceived social norms.
Loss aversion is reasonable in the face of uncertainty, and attempting to change people’s innate loss aversion around their savings is an uphill battle.
But we can change social norms.
The language used to describe investing is really important. It shapes our perception of whether it would be ‘normal’ or expected for someone like us to invest.
Indeed, the latest research by Tisa shows that changing the language of risk warnings helps reduce the gender investing gap. This is a clear indication that the way we communicate about investing matters. Yet, some in the industry still resist change.
Just last year, an asset manager told me he deliberately used jargon in his communications because of a belief that clients expected it to justify charging his fees. I struggle to believe that existing retail investors actively want their providers to use technical, inaccessible language.
But even if this is the case, we will only improve the inclusivity of retail investing by changing how we talk about investing. Jargon puts off future investors. There is still room for improvement. Our research found that investments T&Cs documents both use more jargon words and have the highest reading age of any sector we monitor.
It also feels self-evident that policy changes such as reducing the cash Isa limit will not be a game-changer. Changing tax rules will not overcome the deep-rooted behavioural barriers to investing.
It would be more effective to focus our efforts on changing perceptions around investing by reaching people at the right touch points, and by informing social norms with positive stories.
In the long term, improving the understanding of compounding returns through financial education in schools could help reshape attitudes towards investing from an early age.
Avoiding the sideshow of home bias
I passionately believe that investing could be beneficial for many of those millions of people holding large cash savings.
But this is not about driving more investment into UK-listed companies.
Many UK retail investors already display a significant home bias towards UK-listed companies. Investing in UK-listed firms is not necessarily a bad decision – for example, you may know more about the firms and their markets and thus be better placed to understand the investment risk.
That being said, it is important to note that most of the revenue made by firm in the FTSE 100 is made abroad.
More importantly, home bias reduces diversification. I’m not a fan of home bias for this reason. The rest of my economic life is highly undiversified – my labour market earnings are entirely dependent on the UK economy. I’d rather avoid putting all my eggs in one basket, and so I choose to invest in globally diversified funds.
In the words of a Nobel-prize winning economist: diversification is the only free lunch in investing.
Instead of fixating on increasing home bias, we should instead focus on how to encourage more people to invest in ways they will not regret.
That means making low-cost, diversified funds easier to understand and more intuitively communicated.
Investing does not have to be complicated, but the industry must do more to ensure it doesn’t feel that way.
Tim Hogg is behavioural economist at consumer group Fairer Finance
