Ten years of epic wealth destruction

The stock market has kept delivering while savers struggle…

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Earlier this month was the tenth anniversary of the last time that the Bank of England’s Monetary Policy Committee actually raised interest rates.
 
Seeking to cool the economy, it raised Bank Rate to 5.75% – a level many, many times higher than the 0.25% or 0.5% that we have now become accustomed to regarding as ‘normal’.
 
I prefer to focus on a different ten-year anniversary, though.
 
Next week, on July 17th, it will be the tenth anniversary of the day that soon-to-collapse Wall Street investment bank Bear Stearns told investors that two of its sub-prime mortgage funds had imploded, and that their investments in them were essentially worthless. 

Crunched

Three weeks later, on August 9th, the credit crunch began. The trigger: French bank BNP Paribas confessing that two of its own sub-prime funds were in trouble, as the market the underlying securities had effectively frozen.
 
The die was now cast – and soon, a whole series of retail banks, building societies, and investment banks hit the buffers, starting with Northern Rock in September.
 
So, on this side of the Atlantic, once-proud names such as Bradford & Bingley, Lloyds, Royal Bank of Scotland, Barclays, and Halifax Bank of Scotland were brought low, to then be bailed out, or nationalised.
 
On Wall Street, beginning with Bear Stearns and Lehman Brothers, the carnage was just as great.
 
Eventually, the Bank of England was forced to slash Bank Rate to 0.5% to try and rescue an economy that had sunk into the worst recession for three-quarters of a century.

Stoozers and rate tarts

For investors, these were sobering times.
 
But investors today face a situation that is just as sobering, albeit not quite as dramatic.

Back in 2007, high rates of interest had tempted investors into any number of high-paying savings accounts – accounts offered not just by the High Street majors, but by popular incomers such as ING, or Iceland’s Landsbanki, which operated as Icesave in the UK.
 
And for savers prepared to lock their money up for a year or more, fixed-term accounts offered even higher returns.
 
For a brief time, a whole new vocabulary existed. “Rate tarts”, for instance, who jumped from account to account, chasing ever-higher returns. And “stoozers”, who borrowed money on credit card providers’ low introductory rates – and then banked it, earning interest.

Savings erosion

Today, not only has Bank Rate not risen from the unprecedented level of 0.5%, it’s since fallen further, to 0.25%, as an emergency measure following the Brexit referendum of last year.
 
In real, inflation-adjusted terms, bank and building society accounts are paying negative interest rates – meaning that the value of your savings is falling.
 
Some figures that I saw in the Financial Times the other day reckoned that consumer prices had risen by 19% since January 2009, just before the Bank of England cut Bank rate to 0.5%, while savings had delivered just a 4% return.

You don’t need me to tell you that this is wealth destruction, not wealth accumulation. And wealth destruction, what’s more, that is especially painful for people relying on those investment returns for their day to day expenses.

What about the stock market?

So how might investors have done in the stock market over such a period?
 
Let’s ignore what might have happened to individual shares, and simply examine the performance of the overall market – a low-cost FTSE 100 index tracker, for example.
 
At the time of writing, the FTSE Total Return index – that is, with dividends re-invested – stands at 6,130. At the market’s nadir in March 2009, when the FTSE 100 itself bottomed out at 3,512, the FTSE 100 Total Return index stood at 2,147.
 
So while cash savings have returned 4% since early 2009, the stock market has delivered 186%. That’s right: 186%.

Worst-case comparison

Ah, you say: that’s an increase from the market’s recessionary low point. So it’s bound to be a good return, innit?
 

Well, let’s re-do the figures, taking as our starting point the market’s 2007 peak instead – just before the credit crunch hit. On 15 June 2007, the market closed at 6,732, with the FTSE 100 Total Return index closing at 3,851.
 
On which basis, the total return over the period is still a very decent 59% – and several orders of magnitude greater than the return from cash savings.
 
All of which goes to show the power of stock market investing over the long term, especially with dividends being reinvested.

Savers’ gloom

The moral of all this? Simple: with interest rates at rock bottom levels, and – frankly – showing little sign of any significant uplift over the next few years, savers have seen wealth destruction of epic proportions, once inflation has been factored in.
 
Not so investors in the stock market – or at least, those who invest for the long term, and reinvest dividends.
 
Everybody needs some cash savings, as a source of liquidity, and to offer some diversification. But for wealth accumulation – as opposed to wealth destruction – cash these days is a very poor bet indeed.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Malcolm Wheatley owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »