Blindfolded woman walking on a string above a sea of sharks. It represents the risk young investors are taking by blindingly jumping into investing opportunities they don't understand or know much about

Written by 10:01 am Investing, Money & Lifestyle

New investors are taking big risks. Here’s why that’s a bad thing.

About 7 minutes to read

In the wake of the pandemic, more young people are investing than ever. 

Thousands of millennial and Gen-Z investors have flocked to retail investment platforms since last March, dropping the average age of users on some platforms by nearly a decade.

It’s not entirely a surprise. The FT actually predicted this boom back in June last year.

As Ella, a 31-year-old content director, explains, “It’s been on my to-do list for years, but I never had enough time or really the money to be investing, but over the last year I’ve had time to learn. It’s been more simple than I expected.”  

With months on end stuck between the four walls of our homes, a fair number of people like Ella have had extra time to consider their money – both the positive and negative. Some of us have been able to think more widely about our financial goals, having saved more than usual thanks to lockdown restrictions. Others have been forced to reappraise their situation in light of reduced salaries, furlough schemes or job uncertainty. Add in wider economic turbulence, increasingly low interest rates, a booming availability of investment and trading apps, vaccine positivity and nervous-excitement around the ‘new normal’ and you have the perfect mix for inspiring conversations about money that simply wouldn’t have happened in January 2020, let alone years past.

After all, talking about ‘what you’ll do when this is over’ is akin to ‘what would you do if you won the lottery’ these days. A significant proportion of the topic revolves around our money. It’s about what you have in the bank and what you’ll be spending on when this is ‘over’. It’s about what new habits you’ll keep and which you’ll trade in for pre-Covid comforts. And it’s about what we value now as we approach the new normal – which for many of us includes control over our financial futures. 

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The newfound interest in investing by young people is – on paper – a good thing. For years, financial advisers and commentators and media pundits have decried the lack of engagement shown by young people for long-term financial products. Moreover, the demographics of these new investors skews strongly towards not only people under forty, but women and people from BAME backgrounds too – meaning that typically underserved communities are beginning to invest in far greater numbers than before.

However, not everyone is happy with the fact that thousands of people are signing up to investment platforms.  

Lockdown investing worries the UK watchdog.

Last week the Financial Conduct Authority (FCA) warned that financially vulnerable younger investors are engaging in high-risk investing through new apps and digital platforms.  

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

The concern is that new investors are facing potentially huge losses on volatile products like cryptocurrencies and foreign exchange. Memestocks stories, like the GameStop saga, only emphasise how inexperienced investors can be pulled into making financial decisions that could have hugely damaging impacts on their wallets and their overall financial wellbeing. 

Younger investors typically have lower financial resilience, but this may be exacerbated by the last twelve months. Many more people under thirty were negatively impacted by the pandemic, suffering a higher proportion of job losses and salary cuts. This makes them more vulnerable to investment loss and, according to the FCA, means that they may not be able to afford to lose the money they invest. In fact, such losses could cause a fundamental lifestyle impact for 59% of the new cohort of self-directed investors with less than three years’ experience. 

It’s understandable why the regulator is wary of current trends. Right now, the hashtag ‘stocktok has more than 860 million views, flooding TikTok with videos promoting stock tips from traders in their twenties or younger. ‘Demo’ accounts for trading apps, aimed at under-18s, are also growing in interest, with experts worrying that this could be a gateway to gambling habits. 

As Martin Bamford, chartered financial planner at Informed Choice, told This Is Money, “Speculating on individual stocks is about as close to gambling as you can get. The apps that facilitate day trading on stocks have made the process a game, hyping up the most traded company shares.” 

One of the big flags for the FCA appears to be the disconnect between the confidence of new investors and their understanding of the risks involved in investing. 

Research suggests that many new investors have high confidence and claimed knowledge – but in practice this may not be the case. 

Quite the opposite. There seems to be a lack of awareness – or belief – in the risks of investing. Over four in ten don’t view potential financial loss as a risk when investing, despite – as with most investments – their whole capital being at stake. Instead, there’s a strong reliance on ‘gut instinct’ and ‘rules of thumb’. Almost four in five said they ‘trust their instincts’ when it comes to trading. A further 78% also agreed that there are certain investment types, sectors or companies they consider a ‘safe bet’, despite there being no such thing. 

Furthermore, the FCA’s wider report shows that investors with the highest risk appetite are not approaching investing as a way to build their wealth, so much as a means to prove their skill, flaunt social status, and make money fast. When I reached out on social media to find out some more stories around this, several of the people I spoke to mentioned that they were looking at NFTs and crypto specifically because they wanted to supplement their current income or to make up for lost earnings. In one case, it was even mentioned that they were buying crypto despite being in their overdraft as they hoped the return would help clear their debt.

Now the issue here isn’t that young people shouldn’t be investing. They absolutely should and it’s a great thing that more of us are. 

