Why Many Young People Are Making Risky Investments
The appearance of apps and platforms that allow anyone to make investments.
A recent investigation by the BBC Business Daily radio show revealed that many of these under-35 investors have one characteristic in common: their daring.
The phenomenon occurs in many parts of the world. One example is India, where the number of retail investors has doubled in the past two years, with some 20 million new investors, many from humble backgrounds and no stock market experience. Nachiket Tikekar is 23 years old and studies business administration. Since the pandemic began, he has invested all his and his parents’ savings – about $30,000 – in stocks.
“The covid crisis has made people realize that passive income is very necessary. That’s what led me to invest,” he told Business Daily host Ed Butler. Nachiket said that the Indian stock market suffered two sharp falls since he started investing, but that did not deter him. Quite the contrary.”I think market crashes present an opportunity because there are very good stocks at a very good price,” he said.“You have to have resilience. If you want to be successful as an investor, you have to stay calm while the market gets back on track,” he said. This strategy, he pointed out, allowed him to generate profits of between 30% and 40%.
The risks
But experts and authorities fear that this growing interest in online investments and financial speculation could provoke a new crisis, like the so-called “dot-com bubble” when the Nasdaq stock index collapsed two decades ago. Others warn that the most imminent danger is that many of these young and inexperienced investors, who risk their savings, either in the stock market or buying cryptocurrencies, lose all their money.
“Our research shows that people between the ages of 18 and 40 are twice as likely to invest in high-risk investments, but when you ask about their risk tolerance, it’s acting,” he said.
“To give an example: 70% of the young people we surveyed believed that the purchase of crypto assets was protected so that any loss would be compensated when it is not.”The expert also pointed out that many inexperienced investors do not know that their assets can be reduced, instead of increased.
“Almost half of the investors who invest without being financially advised do not realize that they can lose money because of the risk of their investment. That is what worries us,” he said.
Pritchard noted that there have always been people looking to maximize their income through investments, but ” what’s new is the speed with which you can do it, with the increasing digitization of our lives.”
According to FCA research, many young people start making risk investments as a way to compete with friends or family or are motivated by what they see on social networks and other media.
While these fledgling venture capitalists became active during the pandemic, Pritchard doesn’t think the phenomenon will end when the coronavirus is no longer a threat.
“We know that a million people (in the UK) bought or raised their high-risk investments in the first six months of the pandemic, but we think this is here to stay, as the market changes.”
Is it that bad?
But is it so bad that young people are taking more risks with their savings?
After all, it’s common to be riskier when you’re young.
And financially, it might be better to take bigger risks when you have less to lose and more time to get it back.
Lesley-Ann Morgan led a global study that looked at investment trends in more than 20 countries for investor Schroders Wealth Management.
Morgan told the BBC that many young people found they had more money on hand than usual during the pandemic.
“Many told us that they saved more than they anticipated and had invested more than they planned because, on the one hand, they were spending less money because they couldn’t go out as much because of covid, but also because their income had increased during the pandemic as a result of state aid”.
Many of these new investors tended to ignore traditional strategies, betting on shares of technology and internet companies.
“This did not surprise us because these types of companies benefited from the pandemic,” said the expert.
But young people also showed a lot of interest in other new investments, such as electronic cars, biotechnology, and cryptocurrencies.
Morgan agreed with the FCA report which noted that social networks play an important role in promoting this type of investment.
“I think a lot of people are being bombarded with information on social media to invest in these types of businesses,” he said.
As for the damage these high-risk investments can do, he believes that betting on riskier assets when you’re younger and have plenty of time before retiring is “normal and very acceptable.”
However, “the real question is how much of their assets are in these risk investments and whether they could withstand a 20%, 30% or 40% drop, as we have seen in the case of some cryptocurrencies this year.”
Another key point, he said, is where the money invested comes from.
“If it’s money you need to pay rent, for example, and you’re using it for what is essentially gambling, that’s a problem .”
“But as a general rule, if you have more time to wait to make a profit, riskier assets make sense when you’re younger,” he acknowledged.
