FCA sounds warning to new breed of thrill-seeking investors

Young people are being drawn to high-risk investing despite almost two thirds admitting they can’t afford a significant loss, the financial watchdog has warned. 

The research, conducted by the Financial Conduct Authority, found that a new breed of young investors are attracted by the thrill and novelty of high-risk products rather than investing for the long-term. 

In fact, 38 per cent of those surveyed did not list a single practical reason for investing in their top three.

And the FCA warned: ‘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.’

A new, younger, more diverse group of consumers are getting involved in higher risk investments according to the FCA

The new cohort of thrill-seeking young investors are primarily focussed towards products such as cryptocurrencies, hot story stocks, and foreign exchange – and expect outsized returns compared to the long run stock market average.

It is thought to be prompted in part by the accessibility offered by new investment apps, as well as social media and online advertising. 

‘Social media has been behind the rapid rise in young investors in recent years,’ said Heather Owen, financial planner at Quilter Private Client Advisers, ‘on Instagram, there are 8.9m posts featuring #investing and 8.7m featuring #finance.’

‘On TikTok, the numbers are even more stark with videos featuring #investing have generated over 1.6 billion views, videos featuring #finance have generated 1.5bn 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.’ 

The newer audience is not so easy to characterise, however. 

Dubbed lockdown traders, many have been stereotyped as young risk-taking men, but newer investors have a more diverse set of characteristics than traditional investors – and skew more towards being female, under-40 and from a wider variety of ethnic groups. 

‘Almost one million new investors started investing in 2020,’ said Holly Mackay, chief executive at Boring Money 

‘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.’ 

The research shows that these investors often have high confidence in their own judgement and knowledge of what they are investing in.

But it also shows a lack of awareness, with over 4 in 10 not considering ‘losing some money’ to be one of the risks of investing.

‘Playing the markets is one thing – playing at it is entirely different,’ said Danni Hewson, financial analyst at AJ Bell

‘That’s not to say all young investors are ignorant, far from it; but a worryingly large number seem to be blind to the pitfalls. 

‘Worse, almost half think there is no danger.’ 

FCA advice: Five things to consider 

1. Am I comfortable with the level of risk?

2. Do I fully understand the investment being offered to me?

3. Am I protected if things go wrong?

4. Are my investments regulated?

5. Should I get financial advice? 

The FCA research suggests that many young investors also rely on gut instinct when making investment decisions.

Almost four in five trust their instincts to decide when to buy and sell, whilst a similar number also claim there are certain investments they consider a ‘safe bet’.

‘Relying on your gut feelings is a terrible strategy for investing if you actually want your money to grow meaningfully over the long term,’ said Becky O’Connor, head of pensions and savings, at Interactive Investor.

She added: ‘A “Fear of Missing Out” is driving younger investor behaviour with people feeling like they need to invest in high risk products, like crypto, because they see influencers that look and sound like them on social media platforms suggesting it.

‘As with most big life decisions, impulsive action driven by what others are doing is rarely a recipe for success.

‘Investing is a long-term thing, not a get rich quick scheme.’

Many young investors admit to being ill prepared for investment losses.

Many young investors admit to being ill prepared for investment losses.

There are also concerns that younger investors lack the financial resilience to cope effectively with a major investment losses.

The research showed a significant loss could have a fundamental lifestyle impact on 59 per cent of investors with less than three years’ experience – the same people who are more likely to own high risk investment products.

However, for more risk adverse investors with over three years’ experience this was only the case for 38 per cent of those surveyed.

‘It might feel like a game but the figures on screen are real – real money, real risk, and when it all goes wrong, which any seasoned investor knows it can, the end result can be shattering,’ said Hewson.

‘No one likes to lose money, but if that loss is going to have a fundamental impact on your life choices you need to ask why you are putting it on the line in the first place.’

What is the advice for young investors?

Diversifying your investments is the best way of reducing your risk by not putting your eggs all in one basket

‘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,’ said Mackay.

‘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.’ 

Understanding what you’re investing in whether that be bitcoin, shares or property is another vital factor.

By failing to understand what you are investing in, you are preventing yourself from making an informed decision.

Having a realistic financial plan to meet your investment objective is also important.

‘You need to know how much you can realistically set aside each month to invest, understand your capacity for loss, and get exposure to a suitable amount of risk given your investment objectives,’ explained Owen

‘For instance, if you want the money for a house deposit in the next five years, then reduce the amount of risk.’

Being wary of influencers on social media handling out investment tips is also important.  

‘They will often pose as successful day traders, but the reality is anything but,’ said Owen.

‘If they do not appear on the FCA register, then it is likely that they are providing advice without the necessary permissions.’

Beware scams:  Investment scams facilitated online and on social media are becoming more prevalent.

Clone scammers peddling fake investment products stole close to £213,700 a day from Britons in 2020, with victims losing £45,242 on average, according to the fraud reporting service Action Fraud.

‘Be wary of an investment proposition that offers an unrealistic rate of return, which downplays the risks or puts you under time pressure to make a decision,’ said Owen.

‘If in doubt, check the FCA’s register and make sure you a dealing with a regulated financial services firm.’

Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.

Read more at DailyMail.co.uk