Research has found that 44% of British investors chose not to do any form of research before they started to invest. Keep reading for a closer look at the findings of the report, plus, why you should always consider seeking professional advice before you invest.
A joint study by the Financial Conduct Authority (FCA) and the Financial Services Compensation Scheme (FSCS) published in May, found that individuals deemed investment research “too complicated” and “time-consuming”.
And yet, by investing without completing diligent checks, UK investors are leaving themselves open to the dangers of high-risk funds and potential scams.
Understand why you are investing
Investing is a long-term proposition. It should be based on a specific goal and an individual’s attitude to risk and ability to sustain losses.
Worryingly, the joint FCA and FSCS report found that other factors are influencing the decision-making of some. When asked why they invested, it was found that:
10% did so because their friends did
26% said they found it "fun"
14% chose investments based on celebrity endorsements on social media.
A long-term investment goal not only provides an investor with an end date to aim for, but also sets the time frame for the investment. In turn, this helps inform the amount of risk an individual is willing to take.
Investing for a retirement that is still 30 years away, for example, allows for longer periods of recovery, should a short-term loss occur. This might make it possible to take greater risk, at least in the early years of investment.
Conversely, as an investment goal nears, greater emphasis might be placed on consolidating earlier gains by moving to a lower-risk approach.
A 10-year investment designed to pay a child’s school fees, on the other hand, might require a lower risk approach from the outset.
Take time to think about the risks
Invested funds can fall as well as rise and there is no guarantee that you will get back more than you put in and in some cases you may get back significantly less than you put in. A risk-managed approach, coupled with expert financial advice, is the best way to achieve your goals.
Taking “advice” from social media platforms is a high-risk approach.
Accounts are often fronted by influencers with no financial qualifications and the “opportunities” they are endorsing are highly unlikely to carry the necessary risk warnings.
The investments on offer could also be in high-risk areas, including overseas, where FCA regulations and protections might not apply.
All of these factors increase the risk of an investor losing money or being scammed.
Despite these scam red flags, investors in the FCA survey admitted to opening themselves up to potential fraud:
27% confirmed that they were more likely to invest in an “opportunity" with a limited time frame
22% said they had failed to check if their investment was FSCS-protected.
And yet, attitudes towards research and the possibility of fraud are putting these investors “at a higher risk of being scammed or putting their money with an unprotected platform or provider".
Educate your children on the importance of investment research
Many people are now turning to the internet, using online platforms for their investment arrangements because it appeals to those who don’t want the bother of taking advice - they want quick and easy solutions.
While these platforms are making investing “easy and accessible for everyone”, younger age groups potentially run the greatest risks. Of those 18- to 20-year-olds who are investing:
13% do so while watching television, Netflix, or other streaming services
11% invest at the pub
7% make an investment decision when they return from a night out.
While the numbers decrease among the over-25s, the potential impact of these investment behaviours is clear.
In February 2021, the Independent reported that 20% of younger investors see social media as their most important source of investment information (compared with just 4% of over-35s). Regular use of these platforms could increase the chances of this age group succumbing to scams.
Younger investors are also less likely to be financially stable, and so less able to cope with the financial shock of an investment loss.
According to the FCA, nearly two-thirds (59%) of younger investors believe that a significant investment loss would have a fundamental impact on their current or future lifestyle.
Get in touch
At Ermin Fosse, we have many years of experience dealing with the markets and can offer expert, FCA-regulated investment advice.
Whether you are thinking about investing for the first time or would like to add to an existing portfolio, get in touch now. Email info@erminfosse.co.uk to find out how we can help.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. Errors and omissions excepted.
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Ermin Fosse Financial Management LLP is authorised and regulated by the Financial Conduct Authority Financial Services Register No: 197438