Give savers more options.
Saving to invest is an important factor in how consumers build capital. In fact, in many European countries it is seen as a virtue to be meticulous savers, as opposed to lavish spenders. If only governments would act in the same way…
That said, how Europeans save can vary significantly from our American friends. In fact, less than 15% of Europeans (often merely 1% in Central and Eastern Europe, 15% in Germany, up to 40% in the Netherlands invest directly or indirectly in stocks. By contrast, up to half of American households have purchased stocks directly or equity through funds, most of the time as a long-term saving commitment. One reason is that while working with financial services across state lines is seemingless in the United States (think the federal 401k retirement accounts scheme), Europe is on a higher level of complication.
The S&P 500 Index had an average annual growth performance of 8%. Most Europeans can only dream of such annual yields that double one’s investment every nine years. The compound effects of this are even more significant. If a 29-year-old invests €40,000 at such an annual performance rate in stocks, she has €640,000 at age 65, and that does not even include additional cash injections into her investment account. For comparison, the average wealth of adults in Western Europe is around €250,000 (with a much lower median wealth).
But when we think of “investors” or buying and trading stocks in Europe, we picture wealthy individuals and large corporations. But in fact, lower-middle-class consumers can have their share in the world economy and guarantee themselves long-term growth if we ease the burdens on them purchasing stocks. Instead of propagating fear, legislators and regulators should embrace small-scale private investments and provide consumers with information. For too long, we have seen investors painted with a broad brush. Only in popular shows such as Shark Tank and Dragon’s Den have investors anywhere near the necessary appeal towards the more general public. At the same time, in parliaments across Europe, the mere word is side-eyed with suspicion.
In understanding the average European, buying shares is reserved for a financial elite or individuals with fortunes and large companies. In reality, all classes of people can have a share in the global economy and secure long-term growth if we ease the burden on them when they buy shares.
Instead of spreading fear, legislators and regulators should encourage small private investments and provide information to consumers. For too long, stock market investing has had a negative connotation. Unfortunately, it is only through popular shows such as Shark Tank and Dragon’s Den that people are discovering the appeal of investing.
The European Union’s Markets in Financial Instruments Directive (MiFID) is currently under review. Legislators should take advantage of the situation to make it easier for people to invest, not more challenging to do so because of new regulatory changes. Legislators should create a true single market for equity investments and lower the barriers for companies offering equities and exchange-traded funds (ETFs).
Historically, stock markets have outperformed other types of savings systems. Currently, only a tiny proportion of Europeans are enjoying single-digit growth in their retirement savings. European policymakers should create a culture of citizen-shareholders through smart regulation and stop denigrating financial markets, as they can bring wealth to a large share of European savers.
Originally published here.