The Financial Conduct Authority (FCA) has recently published a report exploring a worrying trend of younger investors taking big financial risks.
Key findings from the report include that a new, younger, more diverse group of consumers getting involved in higher-risk investments, potentially prompted in part by the accessibility offered by new investment apps. There is evidence that these higher-risk products may not always be suitable for these consumers’ needs as nearly two thirds (59%) claim that a significant investment loss would have a fundamental impact on their current or future lifestyle. The warning from the FCA that young people are taking on big financial risks is important after a year in which more younger investors discovered investing.
It’s likely that many have participated in some of the higher risk trends – from Crypto to the Reddit/ GameStop saga that happened recently. Some of the research findings are extremely concerning. However, while it comes at an important juncture after a savings revolution, a sample size of little over 500, ‘skewed towards those investing in or considering investing in high risk, high return types of investments’ falls short of a wider, more nuanced picture.
Moira O’Neill, Head of Personal Finance, interactive investor, said: “20 years or so on from the bursting of the dot com bubble, stock market opportunists have always been around – and too many speculative investors get their fingers burned time and again. The trouble is, if you talk to them alone, and fail to look at the bigger picture, you don’t learn very much. So, this FCA report feels almost like a wasted opportunity.
“It’s why we have been calling for more financial education in schools for years – it’s horrifying that some young investors are being steered by TikTok, not teachers or parents, on important issues that will affect their financial futures far more than which GCSE options they pick.
“Our younger investors have more investment trust exposure and less direct equity exposure than older generations. For every ‘GameStop’ in the top 10 most bought funds over the last year, you’ll find several solid blue chips running alongside it. There’s no question that many younger investors have participated in some risky investing behaviour over the last year, but it is not the whole story.
“If self-directing investors make a poor investment decision, they will have to live with the consequences, whatever the protections. And financial advice is all well and good, but many people just can’t afford it. There is a danger here that investors end up retreating back into cash savings – something the regulator has previously warned about. We need to be having much more nuanced conversations about risk and reward.
“Playing around with risk, and how even small extra contributions, and a little more risk, can add up, can have a profound impact without taking on too much risk, is important. This needs to start at school.”
The impact of Coronavirus
Myron Jobson, Personal Finance Campaigner, interactive investor, says: “The coronavirus market downturn has spurred many young people to dip a toe into the world of investments for the first time – perhaps because they are at home more because of the government enforced coronavirus restriction and have more time to consider their finances and ways in which to make their money work harder for them in the low savings rates environment. Some 25% of new ii customers were under 35 in Q4 2020.
“The concern is that many of these young, novice investors will learn important investment lessons the hard way by losing money on high-risk propositions. The GameStop saga is case and point. Fortunate investors could have experienced huge gains if they had sold at the right time, but many lost out once the bubble burst. This baptism of fire into the world investing could put the uninitiated off for life and scupper financial goals.
“The FOMO culture that shrouds social platforms like TikTok, Reddit and Instagram has become a breeding ground for the marketing of high-risk investments shunned by the mainstream investment industry – often for good reason.
“While it is easy to get caught up in the hype around the latest high risk ‘get rich quick’ investment, it is important to take a step back and remind yourself of why you are investing in the first place. Investing is a one man/woman’s race. As such, your investment strategy should align with your attitude to risk and your investment time horizon.”