The thing about useful stuff is: Portfolio value in free-fall

Portfolio value in free-fall - you should riot Friday, July 18, 2008

Image via WikipediaAn FT report caught my eye today that led with

Investors upset over falling Pakistan share prices smashed windows of the Karachi Stock Exchange on Thursday during a day of protests that led to scuffles between traders and investors demanding the temporary closure of the stock market.

The KSE 100 index dropped by 2.7 per cent to close at 10,212.92 points. The index has plunged 35 per cent from a record high reached on April 21.

A key issue has been the entry of new / inexperienced retail investors into the Karachi market who have punted their savings on what they perceived as a one-way (winning) bet via a rising market. Naturally, they have been alarmed by the sharp falls that have eroded their meagre assets.

When the term "share-owning democracy" was popularised in the 1980s during the Thatcher years and Conversative government, it represented a view that by encouraging wide-spread share ownership it would both allow everyone to directly share in the benefits of wealth creation and encourage people to take a keener interest in business/economic affairs.

Human nature being what it is, people tended to "tune-out" the mandatory wealth warnings that "shares can go up and down", and "historical performance is no guide to the future", wishing to only hear the good news that they would become richer. Hence, market "corrections" / falls caused shock/outrage from people who saw their savings eroded. This was [still is] often exacerbated by the inability of the retail investor to adequately diversify their portfolio given the relatively small sums invested. Whilst index trackers and mutual funds were available that would provide such diversification, they don't present the same "excitement" as owning a share in a company.

Two decades on, I believe people in the UK are more familiar with the risks of investing directly in the stock market. Sadly the lesson same hasn't had time to take root in many other countries, hence the uproar.

However, I suspect that a bigger shock will come when people in the UK wake up to the impact of being in defined contribution pension schemes, rather than the defined benefit pension schemes that prevailed for decades in the UK. Suddenly, the burden of volatile investment performance will not be funded by employers. Consequently, employees will have to pay much closer attention to the performance/value of their own pension funds. Combinations of underfunding and market falls could material harm the pension pot available for retirement, at which point those approaching retirement may well start looking for someone to blame for their misfortune and financial destitution. At which point, things could turn equally ugly here.