The UK regulator, the FCA, recently warned that young investors are taking big risks at the moment, piling into highly leveraged forex trades and actively trading in volatile cryptocurrency markets. It released research that shows younger traders have high levels of confidence and claim knowledge which they don’t possess. This is leading many to run up substantial losses.
The regulator had previously banned the promotion of financial spread bets and CFDs based on cryptocurrency prices in the UK, but younger traders are continuing to follow financial influencers online, hoping to make big bucks on highly risky positions.
Are you just trading for the thrills?
What is a particular warning light in this research is the finding that many investors who put money into high risk products appear to be thrill seekers, investing for a challenge, for competition and for the novelty factor rather than conventional reasons like saving for retirement. 38% of those surveyed did not list a single functional reason for putting money into their top three investments, pointing to a lack of fundamental research or understanding around the trades being initiated.
“Although it is encouraging that social media is prompting a more diverse range of investors to dip their toe in the stock market for the first time, it’s important that they don’t just follow herd instincts and look at assets as a long term strategy, rather than for speculative short term gains,” said Susannah Streeter, senior investments and markets analyst at Hargreaves Lansdown.
In many ways trading apps have democratised the whole investment process but they need to be used thoughtfully. If you are trading on the go, you need to ensure you give each trade as much consideration as you would if you were sitting in a quiet place at home, to try and ensure you are not swept up in any hype.
“The findings…from the FCA regarding what the regulator calls a new, young group of more diverse investors show that many are underestimating the risks of investing,” said Adrian Lowcock, head of personal investing at investment platform Willis Owen. “It is particularly worrying that 4 in 10 respondents said they did not view ‘losing some money’ as one of the risks of investing in cryptocurrency and other assets, and this is a failure of the financial services industry to properly inform consumers about the realities of investing.”
There are clear financial dangers if traders indulge in highly speculative behaviour and put money into products as part of a gaming mentality rather than pursuing a well thought out investment strategy.
The more established investment platforms don’t provide chat communities which can fuel short term trading behaviour.
“Although shares which have been the focus of speculation have become more sought after on our platform, we are making every effort to encourage traders to diversify their holdings through client communication and risk warnings are fed straight through to their app and online accounts,” said Streeter.
Younger investors have lower levels of financial resilience
The research highlights that the new younger investors may have the lowest levels of financial resilience making them more vulnerable to investment loss. To maintain financial resilience, it’s highly advisable to build up a pot of 3 – 6 months of essential expenses to fall back on before putting money into investments.
As this warning from the FCA shows, it’s really important not to chase after the hot stocks; if multiple investors are going after one particular investment, then they’re probably buying it at an inflated price. Investing will always present a certain level of risk: however, if you diversify your investments, you can spread and reduce that risk significantly and stand a chance of making much greater returns than if you had left your money in an account paying minimal interest.
“You could think about your investments like a planet of core investments and more riskier shares as satellites orbiting around it. Or another way of looking at it is viewing individual stocks as side dishes to your well diversified main plate of investments,” said Streeter. “Finding the right level of diversification depends on your circumstances. If your investment horizon is a decade or more you can often afford to take a little more risk and invest a bigger part of your portfolio in share based investments across different geographies.’’
The surge in online trading activity is being partly driven by lockdowns in the UK, the proliferation of trading discussion on social media channels, and, dare we say it, general boredom. There is also more ready cash available as night clubs and pubs are closed, and there is no need to spend money on commuting, as most work places are still shuttered.
“The questions the FCA has set out are important to help prevent customers losing money, but they miss some key areas,” observed Lowcock at Willis Owen. “We think questions such as “why am I investing in the first place” and “will this specific investment help me achieve my goal” are fundamental to all of this, and should also be included as a starting point.”