Technology has made investing far more accessible. You can now invest and make changes to your portfolio with just a few taps on your smartphone. While more people investing for their future is a good thing, technology is instilling bad habits in some investors.
Far from investing with a long-term goal in mind, some investors, according to a report published by the Financial Conduct Authority (FCA), are opting for high-risk investments for the “challenge, competition and novelty”.
Dubbed “having a go” investors in the report, these investors are keen to take control of their portfolio. However, the findings suggest they could be making mistakes that cost them money in the short and long term.
When asked their reasons for investing, emotions and feelings played a greater role than “functional reasons”. Their decisions are influenced by the thrill of trading and social factors, like the status that accompanies a sense of ownership in the company they invest in. For some, these reasons were more important than functional reasons, like wanting to make their money work harder or to save for retirement. In fact, 38% did not list a single functional reason for investing in their top three responses.
It’s easy to see why investing can be thrilling for some – daily market movements and “winning” when investment values rise can make tinkering with an investment portfolio addictive. However, this attitude and strategy could cost investors financially.
What’s the worst that could happen?
High-risk investments aren’t suitable for most investors, yet many are overlooking this fact.
The FCA paper found six in ten (59%) people investing in high-risk products say a significant investment loss would have a fundamental impact on their current or future lifestyle. Your capacity for loss should play a role in not only the investments you choose but whether you should invest at all. If losses could have a significant impact on your lifestyle, other alternatives may be more appropriate.
Worryingly, the findings also indicate that many investors are unaware of potential losses. More than four in ten did not view “losing some money” as one of the risks of investing. This is despite all investments coming with some level of risk and the potential for investment values to decrease.
When investing, you should always ensure investments match your risk profile and be comfortable with the amount of risk you’re taking.
Avoid the investment “hype”
One of the reasons investors are getting a thrill for high-risk opportunities is that they are “hyped”. These investments are spoken about widely or appear frequently on social media, which gives the impression that everyone is investing in, and benefiting from, a particular company. In some cases, these investments then become viewed as “safe”.
The findings demonstrate how financial bias can have an impact on our decisions. “The bandwagon effect” refers to the phenomenon where people think or act in a certain way because other people are doing the same. When it comes to investing, that may mean investing in certain assets or companies so that your actions align with those of the group. When an investment is hyped, the bandwagon effect can encourage investors to follow the crowd, even if it’s not right for them.
So, how can you avoid investment hype?
- Set clear, functional investment goals. Ask yourself why you want to invest and what you want to achieve.
- Focus on the long term. Investment values fluctuate, rather than following daily or even weekly movements, so look at the bigger picture.
- Don’t make snap investment decisions. Instead, spend time thinking about opportunities and how they fit into your wider profile with your goals in mind before moving forward.
- Understand your risk profile and what investments are appropriate for you.
- Remember: an investment that is right for a friend, colleague, or anyone else isn’t necessarily right for you.
Working with us can also help you avoid investment hype and select investments that are right for you. Sometimes, another pair of eyes can help highlight where bias is occurring or point out why an investment opportunity isn’t appropriate. We also work with our clients to put a long-term plan in place that’s tailored to them. This can provide you with confidence about your future, so you’re not tempted to reach for an investing app that is swayed by market movements.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment 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.
Richard Fyfe is a Chartered Financial Planner and a Director of Fyfe Financial.