And it’s not that we’re investing in the wrong things or that we should or shouldn’t be investing in high-risk investments like crypto or forex or even memestocks. Those things are controversial but understandably interesting to investors of all levels of experience.

The concern is when people take risks without fully knowing that they’re taking them. It’s around people taking financial decisions that can impact their wallets, lifestyles and overall wellbeing without realising that this is the potential outcome. 

When we know how interconnected our money is with our mental health and ability to withstand volatility throughout our lives, the worry is how many people could be devastatingly impacted at a young age, leaving them not only in financial difficulty now but potentially deterring them in the future too.  

But risk and investing go hand-in-hand, don’t they?

Yes. But we all think of risk differently. In the same way that some of us enjoy cliff diving whilst others prefer to keep their feet firmly on the footpath, we accept (and may even enjoy) different levels of risk in our lives and our finances. 

Moreover, when it comes to investing our appetite for risk (which is the desired level of risk we’ll take to achieve a goal) may be different to our risk tolerance (which is our ability to withstand all variations of outcome, including partial or total loss of funds).  

Someone in their twenties or thirties with no dependents might feel comfortable taking on more risk because they know there’s a good chance that in the long-term they’ll be able to make back any losses and that in the short-term they can maintain their lifestyle through a well-paying job. On the other hand, if that same person had a young family, less job security, or more debt, then even if they had the same attitude towards risk, their tolerance may be tempered, meaning they’d prefer to take a more moderate approach in order to ensure that their overall security isn’t jeopardised. 

In this sense, the investment risk that’s right for you entirely depends on your personal circumstances and how financially resilient you are – not just your attitude to risk or even your goals.  At ikigai, that’s why we offer different levels of risk across our fully-managed portfolios – each designed to fit with your risk profile whilst still helping you meet your goals.

When we look at the concerns raised by the FCA, it’s clear that the primary reason for their warning is around thrill-seeker investors who may not be taking into account their financial resilience or risk tolerance before they invest. 

If we want to approach money more mindfully, growing our wealth whilst staying in control, then analysing our relationship to our finances is essential. We need to take the time to consider how resilient we are, what money we can lose if things go wrong, what kinds of products are in line with our values and goals. This will help guide us towards the right level of risk for us – both in terms of appetite and tolerance. 

We can also take steps to bolster our financial resilience – from starting a rainy-day fund so that we always have money to fall back on in emergencies, to taking time to increase our financial knowledge through education, conversation or advice. Ensuring that our investment portfolio is diversified can similarly reduce our overall risk profile and shore us against volatility. 

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Investing for the long-term, not the quick wins. 

Seeing your investment portfolio shoot up in value is always exciting. However, as we’re always talking about here at ikigai, investing is about making your money work for you. It’s a long-term approach to growing your wealth, helping you achieve your goals and securing your financial future. This is very much what the FCA seems to want to see more of as well. 

“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,” explained Mills from the FCA. “Investors need to be mindful of their overall risk appetite, diversifying their investments and only investing money they can afford to lose in high-risk products.”

But I also want to point out this: nothing in the FCA warning should deter anyone from exploring the investment opportunities out there. 

What it should do is make us all consider how we invest, what we invest in, and how much we’re investing. It should encourage us to ask ourselves more questions before we invest: 

  1. Am I comfortable with the level of risk? 
  2. Can I afford to lose the money I’m investing?
  3. Do I fully understand the investment being offered to me?
  4. Am I protected if things go wrong?
  5. Are my investments regulated?
  6. Should I get financial advice?

These questions can help you pause and think about each opportunity that’s of interest. 

Investing can be fun and impactful and responsible at the same time. We can take risks in informed and considered ways. We can learn from influencers and follow trends without falling for the memes if we take the time to dig into what we’re told rather than accepting things at face value. 

So whilst the regulators are right to worry about the growing number of investors who don’t know much about risk – the real focus should be on sharing better information through the channels that matter: social media and online communities. Financial education is so essential with investment on the rise – and that means teaching people about risk, volatility, regulation, protection, resilience, the difference between investing and gambling. It means prioritising financial self-care and encouraging long-term engagement over short-term wins. 

Being young or inexperienced with investing isn’t something that should stop us from investing. The best way to learn and gain experience is to start. And it’s brilliant that so many of us are taking those early steps – our involvement in the investment landscape is long-overdue.

But as we do so, let’s keep in mind our values and goals so that whatever opportunities we pursue, we do so knowing that it’s the right thing for us. 

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We built ikigai specifically for those who want to bring their lifestyle to the next level, by taking better care of their finances.

ikigai beautifully combines wealth management and everyday banking in one single app. And by doing so, it creates a whole new world of opportunities.

Visit to find out more.

Maurizio & Edgar, Co-Founders, ikigai

When investing, your capital is at risk.

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Tags: , , , , , , , Last modified: 2 April 2021