In the 1970s the UK stock market was one of the largest in the world when you measured the value of all the companies listed there.
Nowadays if we look at where every single investor in the world invests, the UK stock market has declined to less than 5% of the global capital market.
It’s important to understand what’s going on here because your pension is likely to have a significant proportion invested in the UK stock market.
If you have read any of my articles or watched any of my videos before, you will know how important the investment return is to your future retirement plans.
So, let’s have a look at what is going on and whether you should still invest your pension in the UK stock market.
The decline of the UK stock market
Over the last 20 years the FTSE 100, an index of the 100 largest companies on the UK stock market has risen in value by 281.57%. Which is an annualised return of 6.92%.
However, over the same period the S&P 500, which is an index of the 500 largest US companies has risen by 933.05%. Which is an annualised return of 12.38%.
So had you been investing your £100,000 pension in US stocks for the last 20 years you would now have over £1 million in the pot.
Whereas had you chosen the UK stock market instead you would only have just over £380,000 in your pension pot.
This is the difference between early retirement and being able to spend a lot more in retirement.
We have recently seen quite a few companies leaving the UK stock market and listing elsewhere.
The strength of the UK stock market is important to the overall UK economy. Not only does the whole financial industry connected to the market generate a large share of UK GDP it also provides valuable investment for the UK’s newest companies.
The UK is still a thriving place of innovation and exciting new businesses. In fact, the UK has the highest number of ‘unicorns’ (meaning a private company worth more than $1 billion) in Europe.
It’s important that these types of companies have a route to one day being able to list on the UK stock market as this gives them access to capital to allow them to grow even more. It also allows entrepreneurs that have taken the risks to build these great businesses a chance to be rewarded. If there is no reward, there is no incentive and we will lose all this great innovation.
As well as an important part of the UK economy the UK stock market is also important to your future retirement options as most pensions will have a large amount invested in UK companies.
You may not have specifically chosen to invest in the UK stock market, however most default pension funds will allocate a large chunk of your pension money to UK stocks. Even if you have chosen a more global focused fund, it will still probably have a higher proportion invested in the UK stock market due to something called ‘home bias’. There is a tendency for people and investment managers to invest more closer to home as it is deemed easier to research and understand the market where you are based.
So, I urge you to check your pension investment allocation now. Look under the bonnet and see if your pension provider can show you your overall allocation by country. If not, you should be able to see this for the individual funds by checking the fund fact sheets. The pension provider should have a link to these.
Using the UK stock market in your pension
So far, this article has been rather negative on the UK stock market and you may think it best to avoid UK stocks altogether and just invest in the US.
Well don’t be too hasty.
There have been many reasons cited as to why we have seen a decline of the UK stock market.
Some will say the increase in regulation since the 2008 financial crises has had an impact. Making it more difficult for companies to actually invest.
Brexit is of course blamed for everything and may have put off some businesses that want to be more European focused. Although Brexit is still a relatively new phenomenon and the UK stock market was in decline before then.
I think the biggest major contributor has probably been the rise of other markets. US technology companies have become huge over the last 10 years and along with newer markets from the emerging nations like China, this has just naturally taken away market share from the UK.
If you look at the companies listed on the UK stock market, they are mainly based in industries such as banking, oil and pharmaceuticals. These are more established industries and now a bit old fashioned compared to the exciting technology sector in the US.
The UK government has been looking at ways to revive the UK stock market and has even floated the idea of a British ISA. The theme seems to be that tax incentives could be on there way if investment is in the UK stock market.
I personally don’t like government intervention and we should not be forced into investing somewhere.
Having said this, the UK stock market is considered cheap compared to the likes of the US. So, could this mean that the US market becomes so overvalued that at some point there is a crash? Maybe.
Remember price is the only thing you can control when investing. You can’t control how well a company is going to perform but you can control how much you pay for it.
Diversification is the key to controlling risk.
Putting all your eggs into the US basket leaves you exposed to US specific risks.
To avoid this, focusing more globally will allow you to spread your risk and to take advantage of different companies in different markets including upcoming regions.
If you don’t want the responsibility of deciding what to allocate where, then you should seek a global equity portfolio.
A truly globally diversified equity portfolio will base its allocation on the market allocation. So, if the UK forms about 3% of the global market, then that is what the allocation will be.
Some global equity funds will have a much higher proportion than this even though they are meant to be global so you might need to adapt your fund choice.
The portfolio will then adapt as the global situation changes. For example, if there is a decline in the US and the UK rises once more your portfolio will automatically adjust accordingly. You don’t need to worry about picking the next big thing as you will already own it.
When it comes to investing, if you want the best chance of achieving the greatest return you need to put home loyalties aside. We live in a global world and the UK is only a small part of it. Still important though none the less.
The key is to remain flexible, keep things under review and not to have all your eggs in one basket.
Tax incentives for investing in the UK stock market could be interesting and may mean a little more should be weighted there but only if the investment return potential is there. Saving money on tax is no good if you lose out through poor returns compared to elsewhere.
If you would like to stress test your retirement plans or even to get a plan in place then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
