Table of Contents
- Optimism has returned to investors and many are considering riskier investment options.
- Younger investors are leading the charge, and millennials are not far behind
A study shows that one third of amateur investors are willing to take on greater investment risk in the next three months.
Those who receive financial advice are actually more willing to make riskier investments, according to research by Charles Stanley Direct.
More do-it-yourself investors said they want to take on more risk than they normally do, and 10 percent plan to significantly increase their risk exposure.
While 95 percent of DIY investors are looking to take on some risk over the period, 11 percent said they are willing to take on “very high” levels, while 23 percent will accept “high” levels.
Beginner’s Luck?: Gen Z is the most willing to take high risks when investing
This follows growing confidence in the UK stock market, with almost three-quarters expecting the FTSE to rise over the next six months. Only 10 per cent of investors said the FTSE will fall over the same period.
Younger investors, who generally have a greater appetite for risk, appear to be driving this growing confidence.
Up to 80 per cent of Gen Z DIY investors are betting on the FTSE to rise, with 77 per cent of millennials also backing the market’s growth.
More than half (61 percent) of Gen Zers said they were willing to take an optimistic approach, while 39 percent of millennials said they were planning a “high-risk” approach.
This contrasts with just 9 percent of those over 59 who intend to make risky investments, while a majority, 51 percent, intend to take on little or no risk.
Despite a much lower appetite for risk, 64 percent of those 59 and older said they expect the market to rise, the same as Gen Xers.
Rob Morgan, chief investment analyst at Charles Stanley Direct, said: “Younger investors are driving forces of optimism, and rightly so. Those who can afford to take on more risk at the moment are likely to be well rewarded. Despite a sharp fall in global markets at the start of the month, the FTSE is up 6 per cent so far this year and is recovering well.
‘Investors who have actively increased their exposure to UK equities over the past three months (at a faster pace than their global investments) will be well positioned to realise their financial ambitions faster and more effectively than their passive peers, but all investors should follow the same rules: invest for the long term, with a diversified portfolio and advice where appropriate.’
How much risk are you exposed to?
Deciding how much risk you are willing to take can be a difficult decision. The direction you take with your investments will depend largely on a number of factors.
Keep in mind that even with low-risk investments there is a chance that their performance will not be favorable. Therefore, it is essential that you can afford to lose what you invest and that you have money left over to deal with emergencies rather than having it tied up in investments.
Claire Exley, head of financial advice and guidance at digital wealth manager Nutmeg, said: “Generally, when it comes to investing, the longer you plan to invest, the higher the level of risk you can choose. For example, if you’re investing in a house that you plan to buy in three to five years’ time, it may be more appropriate to take on less risk than if you’re investing your pension money over 30 or 40 years.”
Generally, the higher the level of risk, the higher the potential gains, but the value of your investments is also likely to fluctuate over time, so you must accept that your portfolio may go up as well as down. No investment is risk-free and profits are never guaranteed.
Time period
The longer the term of your investment, the less risk you will be exposed to.
“Shorter time horizons mean a greater likelihood that investors will get back less than they invested,” said Dan Beecroft, a foundation planner at Charles Stanley. “A longer time horizon provides greater opportunities for investments to grow and recover from any market downturns, providing the opportunity to take on greater risk.”
If you plan to access your money in less than five years, then it may be worth considering other investment options.
Objectives and risk capacity
Establishing your reasons for investing is crucial to understanding how much risk you can afford to take. If you are investing to create an income stream, make sure you can afford to lose money before taking on big risks. If you need a stable return, lower-risk options would be a better choice.
On the other hand, if you can afford to leave your investments for long periods, higher risk options might work.
Keep it diverse
Making sure your portfolio is diversified can help protect you if one of your investments fails.
“It’s a good idea to diversify your portfolio with a mix of bonds and stocks across different sectors and geographic areas,” Exley said. “This should help smooth out any market volatility affecting one sector or geographic area.”
If you’re not sure what risk you should take, Exley suggests completing an online questionnaire to help you understand how you feel about risk and your attitude toward losing money.
Also driving the growth in market confidence are investors opting for an advisor-led route, with 67 percent intending to expose themselves to greater risk in the coming months.
Only 33 percent of those without financial advisers said the same.
As a result of this growing confidence, 40 per cent of investors have increased their holdings in the FTSE 100 in the past three months.
Around 35 per cent are also choosing to increase their exposure to the FTSE 350, and 28 per cent are increasing their holdings in the Alternative Investment Market.
Morgan said: “The UK has a thriving network of do-it-yourself investors – people who pride themselves on making their own investment decisions and turning their financial ambitions into reality. These investors are currently recovering from a difficult few years filled with economic uncertainty, political turmoil and market volatility.
‘Now, the future looks bright, with expectations of higher growth, lower interest rates and something that looks suspiciously like stability.’
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