For more than a decade now I’ve been on a mission to stamp out the financial illiteracy that is evident in every corner of our society. We are not taught about money management or investing at school, at university or in the workplace. The result is that even successful professionals and business owners often lack the most basic appreciation of how to create and protect long term wealth.

A cynic might say that the government wants us to be dependent on handouts so the last thing they need is for people to achieve genuine financial independence. But I don’t buy that – we can’t blame our political leaders for our own lack of interest in our financial future. We can’t keep saying ‘they ought to do something about this’. We need to rediscover the lost art of personal responsibility and accountability. And, while we’re at it, we should teach our millennial and Gen Z children about this concept of making our own way in life and dealing with the ups and downs as a family rather than waiting for our adopted governmental parents to take care of it for us.

Brits are clearly in love with bricks and mortar, many believing that property is the best and only way to long term financial security. It’s taken a decade of bombardment from successive ‘Tory’ chancellors for the majority of Buy-To-Let landlords to start looking at alternative asset classes. I don’t deny that real estate has an important role to play in every portfolio, and it can be a good store of value in times of high inflation. My battle has always been to get UK Investors to give at least some thought to diversifying their portfolio into other equally attractive investments.

Which brings us to the asset class that has the best track record of all over the last century – stocks and shares. Think about what the world went through between the beginning of 1923 and the end of 2022. A depression, a world war, a Cold War, a global pandemic on the downside. Talking movies, radio, television, the democratization of road and air travel plus a moon landing on the upside. Across that entire century the S&P500 of American stocks and shares grew by 10.3% a year gross, 7.25% adjusted for inflation. Nothing else comes close in terms of predictable, long-term above inflation real returns.

Unless you were even braver and took a punt on smaller companies which, by definition, have more room for growth than the firms who are already the biggest in the world. If, back in 1955, the year before I was born, you’d invested in the Numis index of the 1,000 smallest companies on the UK stock market, you would have grossed 16.4% per annum for the next 66 years. Allow for inflation and you would still be in double figures at 11.3% real growth every year.  Which is four times the return on UK property over the same period.

As if these outstanding returns were not exciting enough, the UK also offers one of the best investment wrappers in the world (at least until Rachel Reeves gets her hands on it) – the Individual Savings Account.  You can save £20,000 a year, £40,000 for a couple, and have the entire proceeds tax free when you decide to realise your gains. With so many people now being dragged into higher rate tax this adds an effective 40% to the returns already available, the nearest thing to free money we’re likely to see in our lifetime.

So how many Brits are taking advantage of this exceptional opportunity? Barely 5%. Yes I know we are in a cost of living crisis but these figures were just as bad in the heady days of zero interest rates and two per cent inflation. They were just as bad in the liar mortgage days of the early 2000s and even worse after the 2008 Financial Crisis. Why do we regard property as being ‘as safe as houses’ while stock markets are casinos where you’re guaranteed to lose all your money?

The mainstream media certainly doesn’t help. They will be the first to announce any bad financial news while ignoring years of steady gains. Central bankers also have a place in this Hall of Shame, with Andrew Bailey leading the way with spurious predictions of the worst recession in a century. If we are not actually going through a crisis, we seem to be permanently predicting the timing and severity of the next one. Despite the lugubrious Gordon Brown claiming to have ended the boom and bust of the business cycle, it is a fact that stock markets go through ups and downs. Some people try to time these moves, usually with little success. Smarter people drip-feed their savings into the market on a monthly basis, buying fewer shares if prices rise and more if they are in a dip.

One of the worst examples of people abdicating responsibility for their financial affairs can be found in the world of pension funds. Some will say that they recognize the need for stock market exposure but they leave the decisions to their pension fund managers. Have you checked lately? In recent years the exposure of pension funds to UK equities has plummeted from above 50% to just 4%. Exposure to stocks and shares anywhere in the world has fallen from over 60% to just 19%. And what have they replaced these ‘risky’ shares with?  Yes, those safe haven assets known as government bonds. That’ll be the same safe assets that caused the collapse of Silicon Valley Bank among others and that caused the Federal Reserve itself to announce its first loss since 1915.

A quick reminder of how the game works. When inflation was benign the yield on bonds declined to almost zero, in some cases actually going negative. As the central banks raise interest rates to counter the inflation they caused during Banana Syndrome, new bonds are issued at ever increasing yields. This makes the old, low yielding bonds worth a lot less so the value of assets on the banks’ balance sheet plummet causing losses and triggering bank runs. The same thing has almost certainly happened in your pension fund, but because there is no such thing as a ‘pension run’ the losses can only be found in the small print of your fund manager’s annual report.

The good news is that pension managers have used some of the liquidity to increase their allocation to alternatives including private equity. A combination of mergers and acquisitions and migration to foreign stock markets has reduced the number of companies on the UK market from over 3,000 to less than 2,000. In parallel with this decline is a rise in the number of companies staying private for longer, creating significant wealth creation opportunities if you can find a way of accessing them. Pension funds do this by acquiring shares in listed private equity funds, while we offer our members direct access to buying shares in carefully selected growth companies.

The danger on the horizon is that the government wants to access the £545 billion now sitting in defined contribution pensions. The idea is to get fund managers to increase their allocation to long term, private equity projects that are currently struggling for funding. In principle this could be a good idea as we certainly see more value now being created in private unlisted companies than we’re seeing on the stock market. However, when you look at the kind of projects that politicians like to approve their track record should raise some red flags. White elephants like HS2 are never going to give a positive return to investors. Net zero needs massive infrastructure spending on everything from wind farms to EV chargers and at present they seem to be leaving it to the private sector to make these investments viable. How long would a private investor have to wait for a return on investments like these?

Pension superfunds do not have a great track record in America, mainly because the trustees are not entrepreneurs and cannot separate the Googles and Amazons from the Myspaces and Pets.coms of this world. My suggestion? Make sure you are drip feeding funds into the stock market through tax wrapped ISAs and SIPPs before putting too much into private equity. Our model portfolio allocates 15% to private equity if you already have funds in the public markets. There’s a century of data to suggest that you need exposure to stock and shares. As with most things in life, make sure you are in the 5% and not the 95%.