Sid rediscovers shares beat slow motion bank robbery

You might think that with Greece apparently bankrupt, the eurozone splitting at the seams and new signs emerging of a double dip recession in Britain, this would be a good time to avoid the stock market.

But rising numbers of individual investors disagree. Retail shareholdings rose to £237bn in May, the highest level since the global credit crisis began more than three years ago, according to Capita Registrars. Britain’s biggest administrator of company shareholders’ rolls reports the longest unbroken period of net buying of equities by individuals since it began tracking these figures five years ago.

So, Sid – as the City slightly snidely dubbed individual investors during the 1980s privatisation boom – is buying with both hands again. But why? Charles Cryer, chief executive of Capita said: “Private investors have recognised equities offer protection against inflation, the prospect of growth, and a superior income to many other assets.  It’s no wonder they have been pouring their savings into shares.  Since interest rates were slashed to 0.5pc just over two years ago, net investment in equities has been £2.7bn.”

Savers are fed up with being fobbed off with inadequate returns from bank and building society deposits. While base rate has remained frozen for 27 months at a fraction of the rate at which inflation is reducing the real value or purchasing power of money, there is rising awareness that savers are the victims of a slow-motion bank robbery. The Government is stealthily seeking to reduce the real value of its own vast debts by running an unstated policy of negative real interest rates and slowly devaluing the currency.

But shares – unlike deposits – offer no guarantee of capital protection; before or after inflation. One reason rising numbers are willing to take risks with capital is that they are investing for income. Phil Wong of stockbrokers Redmayne-Bentley pointed out: “Despite the recent retreat in equity markets, stocks and shares are still appealing to private retail clients.

“With the UK base rate at 0.5 per cent still and the Consumer Prices Index (CPI) at 4.5 per cent, individuals are seeing a negative real return on their cash deposits driving money into high yielding, defensive stocks such as National Grid, Scottish & Southern Energy and GlaxoSmithKline. These three stocks all offer a yield of more than 5pc and present a more attractive alternative versus cash interest.”

Bear in mind that all share yields are quoted net of basic rate tax and those blue chip yields look even better compared to many deposits paying less than half as much interest before tax. Stephen Peters of Charles Stanley agreed: “I’d say that with investors getting zero in the bank, equities with a yield look attractive.”

But newcomers to the stock market should beware of ‘value traps’ – or high yields which signal trouble to come – and the risk that the real price of a high income today is capital erosion tomorrow. Charlotte Black of Brewin Dolphin emphasised the need to diversify assets to diminish the risk inherent in stock markets: “As expectations of higher interest rates remain in the distance. We certainly consider an equity investment strategy a good one – as long as it is within a diversified portfolio with a medium to long term view.”

Stock markets can deliver shocking disappointments – for example, the FTSE 100 index remains substantially lower today than its level 11 years ago. But the alternative for savers in bank or building society deposits is the certainty of losing money slowly as inflation erodes its real value or purchasing power.