Almost two-thirds of new investors buying products classified as high risk, such as cryptocurrencies and foreign exchange, would struggle to afford their losses if their investments soured, said the UK regulator in a report published on 23rd March 2021. “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,” said Sheldon Mills, executive director of consumers and competition at the FCA.
According to the FCA, new investors showed high levels of confidence in their investing ability: 78% reported: “I trust my gut instinct to tell me when it’s time to buy and sell.” These investors are also more likely to be self-directed, using social media and YouTube for investment advice.
But the research also revealed that these same investors also showed poor awareness and understanding of the risks of investing. Four in 10 investors did not acknowledge that “losing some money” was a possible risk of investing.
Government efforts to support the pandemic-hit economy and ultra-low interest rates have fuelled a market recovery that has given investors who have bought in since March a strong bull run, without the pain of a correction. “Many (investors) are often relying on gut instinct or advice gleaned from social media rather than established sources of information with rigorous checks and balances. And the high, when it comes, can override everything, clearing the way for unscrupulous scammers to prey on their vulnerabilities,” said Danni Hewson, an analyst at AJ Bell.
The FCA noted that misleading advertising contributed to new investors lacking understanding about the realistic risks of these products. “Pressure is creating a herd mentality, 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,” said Becky O’Connor, head of pensions at Interactive Investor. She said: “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.”
Adapted from an article in the Personal Money section of the Financial times by Madison Darbyshire: ‘FCA warns over young people engaging in high-risk investing’