DIY investing means you might not end up as a Wild West hero
ARE you riding the range in the new “Wild West”?
It appears that a new breed of younger investors are doing just that.
They move into lawless terrain by making their own decisions, investing their money without financial advice, getting involved in high-risk investments. They are trying their luck with stock market offers they don't understand, or pouring portions of their wealth into crypto-currencies like Bitcoin, Litecoin or Ripple.
Why is this happening? It's for two reasons.
First, they are persuaded by glitzy ads and extravagant claims on social media talking about the fantastic returns made by a small number of people (often with celebrity endorsements), backed up by fantastic tales by social media influencers.
Second, investment apps now available make it easier to do your own financial thing with no professional advice, and no awareness of the risks you're getting yourself into. You can fire a few thousand of your savings into some new fad, from the comfort of your seat on the bus into town.
These investors are typically under 40, and for their tips and news they look mainly to YouTube and other social media.
They indicate to researchers that they do it for the thrill of ‘paying their money and taking their chance'.
Couldn't they just buy a lotto ticket, rather than risking thousands? With the lotto you stand practically the same chance of hitting the jackpot whether you're in or not, but at least you only lose a few quid!
They also do it for the prestige of owning shares in the companies, or buying units of the virtual currencies everybody's talking about. So it's a cross between having a punt in the markets, and having something to brag to friends about on Facebook.
This is not the best financial strategy.
Here are the figures (according to findings in an FCA report earlier this month entitled ‘Understanding Self-directed Investors'): over a third (38%) of Wild West investors said they were thrill-seekers, looking for competition and novelty of market speculation, rather than investing thoughtfully in lower-risk, long-term investments which may offer more reliable growth in their money, or building their pension for retirement.
Asked to list their top three reasons for their decisions, none of this group gave a single sensible or functional reason for investing.
Over four out of 10 did not view ‘losing money' as one of the risks of investing, when the reality is that their whole capital was at risk.
Nearly four out of five said they were deciding by gut instinct and rules of thumb. The two statements they agreed to in the research said “I trust my instincts to tell me when it's time to buy and sell” and “There are certain investment types, sectors or companies I consider a safe bet.”
There's that alarming word again – ‘bet'.
At the same time, nearly two thirds said that a significant investment loss would have a serious impact on their lifestyle, both now and in future.
The official advice to these people from the financial regulator comes in the form of five questions to ask about your investments.
Am I comfortable with the level of risk? Do I fully understand this investment? Am I protected if things go wrong? Are my investments regulated?
And my personal favourite: Should I get financial advice?
So before you strap on your six-guns and go out riding the range, just remember what John Wayne didn't show us: you might not end up as a Wild West hero.
You could well end up losing it all, and being carried in a box to the financial equivalent of Boot Hill.
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice Ltd or at www.mkennedyfinancial.com