Young investors can only learn about risk by taking risks

The Financial Conduct Authority has issued a stark warning about younger investors taking on big financial risks.

The regulator this week expressed concern about people engaging in high-risk investments such as cryptocurrencies and foreign exchange.

“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,” said Sheldon Mills, FCA executive director for consumers and competition.

All very sensible, you might think. And I agree. But part of me rejoices that more young people are investing actively and even boldly.

Over the past year since we first went into lockdown, greater numbers of young adults, propelled by boredom, surplus savings and the fear of missing out (FOMO), have dipped their toes into the kind of investing where they can lose some or all of their money.

In the UK, they have used major investment platforms — in the last quarter of 2020 they made up 25 per cent of new customers to Interactive Investor. Hargreaves Lansdown reported a similar trend. Other young people turned to free trading apps and robo advisers.

In the past two months the Reddit frenzy has taken off. At Interactive Investor, we have seen GameStop and cinema chain AMC Entertainment Holdings — two companies unknown to most investors a few months ago — enter the most popular holdings list for the 18-34 age group. A stark contrast to a favourite of the 65-plus cohort — the Glencore commodities group.

Yes, young investors are backing dangerous, volatile stocks that can make big winners and losers. It’s easy to see the downsides of the inexperienced buying high-risk investments on the advice of the faceless individuals — who don’t even use their own names — posting on social forums. The FCA is right to point all this out.

But I think it’s too easy to wag our wrinkled fingers at the young. First, they have the highest capacity for investment risk because they have time on their side to navigate bumpy markets and recoup losses.

When I was editor of Moneywise magazine, I once asked readers aged over 50 to tell me what they wish they had known in their 20s. The most memorable answer was: “I wish I’d looked at a long-term graph of the stock market, because it would have been the kick up the backside that I needed to start investing young.”

Others pointed out that keeping money in the bank is the stuff of nightmares if interest rates are low and you do it over 30 years. And sticking to bank deposits between the ages of 20 and 30 is a missed opportunity for long-term growth that you will never have again. You only live once (or YOLO as this generation prefers) and it could become one of your biggest financial regrets.

Over the past year, Generation Z and millennials have got their “kick up the backside” from social media, with investing influencers mushrooming on platforms such as Instagram and TikTok. Many of these peddle sensible education, but others are jokers.

The “advice” of influencers can be confusing and conflicting. It’s certainly time for the regulator to have more of a presence here, but the officials will need to get familiar with memes, gifs and emojis — finding new ways to translate messages like ‘past investment performance is no guide to the future’.

Are these new ranks of investors criticised too much? There are many positives to their risk-on approach.

First, they have started to think about how their money can work harder for them through taking on risk. The democratisation of investing through social channels is a good thing (even if it needs to be navigated carefully). As investing is not taught at school, most people only get to know about it through the influence of family or friends. But if you don’t move in the right circles then how would you find out?

Second, the young are experiencing the fun and excitement of investing, a topic that has become engaging enough to make it on to the mainstream news channels. Yes, I think investing can be fun and exciting as well as responsible. I’m hoping that this means that the Gen Z members of my family won’t read this, yawn and say ‘OK, well, whatever . . . ”

The young are prone to mistakes. That is their right. But we also need to counter the anti-wealth culture and argue that not investing means staying poor or getting poorer. The pandemic’s market crash was a great starting point for investing for this generation.

Alongside the “Reddit stocks”, we have also seen young adults buying into the heavyweight shares popular with all age groups, such as Lloyds Banking Group and BP.

Have they started out on a platform that is going to educate them about sensible investments and strategy? Or are they on a gambling site that will push them into high-margin betting on contracts for difference?

Many have held Scottish Mortgage Investment Trust, a popular stock with longstanding investors that earned a justified reputation for delivering growth through backing high-tech companies even if it has suffered a setback this year in the wider sell-off of technology shares.

In 2020, younger investors’ portfolios on the Interactive Investor platform (18 to 24-year olds) saw the strongest growth among all age groups of 8.1 per cent on a median average basis. Despite their inexperience, they were not far behind the wealthiest customers on the platform (£1m-plus accounts) who recorded average gains of 8.7 per cent.

What drove this performance? Not high-risk tech stocks or penny shares but the City’s best-kept secret — performance in both groups had high exposure to investment trusts, solid long-term highly diversified sensible investments. This suggests the young know enough to be prudent.

But, at the same time, the vulnerable in this age group need to have the opportunity to learn safely about the difference between investing and gambling.

Have they started out on a platform that is going to educate them about sensible investments and strategy? Or are they on a gambling site that will push them into high-margin betting on CFDs (contracts for difference), where they stand to lose a lot?

The regulator should be concerned about these crucial differences — and consider how to inform young people through social channels.

As Interactive Investor is an execution-only platform, we don’t know about these young investors’ net worth or how much risk they are taking on in relation to their total finances.

But if they’ve put the money from a holiday fund or savings from Pret A Manger lunches into a high-risk stock and lost it, they can use that as a valuable lesson about the importance of diversification.

Investing is the only way to acquire real investment knowledge — and an understanding of risk. The sooner young people start the better.

Moira O’Neill is head of personal finance at Interactive Investor