Robin Powell
By Robin Powell on June 26, 2024

Don't let politicians tell you how to invest

Investing is a classic example of an activity which everyone seems keen to give an opinion on. The problem is, that they all have their own reasons for expressing the views that they do, and, almost invariably, there’s an element of self-interest involved.

So, for example, the guy in the pub who’s made a killing by investing, say, in Bitcoin or Nvidia shares and keeps saying you should do the same, may just be showing off. Or perhaps he’s waiting for the price to rise further before cashing in and therefore has a vested interest in talking the investment up.

Media outlets that tend to feature active funds rather than cheaper passive alternatives have their own motives too. Active investing makes for better stories — and, crucially, more clicks — than indexing. Also, advertising by active fund managers largely pays for journalists’ salaries. 

But what if it’s a politician who’s suggesting you invest your money in a particular way? How much credibility should we give to what they say?

In recent months, both of the major parties have been keen to promote investing in British stocks. The Conservative government announced plans in the March budget for a new “UK ISA”, which would have an additional £5,000 allowance, on top of the existing £20,000 allowance across other types of ISAs. (1) The goal is to encourage individuals to invest in UK assets. Whether or not the idea ever comes to fruition, Labour politicians have been broadly supportive. 

The former Pensions Minister Ros Altmann has even suggested that investors should be made to invest 25% of their retirement savings in UK companies. (2) By “neglecting” domestic equities, she says, investors have “pushed valuations to exceptionally cheap levels.” (3) Making people buy more British shares, she argues, would be a “win-win” for the country and for investors.

Extreme caution required

Whichever party these pronouncements come from, you should treat them with extreme caution. Remember, in particular, that politicians have their own interests and agendas.

Governments, for example, naturally want the UK economy to grow. They want to increase the amount of capital available to businesses, and drive more interest in the UK stock market. Of course, most of us would like to see those things as well. But the most important consideration for investors isn’t what’s best for the UK economy or for London’s status as a global financial centre: it’s what’s best for them and their returns that really matters.

The overwhelming evidence is that investors should be globally diversified and avoid being too heavily exposed to their own domestic stock market.

Most UK investors are already exposed to the UK economy by virtue of working and owning property here. Having a large portion of your portfolio invested in UK stocks simply makes that risk more concentrated. Of course, you might feel bullish about the UK’s prospects, but nobody knows what the future holds or what challenges the country will face in the years ahead.

As well as reducing risk, being globally diversified also enhances returns. Inevitably there will be periods when the UK economy lags, and that’s when having broad international exposure pays off. Diversification also gives you access to investment opportunities in countries and sectors you wouldn’t have if you were too heavily invested in UK companies. 

In short, global diversification helps to create a more balanced and potentially more resilient investment portfolio.

MPs enjoy generous pensions

There are two other important points you need to consider when weighing up suggestions from politicians about how to invest.

The first point is that Members of Parliament benefit from the Parliamentary Contributory Pension Fund, which is one of the most generous pension schemes in operation. (4) For a start, as a defined-benefit scheme, the PCPF provides a predictable retirement income. Pensions are typically calculated based on the highest salary earned, rather than the career average, and they are generally indexed to protect against inflation. The scheme also includes benefits such as death in service and ill-health retirement provisions.

In other words, unless they enter Parliament with no provision at all for their retirement, most MPs don’t have to worry about their pension arrangements. That leaves them free to make pronouncements on how others should invest their retirement savings, safe in the knowledge that they themselves are likely to manage just fine.

Personal conflicts of interest

The other point to bear in mind is that MPs often have personal conflicts of interest. There are close links between the City of London and the two main parties, not least because of party political donations. Also, many MPs end up working in well-paid jobs in the City once they leave the House of Commons.

Why is this a problem? Well, what’s good for the City and the financial services industry in general is often bad for investors, and vice versa. All of us are human and prone to put our interests first, including politicians, so there’s another reason for investors to be sceptical when our elected representatives appear to promote a particular course of action.

One final thing: whenever someone suggests you should invest in a particular way, never assume that they’re doing the same with their own money. The investment bank Peel Hunt recently looked into the asset allocation of the PCPF and found that just 1.3% of its assets are invested in UK equities. (5)

As of March 31, 2023, only £10 million of its £782 million investments were in UK stocks, compared to £433 million in global equities. In 2017, the fund had £130 million in UK equities, representing 19% of its assets. 

“It’s absolutely a case of double standards,” Charles Hall, head of research at Peel Hunt, told The Times. “They are not only selling down their UK equities, they are actually materially underweight the UK.”

What politicians are saying, in other words, is “Do as we say, and not as we do.”

The bottom line, then, is to be very careful where you look for advice or guidance. Want to know how to invest your money sensibly? Ask a financial planner, not a Member of Parliament.

This article is produced by us for Financial Advisers who may choose to share it with their clients. Timeline Planning and Timeline Portfolios do not offer direct-to-consumer products.

Robin Powell is a journalist, author and editor of The Evidence-Based Investor.


Published by Robin Powell June 26, 2024
Robin Powell