What are the risks for young investors?

A recent study from the FCA (Financial Conduct Authority) has found that younger investors are taking higher risks. The perfect storm of high confidence, perceived knowledge, easy investment access due to apps and the financial constraints of a post-pandemic world can lead to big losses for young investors.

It’s no bad thing to start learning and getting financial experience early, and like any skill, savvy investment takes intuition and knowledge that comes with experience. Everyone has to start somewhere. The concern for young investors is that when it comes to capital losses, there can be harsh consequences. Learning to navigate the world of investing and being aware of potential risks and wrong turns can help keep you on the right track.

Common mistakes young investors make

Investments come with a degree of risk, but experienced investors tend to know how to balance those risks, and may also have more capital behind them as they have had longer in life to build-up financial resources. Younger investors are on the opposite end of that spectrum. A hard investment hit could mean a significant loss to your financial safety net and a struggle to get back on top.

Ultimately, you will experience losses and make mistakes. While you might be more at risk of your losses having a bigger impact, you also have the time and flexibility to work your way up the ladder again. Awareness is a key step in any learning process and acknowledging the common mistakes that young investors make can be useful if you’re trying to sidestep them.

1. Leading with emotions

Elevating your social status, thrill-seeking, being keen to find the next big thing, and a sense of ownership – these are all exciting draws when it comes to investing. But this also leads to emotional investment decisions where novelty and bragging rights may surpass a more solid and stable return. For example, rather than picking an exciting ride with the hope of getting lucky, you may be better investing in broadly diversified index funds.

2. Not asking questions

Knowing why you’re making an investment and what your financial goals are amongst the most important considerations when you’re starting out on your investment journey. The FCA noted that two in five young investors were unable to map out a concrete and rational reason to back up their choices.

Not asking questions isn’t just about internal reflection, but also collecting knowledge and asking for advice from more experienced peers. A young investor who turns to a financial advisor or even a robo advisor for help is more likely to have a smoother ride and learn invaluable insights than a novice starting out in stocks without any support.

3. Looking to short term solutions

It’s not uncommon for young people, in general, to look to the short term rather than planning for the future. Young investors may be more drawn towards decisions that deliver a quick return, rather than thinking about retirement or access to wealth in later life.

For young investors, retirement might seem a long way off, but most stocks need time to grow. Having milestones mapped out along the way so you get that balance of return and growth can help bridge the gap between your short-term and long-term needs.

This can be as simple as looking at your financial goals with a seven to ten year plan in place. Dividend stocks that offer the potential for growth alongside regular payouts can be a good choice for a medium-term goal.

Questions to ask before you invest

Perceived risk and reward is a personal journey, and not one to take lightly. Checking in with yourself and assessing your comfort level before investing is great practice for making mindful and informed financial decisions. Here are a few short sharp questions to ask yourself before investing.

• Do I understand the investment being offered?
• Why do I want to make this particular investment?
• Am I comfortable with the risk?
• What do I stand to lose?
• What could I gain?
• Is there any protection if I lose my money?
• Is there any regulation for this investment?
• Should I get financial advice first?

If your answers weigh heavy in the “I don’t know” category, then seeking financial advice is always the best solution. 

How to be an intelligent investor

Start early

There’s an advantage to being a young investor as you theoretically have time on your side. The sooner you start, the sooner you can make your money start working for you and for stock prices to rise. Investing early and as much as you can (within a balanced reason) can set you up for the best levels of success. This could be as simple as buying into an exchange traded fund (ETF) every month.

Mix your portfolio

Avoid falling into the trap of seeking a quick fix or fast reward, and don’t gamble too hard when it comes to your investments. Choosing instead to spread your eggs across several solid baskets can reduce your risk and lead to greater returns spread out across your investment life. Selecting a mix of both short term and long term investment opportunities is always a good idea.

Build your skills

Young investors can set themselves up for investment success by being open to the learning process and actively building their knowledge and skills. Whether this means working with a financial advisor, seeking out a mentor, or taking a series of online courses, learning all you can about financial markets and investments is going to help you make calculated risks, build multi-asset portfolios and to ultimately become a self-reliant investor.

Look to safer alternatives

While playing the stock market and chasing investments can be exciting, it doesn’t come without risk. There’s always the chance you could lose your money, the market could downturn, and your stocks could decrease.

While you can balance risk, there is no such thing as a 100% safe bet, but there are alternatives to investing in your future. Savings accounts can help you to grow your money. Fixed rate bonds, for example, can lock in your money at a fixed rate of interest across a chosen time period that spans anything from six months to five years.

Young investors can have the best and the worst of both worlds. They have time on their side which gives their money more time to grow and gives them the chance to bounce back should a financial loss happen. But they also may lack the skills and the knowledge to make balanced choices.

While it can be tempting to invest in ‘hot stocks’ or the latest cryptocurrency and be swayed by advice on social media, this is risky business. You can set yourself up solidly by opening a savings account alongside investing in multi-asset portfolios, planning for the long term, and investing in advice from a financial or robo advisor.