On Friday the Financial Conduct Authority (FCA) published a fascinating article on the views of people on the risks of investment offers under the title “Getting to the Gamers”. It included these comments:
“Consumers can now easily invest in high-risk investments. Some of these promotions use popular ‘gamification’ techniques to encourage people to participate. Gamification uses elements of game playing, like score-keeping, competition and league tables, to encourage people to take part. High-risk investments can be a valid part of well diversified portfolios, but we are concerned that many investors don’t recognise all the risks involved”; and:
“First, we had to find out more about these investors, what attracts them to these offers and where they see them. Our research found they tend to be aged 18-40 and are often driven by emotional and social factors. They enjoy the ‘thrill’ and feeling of ‘being an investor’. 78% said they relied on their gut instincts to tell them when to buy and sell.
But nearly half of them – 45% – didn’t realise that losing money was a potential risk of investing, and over 60% relied on social media when researching investments. They were also disproportionately attracted to offers and platforms that used gamification”.
See FCA article here: https://www.fca.org.uk/about/getting-gamers
Comment: it is certainly plain to see that in the last few years a lot of new investors have been attracted into stock market investment. They have never been through a bear market and their perceptions of risk are therefore inadequate.
What can the FCA or anyone else do about this? Encouraging investors to get some experience before making big bets on shares is one thing to do and more education before they even start to invest are surely the things to look at. Some education should be a pre-requisite before being allowed to invest in the stock market.
Warnings about reading or listening to social media posts on investment topics would also not go amiss and tougher regulation in general of investment web sites would help.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
I agree that education would be a good thing, and the Share Society have made a start with this, But the thing that always bothers me when people talk about “high risk” investments is that typically they are referring to things which are not “mainstream”. When they do this I think of Woodford, which was mainstream at the time, and BP where an investor in October 2018 would have lost 2/3 of their money (ignoring dividends) in the next 2 years. There are numerous examples like Rolls Royce which was as blue-chip as they come but it went into receivership in 1971. Based on what has happened in the past it seems to me that a real risk is that regulation might make it harder for knowledgeable investors to include so-called “high risk” investments in things like SIPPs and ISAs, and we will be corralled into investing where the FCA thinks, erroneously, that we will be safer. I see the FCA says that ‘High-risk investments can be a valid part of well diversified portfolios’ and I think they need to be reminded of that at all times.