Summing up: China first big test for DIY investors

Is China's economic downturn a mere blip, or are we on the brink of a full-scale crisis? Picture: AP
Is China's economic downturn a mere blip, or are we on the brink of a full-scale crisis? Picture: AP
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IS IT a mere blip, or are we on the brink of a full-scale crisis? That’s the question being posed around the world this weekend as we wait for clues as to whether China can ride out its summer storm.

A full-scale bear market could be brutal, not only for Britain’s Isa investors and pension savers, but for a wider economy that has struggled, despite the triumphant headlines, to stage a genuine recovery from the 2008-9 crisis.

This is the first real test of nerve for the growing army of people who, unable or unwilling to take advice, use fund supermarkets and the new breed of online “advice” services to manage their own investments.

The problem is that many of these investors have piled into the market during the QE-supported bull market that followed the downturn. They’ve experienced a few wobbles, but they certainly haven’t faced a crisis that’s made them question the security of their cash.

Business has boomed for fund supermarkets, platforms and online brokers over the past five years. There are numerous reasons for that – mostly regulatory – but the fact is that the most rapid growth has come during a bull market.

The same goes for so-called “robo-advice” websites. These algorithm-based automated investment services use questionnaires and risk-profiling exercises to help investors work out their appetite for risk and place them into a suitable investment portfolio.

But while these services have a big role to play in promoting saving and providing access to low-cost investment “advice”, they don’t offer actual financial advice.

Some tend to shoehorn people into one-size-fits-all portfolios that don’t accurately meet their needs or reflect their appetite for risk. None (yet) offer full advice that factors in things like tax, objectives, existing investments and other considerations that traditional advisers cover.

In other words, to whom will DIY investors turn when they start feeling panicky? The value of traditional, face-to-face advice often lies in the behavioural stuff, such as offering reassurance when investment markets take a tumble and the client’s instinct is to make the wrong decisions.

When the financial crisis unfolded in 2008, advisers were inundated with calls from people unsure how to respond and who typically needed reminding that cashing all their investments in just as their value was plunging was the worst thing they could do.

There’s been an acceleration since then in the transfer of risk and responsibility from states and employers to individuals (the so-called pension “freedoms” being the latest stage).

That would be OK if financial literacy levels – and trust in the financial services industry – provided confidence in investors’ ability to make the right decisions. But they don’t. You only need to look at the millions of pounds in savings being swiped by investment fraudsters, whose victims are often people who consider themselves knowledgeable and even sophisticated.

So in many ways we perhaps shouldn’t focus too much on what happens next in China, or the implications for global markets. History shows that it’s the response to a crisis, rather than the event itself, that determines the extent of its impact.