New research published today from the Financial Conduct Authority (FCA) show a new, younger, more diverse group of consumers are getting involved in higher risk investments
The UK regulator said over 4 in 10 don't view "losing some money" as one of the risks of investing, even though their whole capital is likely to be at risk.
These investors also have a strong reliance on gut instinct and rules of thumb, with almost four in five (78%) agreeing "I trust my instincts to tell me when it's time to buy and to sell" and 78% also agreeing "There are certain investment types, sectors or companies I consider a ‘safe bet'"
First and foremost, investments are about security. Risk will always be there, but it should be calculated, not ignored."
Younger investors with less experience may have the lowest levels of financial resilience with 59% saying a significant loss could have a fundamental lifestyle impact.
Sheldon Mills, executive director of consumer and competition at the FCA, 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."
Adrian Lowcock, head of personal investing at investment platform Willis Owen, commented, "The findings out today from the FCA regarding what the regulator calls a new, young group of more diverse investors show that many are underestimating the risks of investing."
"It is particularly worrying that 4 in 10 respondents said they did not view "losing some money" as one of the risks of investing in cryptocurrency and other assets, and this is a failure of the financial services industry to properly inform consumers about the realities of investing.
"The questions the FCA has set out are important to help prevent customers losing money, but they miss some key areas."
"We think questions such as "why am I investing in the first place" and "will this specific investment help me achieve my goal" are fundamental to all of this, and should also be included as a starting point."
Danni Hewson, financial analyst at AJ Bell, comments: "It might feel like a game but the figures on screen are real. Real money, real risk. And when it all goes wrong, which any seasoned investor knows it can, the end result can be shattering.
"Although based on a relatively small sample, much of which was focused on higher risk investments, the FCA is right to highlight these dangers. Playing the markets is one thing - playing at it is entirely different. That's not say all young investors are ignorant, far from it; but a worryingly large number seem to be blind to the pitfalls. Worse, almost half think there is no danger.
Hewson added: "The research suggests many are often relying on gut instinct or advice gleaned from social media rather than established sources of information with rigorous checks and balances. And the high, when it comes, can override everything, clearing the way for unscrupulous scammers to pray on their vulnerabilities."
"No one likes to lose money, but if that loss is going to have a fundamental impact on your life choices you need to ask why you are putting it on the line in the first place. First and foremost, investments are about security. Risk will always be there, but it should be calculated, not ignored."