1.1.2 Why are savings and investments important for the economy?
Watch the video below to hear Anthony Nutt, an investment fund manager, talk about the importance of personal investments to the economy and the impact of economic policy on savings behaviour.
Download this video clip.Video player: ou_futurelearn_mmi_vid_1005.mp4
Transcript
MARTIN UPTON
Anthony, why are savings and investments so important for the UK economy?
ANTHONY NUTT (Retired investment director and fund manager)
Well Martin, if you think of the role that the investor plays within the economy, he’s a provider of capital. Whether he’s saving in fixed interest markets or whether he’s in equity markets, he’s providing capital to businesses; essentially. He may be institutional, he may be personal. But providing that capital plays a very important role for businesses to grow.
MARTIN UPTON
So, OK savings and investments are very important but the record in the UK isn’t very impressive. It doesn’t look like we save enough and it doesn’t look like we plan our investments very well, do you agree?
ANTHONY NUTT
Well, culturally over the last forty years I would argue, we’ve changed from being a nation of essentially savers, people were more prudent than they are now; we’ve been encouraged culturally for all sorts of reasons, we’ll maybe lay the blame at banks, we’ll maybe lay the blame at governments, to consume more and to spend more. So we typically have so much more debt in this country, as individuals, than we had in the past. Disposable income has an important role to play here too and there isn’t at the moment. There is a less amount of money available for people to save. People are struggling, for reasons of economic policies, for cultural reasons that you allude to; to be as strong a saver as they have been in the past.
MARTIN UPTON
When it comes to the saving culture, what role should the government be playing here? Is it up to the government to try and encourage savings?
ANTHONY NUTT
Well, the government always has a very important role to play, but the governments’ role varies depending on economic necessity. We are going through a period now, in 2015, of what’s become known as financial repression. The governments requirements now are to maintain interest rates at such a low level that people who have high levels of debt, be they institutional, be they corporate, be they government and be they retail personal investors can maintain and pay down those levels of debt without going into liquidation, without personally going bankrupt, without having any serious economic consequences for currency etc. So the government likes to encourage saving and from time to time will issue investment vehicles, national savings, gilts, whatever it may be.
MARTIN UPTON
Limits on ISA’s have gone up as well?
ANTHONY NUTT
Exactly, to encourage investors. But it is restrained I think at the moment by the level of debt in the economy. It needs to reduce that level of debt for people to be more, to be saving more.
MARTIN UPTON
Let’s talk about investment planning, let’s say I’m someone who hasn’t got any experience of investments, I’ve got the literal blank sheet of paper, where do I start?
ANTHONY NUTT
Well first of all I would say it’s not as bewildering as it may appear. You know for the person coming to the investment arena for the very first time, it does look bewildering. But believe you me it isn’t.
And the first thing you must do before you consider any investment whatsoever is have a look at what your aims and objectives are. Are you saving for a pension, are you saving for a house, a car? Are you saving for school fees?
And once you’ve decided what your realistic aims and objectives are, you can then have a look at various investments, the whole investment arena. Maybe fixed interest, maybe bonds, maybe equities, maybe property, whatever it may be, maybe vintage cars, whatever you call an investment.
And decide, and determine through the various models that are available, and the promises that are being made to you as an equity investor, or as a bond investor, i.e. what’s the rate of interest you’ll get from that bond? And does it meet your aims and objectives? And if it doesn’t, and I think this is a very important point, if it doesn’t then anything over and above that that you’re expecting is speculative.
It’s less about investment at that point and more about, can I say, gambling. And so often the retail investor mixes the two up. He wants high returns, he thinks he’s investing, but I would argue he’s not investing, he’s actually gambling.
And let me say at this point the essential objective of any investment is less about the price you sell it at but the return you get from it whilst you are an investor in that entity. That is the important thing because the price you see it at can be determined by all sorts of sentiment, maybe a euphoric stock market, maybe a very bearish stock market if we are talking about equities. So that is much more speculative.
So I like to think as an investor if I’m planning for pension, whatever I’m planning for, what is the return and what am I going to get while I retain that investment. Am I going to get a yield of 4 per cent or half a per cent?
MARTIN UPTON
And the time horizon is critical, isn’t it?
ANTHONY NUTT
The time horizon is absolutely critical because if your time horizon is too short then you are going to suffer, or you’re more susceptible to the vagaries of the stock market, if I can call it that.
What does that mean? You’re more susceptible to sentiment, to short term economic policy, to…well it can be most things it could be the weather quite frankly if you’re investing in the insurance industry, but over the long term these things are ironed out.
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As well as being important for an individual or household, investments are important for the broader economy.
There is interdependence between the household sector and other sectors of the economy, such as the corporate sector. For example, in the act of saving, households are not buying the goods and services that firms sell. However, by saving, households are placing money in financial institutions and this provides a potential source of funds for firms to expand and to invest themselves.
Governments also have an interest in household savings. One reason for this is that governments often spend more than the receipts they have from taxation – this has most certainly been the case since the 2007/2008 financial crisis which saw the budget deficit (the difference between tax receipts and government spending) rise to a record level. To cover such a shortfall, governments have to borrow, including directly from the public. Governments have encouraged people to put money into government savings schemes (and, effectively, loan the government money), such as National Savings and Investments Certificates and Premium Bonds.