A younger and more diverse group of consumers is getting involved in higher risk investing, according to research from the FCA.
The regulator said the increase was “potentially prompted, in part, by the accessibility offered by new investment apps”.
“However, there is evidence that these higher risk products may not always be suitable for these consumers’ needs as nearly two-thirds (59%) claim that significant investment loss would have a fundamental impact on their current or future lifestyle.”
The findings come nine months after a 20-year-old DIY investor in the US took his own life after receiving a notification that his account with investment platform Robinhood had a negative balance of $178,000 that he needed to settle.
Thrill seekers
The research found that, for many investors, emotions and feelings such as enjoying the thrill of investing, and social factors like the status that comes from a sense of ownership in the companies they invest in, were key reasons behind their decisions to invest.
This is particularly true for those investing in high-risk products for whom the challenge, competition and novelty are more important than conventional, more functional reasons for investing like wanting to make their money work harder or save for their retirement.
Four in 10 of those surveyed did not list a single functional reason for investing in their top three.
Sheldon Mills, executive director, consumer and competition at the FCA, said the watchdog is “worried that some investors are being tempted – often through online adverts or high-pressured sales tactics – into buying higher-risk products that are very unlikely to be suitable for them”.
False confidence
The research shows that investors often have high 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 as with most investments their whole capital is at risk.
In some cases, investors can lose more than they initially invested for example with contract for difference investments.
These investors also have a strong reliance on gut instinct and rules of thumb, with almost four in five (78%) agreeing “I trust my instincts to tell me when it’s time to buy and to sell” and 78% also agreeing “There are certain investment types, sectors or companies I consider a ‘safe bet’”.
Social media driven
Research findings indicate that this newer audience has a more diverse set of characteristics than traditional investors.
They tend to skew more towards being female, under 40 and from a Bame background.
This newer group of self-investors are more reliant on contemporary media (eg YouTube, social media) for tips and news.
This trend appears to be prompted by the accessibility offered by new investment apps.
“Investments have never been more accessible, and retail investors can buy and sell securities, including complex options and derivative contracts, at the click of a button,” said Heather Owen, financial planner at Quilter Private Client Advisers.
“This has exposed young people to risks like never before, with two thirds of young people surveyed saying that a significant investment loss would fundamentally impact their current or future lifestyle.
““While it is pleasing to see more young people interested in investments, it is clear they are not sufficiently aware of the potential pitfalls of investing, with 45% not even considering losing money as being a risk of investing.
“Social media has been behind the rapid rise in young investors in recent years. On Instagram, there are 8.9 million posts featuring #investing and 8.7 million featuring #finance. On TikTok, the numbers are even more stark. Videos featuring #investing have generated over 1.6 billion views, videos featuring #finance have generated 1.5 billion views.
“Temptation is all around, and the fear of missing out has resulted in many young investors jumping in, some right at the top of the market,” Owen added.
DIY investor is changing
Younger investors may also have the lowest levels of financial resilience making them more vulnerable to investment loss.
Holly Mackay, chief executive of consumer website Boring Money, commented: “Almost one million new investors started investing in 2020. 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 practice it’s very hard for retail investors to make long-term returns from this approach.
“It is a good idea to consider multi-asset portfolios or funds that invest in a basket of stocks in order to diversify your exposure. Some people will still want to keep some trading activity on the side, but at least they haven’t got all their eggs in one basket if one or more of those stock picks turns sour.
“The FCA is right to sound this cautionary note. 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 has been investing for less than a year. The DIY investor is changing. We need to change the conversation in line with this.”
