Tuesday 23 March 2021 11:36 am

Gut instinct and social media drives young people to risky investment decisions, warns FCA

The financial watchdog has warned that young people are increasingly engaging with risky investments like foreign exchange and cryptocurrency, despite not having the capacity for loss if the investment goes wrong.

The Financial Conduct Authority’s (FCA) research found nearly two-thirds (59%) of young investors claimed that a significant investment loss would have a fundamental impact on their current or future lifestyle.

The newer group of younger self-investors are more reliant on contemporary media like YouTube and social media for tips and news.

Read more: Gamestop phenomenon pushes millennials towards DIY investing

The FCA said the move towards social media appeared to have been prompted by the accessibility offered by new investment apps.

Video platform TikTok has become the number one spot for ‘financial advice’ on social media, with TikTok videos tagged ‘Stocktok’ or ‘Moneytok’ racking up 527 million and 5.1 billion views respectively.

FCA executive director for consumer and competition Sheldon Mills said: “Much of the consumer investments market meets consumers’ needs. 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.

“We want to make sure that we encourage the ability to save and invest for lifetime events, particularly for younger generations, but it is imperative that consumers do so with savings and investment products that have a suitable level of risk for their needs. 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.”

Gut instinct

Young Investors strongly rely on “gut instinct” when making investment decisions, the watchdog found, with almost four in five (78%) agreeing “I trust my instincts to tell me when it’s time to buy and sell”, and 78 per cent also agreeing “there are certain investment types, sectors or companies I consider a ‘safe bet’.”

Despite that, they had high confidence and claimed knowledge – even though more than four in 10 did not view “losing some money” as one of the risks of investing.

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The FCA said younger investors may have the lowest levels of financial resilience making them more vulnerable to investment loss.

Nevertheless, they had high confidence and claimed knowledge – even though more than four in 10 did not view “losing some money” as one of the risks of investment.

The research found that a significant loss could have a fundamental lifestyle impact on nearly two-thirds (59%) of self-directed investors with less than three years’ experience, who are more likely to own high risk investment products, compared with 38 per cent of investors with greater than 3 years’ experience.

Read more: The rise of TikTok ‘finfluencers’ offers lessons for the investment industry

James McManus, chief investment officer at Nutmeg, a digital wealth manager, said young people felt more bullish about investing.

“In truth, what we’ve seen with the meme stocks’ saga and the extreme volatility in cryptoassets are timely examples of the perils of a short-term approach to investing driven by hype. These moments should act as a clear warning that market noise is often just that and if something sounds too good to be true, it probably is,” he added.