Tomorrow, the Financial Conduct Authority (FCA) is expected to publish a paper on younger investors potentially taking on too much risk.
The past year has seen a significant rise in beginner and younger investors, and in Quarter 4 2020, 25% of new interactive investor customers were under 35.
While a whole generation of investors getting into good long-term investment habits is to be celebrated, the FCA is right to sound a note of caution. interactive investor, the UK’s second-largest investment platform for DIY investors, has today launched a risk page for private investors, Risk and You, in its Knowledge Centre.
While interactive investor’s Private Investor Index, published in January 2021, suggests that younger investors, on average, have balanced portfolios, with a good blend of shares, investment trusts and funds (and 18 to 24-year-olds had a clear preference for investment trusts), the Reddit/GameStop (NYSE:GME) saga is a cautionary tale for beginner and more experienced investors alike.
But it isn’t always a case of too much risk being the problem – too little risk can be an issue, too. A report published by interactive investor in December last year, Show Me My Money, found that more than a fifth (22%) of 18 to 34-years-olds have a low-risk pension, suggesting that younger people could be too risk averse when it comes to their pension, potentially damaging their chances of long-term investment growth.
A Mind & Money podcast, aired by interactive investor in February, suggests that young people should be taking more of the right kind of risk with long-term investments, such as a pension, rather than being drawn into the wrong kind of risky ‘get rich quick’ investment opportunities that have grabbed headlines in recent months.
Becky O’Connor, Head of Pensions and Savings, interactive investor, says: “It’s absolutely right that younger people are encouraged to invest. Greater awareness of the benefits of investing among younger people is a good thing, despite the recent Reddit-fuelled rise of GameStop; the rise of social media investment influencers and the constant talk of bitcoin successes driving some young people to act in a very risky way.
“Historically, young adults have been nervous about investing and show tendencies towards risk aversion, perhaps because they are wary of not being good at something new.
“So a rise in awareness may be the silver lining of some of these recent trends, if it helps young people to overcome their usual nervousness as well as inspires them to do more research on the benefits of investing. Engaging young people has always been one area where the industry has struggled.
“But young people need to learn the right kind of risks to be taking, the ‘how’ and the ‘when’ of risk, to meet their life goals over the long term. They need to be taught that there is much more to investing than a quick punt on a hyped-up stock, which might go badly wrong. If the fingers of younger…