A recent survey by the Financial Conduct Authority (FCA) revealed a general lack of understanding about investments among respondents aged 18-40.
We spoke to Martin Lawrence – Director of Investments at Wesleyan – to ask him three key questions and find out his views on what people should consider when it comes to investing their hard-earned money.
Q: What’s fuelling the sudden popularity of ‘high-risk’ investments among novice investors and what should they be mindful of?
Martin: "A growing number of people – especially younger generations – are being influenced in the way they think about investments by news headlines and social media, which is something the FCA’s recent survey findings revealed. It’s becoming apparent that some are taking greater risks with their money, without understanding all the implications, in the belief that they can achieve impressive short-term returns or ‘get rich quick’.
"To highlight the problem, many novice investors don’t realise that cryptocurrencies and foreign exchange (also known as ‘forex’ – trading currencies with the aim of profiting from differences in exchange rates) are not regulated by the FCA.
"This means that anyone investing in them could be exposed to greater levels of risk and potential loss. Earlier this year, Andrew Bailey, Governor of the Bank of England, went so far as to say that anyone buying Bitcoin, Dogecoin or any other digital currency should be “prepared to lose all [their] money”.
"There are other potentially high-risk investments in the market that people should be aware of too, including investment-based crowdfunding, unregulated collective investment schemes, innovative finance ISAs (IFISAs, not to be confused with ‘cash ISAs’ or ‘stocks and shares ISAs’), and peer-to-peer lending, among others.
"Friends and family members can have a big influence on an individual’s investment decisions too, but if those loved ones aren’t formally qualified professionals then the guidance they give is likely to do more harm than good. Anyone looking to invest should arm themselves with the facts first and get professional advice as appropriate.
"The FCA has launched its InvestSmart campaign with would-be investors in mind, to help educate them, so that’s a really good starting point."
Q: Why is understanding investment risk so important?
Martin: "Every investment has risk attached to it. An investment fund, as just one example, is typically made up of different proportions of assets like cash, bonds, property, and equities (also called ‘stocks’ or ‘shares’, which are traded on stock markets), and all those assets have risks too.
"All regulated investment funds in the market have a unique risk level that is clearly presented as a numerical value to customers. As a general rule, the more equities held by a fund, the higher its risk rating is, because equities are viewed as the most unpredictable asset class. People who have received financial advice from a qualified professional should already know what their ‘attitude to risk’ rating is, which then helps them understand which investments are suitable for their individual risk appetite, needs, circumstances and financial goals.
"What is particularly interesting about the FCA’s recent survey is that only one in five respondents had thought about holding their most recent investment for longer than 12 months, and less than one in 10 were considering doing so for more than five years. That contrasts with 60% of those surveyed, who stated that they had a preference for stable returns instead of investments with sharp rises and falls.
"However, it’s really important to know that investments providing smoother returns typically require an investor to be patient and to lock their money away for at least five years, but usually much longer to give the investment time to grow even after going through any market dips.
"A With Profits Fund is a good example of this because it ‘smooths’ the financial returns for its investors, to help protect them from periods of market weakness, but it is a long-term investment and should only be considered by those able to put their money away for a minimum of five years.
Q: The FCA is encouraging consumers to ask themselves five questions before investing. As well as these and ‘attitude to risk’, what are some other important considerations for those looking to invest, perhaps for the first time?
Martin: "There are lots of things to consider and too many to mention here, but a key question is: What are your investment goals? For example, do you need to secure a regular income in the future, do you wish to retire by a certain age, or is it for your child’s university fees?
"Some other questions to ask yourself are:
- Will you need to access your money in the short-term future?
- Are you aware of all the charges involved with direct trading versus an investment fund versus other investment types?
- Do you understand different products and tax wrappers, and your personal tax liabilities?
- Even if you understand investment markets and regulations, do you have the time and expertise to manage your own investment portfolio?
- Do you have preferences on environmental, social and governance issues?
- Do you want financial protection, should the worst happen, or are you prepared to lose all your invested money?
"By asking yourself these questions, you will begin to develop a better sense of what you want your money to achieve, and your answers will also affect the types of investment you consider. As mentioned earlier, some investments are not regulated by a body like the FCA, meaning there is little to no financial protection for investors. If you have been offered an investment opportunity by a friend or found one online that looks too good to be true, it probably is. One of the best ways to make sure you do what’s right for you when it comes to investing is to seek professional financial advice from a Specialist Financial Adviser.
"Investment markets can be unpredictable. At Wesleyan, we invest in the companies and assets that we believe will provide the best possible long-term returns for everyone who invests with us. Our ‘buy and hold’ strategy runs alongside a ‘contra-cyclical’ approach, which in layman’s terms means that our Fund Managers, Property Managers, Analysts and Socially Responsible Investment team work together on research to identify assets that have the strongest potential to perform well over time."
Bear in mind that the value of investments can go down as well as up and you may get back less than you invest. Capital at risk.