Are fledgling investors taking on too much risk? Broadly speaking, the answer seems to be 'yes'. Research commissioned by the Financial Conduct Authority recently found that newer, younger investors tended to take greater risks while showing little financial resilience.
A BritainThinks paper found those who had been investing for less than three years were more likely to focus on racy areas such as peer-to-peer lending, foreign exchange, cryptocurrencies and binary options than their more experienced peers. Over half – 59 per cent – of the newer cohort claimed that a significant investment loss would have a “fundamental impact” on their current or future lifestyle, compared with 38 per cent of those who had invested for more than three years.
As the boom in DIY investing continues, these findings appear to confirm some more cynical assumptions. Younger investors could well run into trouble if hot assets go awry – with big consequences for their wellbeing and future investing habits.
This is the most prominent finding of the research. But given that many of you have been investing for years – if not decades – it is worth considering what it says about you, too.
BritainThinks splits self-directed investors into three broad groups: "having a go" investors who are less experienced but keen to make their own decisions, "gamblers", and a more experienced group focused on "thinking it through".
The research identifies three general "thinking it through" types. There are prudent individuals who tend to invest with specific longer-term financial goals in mind, and seek lower volatility and stable returns. Then we have hobbyists, who enjoy keeping up to date with sectors and markets. And then there is what BritainThinks dubs “the guru" – highly confident and experienced, and sometimes with an academic or professional background in a related specialism such as finance, business, maths or economics. Gurus “enjoy digging into financial data and graphs, as well as annual reports and more extensive data”.
Sound familiar? I would imagine a good number of you fit into the guru category. But here's the bad news – gurus and other more experienced investors are not without their weaknesses.
BritainThinks warns that gurus’ confidence in their abilities and assessment of risk can sometimes be “misplaced”. The paper also hints at the danger of assumptions and stale knowledge, saying that while hobbyists use their know how and experience as a short cut to make quick decisions, prudent investors “do not always have the skills or knowledge” to correctly identify sources of lower volatility and stable returns, and can be swayed by promises of ‘guaranteed’ returns. The paper also found that many self-directed investors lacked a systematic or strategic approach to investing when under observation.
While experienced investors have plenty going for them, this reminds us all to continually question received wisdom and our own assumptions. The pandemic might provide a small silver lining on this front: last year's dividend bloodbath helped challenge the view of income stocks as all-weather defensive holdings, for example. And as we contemplate the reopening of the economy, inflation expectations have also helped to question the presumed stability of government bonds. Reviewing the case for your favourite stocks and funds, more generally, can be a useful habit.