“Rule No. 1: Don’t lose money. Rule No. 2: Never forget Rule No. 1”.
Oddly, nobody seems to know for sure whether Warren Buffett really said that, or whether it was just attributed to him by his acolytes. (Although we do know that it made it into The Tao of Warren Buffett, written by his ex-daughter-in-law.)
And in a way, it doesn’t matter. Buffett has always had a rare sense of humour, and it would be hard to think of a better way of shaking off the wannabes who dog his every step than to send them up this particular blind alley.
Because a blind alley is what it is. Yes, it’s always been a tempting notion that you might be able to ratchet up your wealth, notch by irreversible notch, until you came out on top of the pile. And there are many people who’ve lost money by trying. Or failed to make any. Buy yourself a gilt or a bank deposit or – worse still – an annuity, and hope that inflation won’t rob you of whatever paltry yield it brings you.
For most consumers, the wisdom still holds true that the market rewards risk. You hardly need to look at the Barclays long term gilt/equity study to guess that over the last 90-odd years equities have yielded 8% returns over 2% or thereabouts for bonds. And anyone who voluntarily locked into bond yields now would need their heads examining.
The Next Generation
Except, of course, that that’s exactly what the annuities system entails. Which is why the new generation of funds now being developed, in readiness for next April, have the potential to be useful not just to pensioners but also to other cautious borrowers. The funds are still largely under wraps, but most of them will aim to provide income combined with a hefty degree of capital protection. I mean, if structured products have been able to pull off that sort of a 0%-downside, 100%-upside trick for the last 30 years, why shouldn’t it work?
With the added benefit, of course, that for a pensioner the fundholder hangs onto the capital – or much of it, anyway – to the grave. And, in a sense, also beyond. With competition like that for a risk-free or low-risk investment, the outlook for annuities seems bleak indeed.