Are you interested in investing your money? While I can’t really tell you where to invest it, I can definitely tell you that it’s never been easier to do so. It’s as simple as opening a share-dealing account, making a deposit and selecting your investments. But therein lies a problem. Is it too easy? Are new investors suitably aware of the risks they’re taking and the consequences of high-risk investing?
Here, I take a look at recent research conducted by the Financial Conduct Authority (FCA) into high-risk investing and how consumers could be made more aware of its pitfalls.
Why are people considering high-risk investments?
On one side, interest rates on savings have been at record lows for some time now. And while the Bank of England (BoE) has started to increase the base rate, it will take some time before it becomes appealing enough that people prefer saving over investing. In addition, inflation is running wild and people are looking for ways to offset that.
However, in their pursuit of high returns, people are starting to turn their gaze upon riskier investments like crypto assets. The FCA estimates that during the first seven months of the pandemic, more than a million adults (around 6% of all UK investors) increased their holdings in or bought new high-risk products.
In addition, people were being drawn into a frenzy of speculations and FOMO investing. According to Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, this trend is making regulators extremely nervous. It goes to show that people are willing to risk their money in times of great uncertainty.
High risk, high reward, right?
You’ve probably heard this a million times. However, making choices – especially the right ones – can prove to be complicated. A lot of investors will vow that they are willing to accept higher risk as long as it brings them the opportunity of a higher return.
But do you think their plan involves burning the entire investment? A recent survey by the FCA found that many investors significantly underestimated the risks they were taking. Almost half (45%) of self-directed investors were oblivious that ‘losing some money’ was an associated risk of investing.
And the data suggests…
In their research, the UK regulator used several behavioural insight strategies. With the aim of testing whether they will increase the awareness of consumers about high-risk investments. Simple additions such as alert messaging on web pages returned promising results. As a result, participants were more aware of the risk they were exposed to and were less likely to recommend such ventures to their friends.
Another of the FCA’s experiments was to make the process more complicated with the addition of check-point criteria for self-certification. This also produced desired results, as consumers were more likely to stop and consider their actions.
Making a change
As part of their Consumer Investment Strategy, the FCA aims to improve investors’ confidence and understanding of high-risk investments. The authority is acting to address growing concerns over just how easy it is to invest by exploring additional layers of protection around how high-risk investments like crypto are marketed to the public.
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About the author
Nas is a freelance personal finance writer who is passionate about all things personal finance. He’s an accredited MRS researcher, aiming to bring content that allows readers to make better financial decisions.
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