Thrill-seekers should beware high risk investments – Birmingham Post article 29.04.2021

When you were young and foolish did you ever play the dangerous game of “chicken”?

Running in front of cars, throwing yourself out of the way of speeding trains.

The most daring, the one who pulled away at the last second, was the coolest.

Yes, I agree, complete madness.

However, young people are investing online in a similar manner – attracted by the “thrill”.

Now, City regulator, the Financial Conduct Authority, has warned them they are taking big risks getting involved in the likes of cryptocurrencies and foreign exchange.

It follows FCA-commissioned research looking into “self-directed” investors – those who trade themselves rather than seeking financial advice.

Participants tend to be female, under 40, from a BAME background, and reliant on YouTube and social media for tips and news.

The FCA stated: “The findings reveal there is a new, younger, more diverse group getting involved in higher risk investments, 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 per cent) claim that a significant loss would have a fundamental impact on their current or future lifestyle.

“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. 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 like wanting to make their money work harder or save for their retirement.

“Investors often have high confidence and claimed knowledge. However, the research 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. These investors also have a strong reliance on gut instinct and rules of thumb, with almost four in five (78 per cent) agreeing ‘I trust my instincts to tell me when it’s time to buy and to sell’.”

Sheldon Mills, executive director, consumer and competition at the FCA, said: “We are worried that some investors are being tempted, often through online adverts or high-pressure sales tactics. 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.”

And that is key.

It is great that young people are looking at saving and doing it online can reduce many costs but it also exposes them to scams and unregulated investments which have no consumer protection.

We must encourage young people to save. Even small monthly amounts over a long term can produce sizeable sums, but use an FCA-regulated provider with an online platform. Rather than risk being ripped off, there are many socially responsible funds available and higher risk in terms of volatility. For long-term investors volatility is your friend.

Readers with children and grandchildren should sit them down and talk to them about investing and saving. Many may be considering gifting money down the generations and education is vital. There is no need to take risks in areas that you do not understand or offered by unregulated companies.