But its research into how and why a new, younger, more diverse group of consumers is getting involved in higher-risk investments not only reveals that few of them can afford to lose their money, but that emotions are driving their decision-making.
Enjoying the thrill and social factors like the status that comes from a sense of ownership of the companies they invest in are key reasons – especially in high-risk products where the challenge, competition and novelty are more important than more functional reasons, such as wanting to make their money work harder for them.
In fact, two in every five young investors failed to list a single practical reason for investing among their top three motivators.
“We are worried that some investors are being tempted – often through online adverts or high-pressure sales tactics – into buying higher-risk products that are very unlikely to be suitable for them,” says Sheldon Mills, executive director, consumer and competition at the FCA.
“We want to encourage the ability to save and invest for lifetime events, particularly for younger generations, but it is imperative that consumers do so with savings and investment products that have a suitable level of risk for their needs. Investors need to be mindful of their overall risk appetite, diversifying their investments and only investing money they can afford to lose in high-risk products.”
These investors often have high levels of confidence and claimed knowledge. However, it also shows a lack of awareness and/or belief in the risks of investing, with over four in 10 not viewing “losing some money” as one of the risks of investing, even though their whole capital is at risk.
Nearly two-thirds claim that a significant investment loss would have a fundamental impact on their current or future lifestyle, and yet in certain circumstances, investors can lose even more than they initially put in.
There’s no doubt the circumstances surrounding the pandemic have helped fan the burning desire to get into investing.
Separate data from Boring Money suggests the last 12 months saw almost a million investment accounts opened by new do-it-yourself investors who, with a typical age of 34, are significantly younger than the average investor.
Even before the pandemic investors had been getting gradually younger, and it is encouraging that this group now includes a greater proportion of female and minority investors than in years gone by.
But the experts are worried about those investors starting out in such a turbulent time, especially those buying and selling individual stocks rather than putting their money into a fund that invests in a range of different companies on their behalf.
Holly Mackay, CEO of Boring Money, says: “Many of these first-time investors were accruing extra cash during the pandemic and spotted an opportunity to invest during a choppy year for financial markets.
“However history tells us that new investors in bull markets can suffer from lack of diversification, backing high-risk investments as opposed to more pedestrian choices.
“Popular choices such as tech stocks or cryptocurrencies may have generated paper profits to date but as the Reddit Army assault on Gamestop highlighted, paper gains can turn into real losses very quickly, sometimes with tragic consequences.
“Investing in just a few stocks or crypto is of course a risky strategy. We all love the concept of picking the next Amazon but in practise, it’s very hard for retail investors to make long-term returns from this approach,” Mackay warns.
She suggests that new investors in particular consider multi-asset portfolios or funds that invest in a basket of stocks to spread risk, even if they keep some trading activity on the side
Anthony Morrow, co-founder of online financial advice service OpenMoney, adds: “Understanding and being comfortable with the level of risk you are taking is a crucial part of investing. How much risk you take with your money is a personal decision, based on things like why you’re investing and for how long, what other assets you have and how you feel about losing money.”
The FCA is asking consumers to consider five questions before they invest:
Am I comfortable with the level of risk?
- Do I fully understand the investment being offered to me?
- Am I protected if things go wrong?
- Are my investments regulated?
- Should I get financial advice?
Generally, if you answer “I don’t know” to any of the first four questions, the answer to the fifth question should probably be “yes”.
“The FCA is right to sound this cautionary note,” Mackay adds. “It is incumbent on the industry to try to truly understand the motivations and fears of these first-time investors and to amend their communications approach accordingly.
“Nearly one in 10 investors have been investing for less than a year. The DIY investor is changing. We need to change the conversation.”
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