The Financial Conduct Authority (FCA) recently teamed up with insight and strategy consultancy BritainThinks to understand why self-directed investors are choosing high-risk investments more than ever.
With cryptocurrencies, investment-based crowdfunding, and foreign exchange investments growing in popularity, how are investors deciding where to put their money? And how much do they understand the risk involved?
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Key findings about high-risk investment
Younger investors are taking on bigger financial risks than ever, according to the FCA report. This is in part due to the easy access to so many investment apps. These apps make investing look easy even to complete beginners.
“Much of the consumer investments market meets consumers’ needs,” says Sheldon Mills, executive director, consumer and competition at the FCA. “But 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.”
This new audience pursuing high-risk investments consists mainly of investors under 40 and is predominantly female. They also rely heavily on social media or YouTube for financial tips and information.
Despite their bolder approach to investing, the FCA also found that 59% of those investing this way feel that “a significant investment loss would have a fundamental impact on their current or future lifestyle.”
This means almost two-thirds of those focusing on high-investment risks cannot afford a loss.
In fact, many are taking bigger risks in the pursuit of ‘the thrill of investing’. Others like the status that comes with owning stocks in certain companies. Still, 38% of those surveyed cannot give a clear reason for choosing some investments over others.
The challenges of high-risk investment
Sheldon Mills emphasises that while the FCA wants to encourage people to save and invest, it’s important that they choose risk levels they’re comfortable with. He explains, “Investors need to be mindful of their overall risk appetite, diversifying their investments and only investing money they can afford to lose in high-risk products.”
During the survey, the FCA found that too many young investors know little about the market. Many don’t seem to understand the risks involved either.
In fact, 78% of those who responded said they considered some investment types a ‘safe bet’, even though there’s no such thing when it comes to high-risk investments.
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What is a sound investment strategy?
Long-term investments have several advantages over shorter-term high-risk ones. For starters, high-risk investments are more likely to cause stress and lead to rash decisions.
Long-term investments are mostly about a buy-and-hold strategy. You can spend time figuring out where to put your money, then forget about it for years. There’s no emotional attachment so you can be patient and just let the money grow on its own.
Making investments over the long term can help you ride out the market bumps. Even if there’s a market drop, people who hold investments for a long time will eventually recover.
In addition, long-term investing is easier. You don’t need expert trading skills, especially if you use an investing app.
Whatever your strategy, long-term investments using one of these accounts could benefit you massively in the long run.
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