The UK has endured a tumultuous two years since the start of the global pandemic. As the world has evolved and adapted to meet the challenges and opportunities of our times, so too have the behaviours and appetites of investors.
Our latest Investment Forces research reveals a wave of new investors have taken up investing in the past year. This new generation of investors – Gen I, as we call it – now makes up almost a quarter of all investors in the UK.
Against a backdrop of rising inflation and stagnant wage growth, individuals in the UK are looking for alternative means to grow their wealth. With two-thirds (69%) of Gen I aged 41 and below, we are also seeing a wave of new and diverse approaches to investing coming to the fore.
Whilst it is encouraging to see such a marked enthusiasm for investing in the UK we must also be wary of the risks associated with some emerging investment trends, particularly when adopted by those with limited investment experience.
Social media: a significant source of influence
Social media has become a go-to source of financial information for Gen I, with 49% regarding social platforms as influential sources of financial expertise. Roughly a third believe financial information on TikTok (30%), Reddit (33%), LinkedIn (31%), Instagram (33%) and Facebook (35%) to be reliable sources of information.
Not only that, but media personalities who share financial advice across these platforms are also being increasingly recognised as voices of authority; 45% of new investors take note of ‘influencers’ specialising in finance, and 41% take heed of celebrities who discuss their investments online.
These are not the only informal sources of financial information being sought out by new investors either: opinions from friends; family; online forums and trading apps are all deemed to be as valid as professional fund managers.
Financial advisors are used by less than a third (31%) of new investors. Making investment decisions based on unregulated sources of information is fraught with hazard. It can be challenging for even the most experienced investors to assess whether information gleaned from unofficial or unsubstantiated sources of information, such as on TikTok, is accurate – for those individuals with limited experience, it can be significantly more difficult to discern.
While capital is always at risk when investing, it feels that Gen I, on the whole, has a greater appetite for risk than other generations, and we would urge caution when gleaning information from informal sources.
Crypto is the zeitgeist asset
Not only are new investors turning to less traditional sources of financial information, they are also turning to less traditional assets. New investors are significantly more likely to be investing in crypto than in any other type of asset: 57% favour cryptoassets in their portfolios, far above the more traditional assets of government bonds (20%) and corporate bonds, equities and ETFs (15%) that more experienced investors tend to favour.
With a low barriers to entry, digital trading platforms have made investing more accessible and cryptoassets have become the investment asset of choice. However, cryptoassets are still relatively nascent and yet to feature widely in the portfolios of more experienced investors, due in part perhaps to their volatility, as well as the threat of regulatory intervention.
With 85% of new investors focusing on only one or two types of investments in their portfolios, there is the additional concern that high-risk cryptoassets are making up significant portions of new investors’ portfolios.
It is more important than ever before to highlight the need for diversified long-term portfolios, which are better equipped to weather macroeconomic themes, such as inflation and market volatility.
Catching up with a new world of investing
The chasm between new and experienced investors – and their approaches to investing – is clearly expanding rapidly. The rise in the number of digital platforms and the sheer volume of financial information available today have made the route into investing that much more accessible for new, and younger, investors and, against a challenging macroeconomic backdrop, we expect an increasing number of individuals to explore retail investing as a viable option to grow their wealth.
However, new approaches to investing can also bring additional risk, particularly for those that have limited investment experience.
Education at all stages of the investment ecosystem will be crucial in protecting investors whilst fostering investment growth. New investors will find it increasingly difficult to establish the credibility of financial information when it is emerging so rapidly from varying sources and across multiple platforms.
Regulators should remain abreast of emerging sources of information and consider intervening if they believe that unregulated advice is causing poor investment outcomes.
If growing wealth over time is the primary goal, investors should adopt long-term approaches to investing and, if only favouring one or two types of investments in their portfolios, explore low-risk options.
Whilst cryptoassets seem to be in vogue now, they are also incredibly volatile. If new investors are looking to adapt their strategies to protect against losses, a diversified portfolio, balanced across asset classes and sectors, is a more sensible, time-tested approach.
Richard Flynn is the UK managing director of Charles Schwab. The views expressed above should not be taken as investment advice.