The Financial Conduct authority has recently published research into less risk averse investors, and the motives behind high-risk investments. Forex, Cryptocurrency and derivatives.
The research details that there is a new group of customers investing in higher risk instruments. A cohort far younger and more diverse than would traditionally be expected. This group ignited by the ‘accessibility offered by new investment apps’.
However, the FCA finds that investment in high-risk instruments may not actually meet these young investor’s needs. 59% of young investors clam that ‘a significant investment loss would have a fundamental impact on their current or future lifestyle’.
The FCA research found that for many of this group, reasons to invest were largely driven by the thrill of investing and social status from ownership rather than any specific analysis. Particularly true regarding those who invest in high-risk products. Where a challenge, competition and novelty play a larger part than conventional money saving/opportunity motivation. In the FCA survey, at least 38% of these young respondents did not list a single functional reason for investing.
Sheldon Mills, Executive Director, Consumer and Competition at the FCA said: ‘Much of the consumer investments market meets consumers’ needs. But 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.
‘This research has helped us better understand what drives and motivates consumers so we can tell them about the risks involved in these investments through our investment harm campaign.
‘We want to make sure that we 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.
‘We also hope our research will provide valuable insights for other organisations that are involved in tackling harm in this market.’
The research shows that investors often are overconfident in their knowledge of investing, yet shows a lack of awareness of the real risk they are undertaking. Only 10 respondents see ‘losing some money’ as a risk on investing, even though almost all investments put capital at risk. The issue also lies with the nature of instruments these investors choose. In some cases, investors can lose more money than they initially invested, if using derivatives or contracts for difference.
This young cohort may also rely strongly on gut instinct, 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’”.
The issue is also in the precarious position many of these investors may already be in.
The FCA found that ‘younger investors may have the lowest levels of financial resilience making them more vulnerable to investment loss. Research showed that a significant loss could have a fundamental lifestyle impact on 59% of self-directed investors with less than 3 years’ experience, who are more likely to own high risk investment products, compared with 38% of investors with greater than 3 years’ experience.’
It should also be noted that many of these younger investors are relying on financial advice found on YouTube, Tiktok and other social media, which, although accessible, may be incorrect or misleading.
If you are a young investor, or considering a new investment opportunity, always consider these five questions before you go through.
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?
For more info, please visit https://www.fca.org.uk
