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What type of investor are you?

James Gard  |  30 Mar 2021Text size  Decrease  Increase  |  
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Are you a thinker, a gambler or a “have-a-go” investor? The answer may reveal your age, your level of investing experience – and how likely you are to take on risks that could be seriously damaging to your wealth.

New research commissioned by the UK's Financial Conduct Authority (FCA) into DIY investing suggests the boom in trading apps, lockdown boredom and social media buzz, are leading some novice investors to take a “thrill-seeking” approach that could have harmful consequences for their long-term financial plans.

Spectacular daily gains for the likes of GameStop may also give the impression that the stock market is a place where “easy money” can be made, an idea that’s most tempting to young investors.

Research group BritainThinks divides the DIY investor approach into three main groups:

  1. “Having a Go”,
  2. “Thinking it Through”
  3. “The Gambler”

The first category covers inexperienced investors who “adopt shortcuts to decision making which can include going with ‘hyped’ options they have heard a lot about”. The “think it through” cohort are more experienced, generally older and sometimes have a professional background in finance. And “The Gambler” treats investing as betting, looking to short-term gains via high-risk products.

Given the level of technical knowledge required to be a “Gambler”, this type is often a tech-literate and sophisticated investor with a higher disposable income than the other groups. But they are similar to the “Have a go” group in that they enjoy the thrill of risking money for the chance of a better return.

TikTok investing

Let’s look at the “Have a Go Heroes” in closer detail. These investors are typically younger, and, crucially, more likely to use shortcuts to make decisions – investing in hyped companies or assets (Bitcoin) or well-known firms like (Amazon/Tesla) which are perceived to be low risk because of their size and prominence.

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Social media has a much bigger impact on this group than others, and those in the survey mention making decisions based on YouTube and TikTok videos. “I started investing this year in Bitcoin. I was initially sceptical but I watched a video saying it was the future,” said one respondent.

“Have a go” investors tend to heed the advice of a small number of people they trust, whether online influencers or friends and family. Researchers say this cocktail of factors makes this group highly persuadable and vulnerable to high-pressure sales tactics and even scams.

MORE ON THIS TOPIC: Under the finfluence

There is a worry that people are investing money they can’t afford to lose and downplaying or not fully understanding the risks. 

Doing nothing

Writing about the GameStop saga, Morningstar’s head of manager research, Jeffrey Ptak, says that true investing should be “boring” if you’re doing it right: “You put the money in, wonder where it goes, leave it alone, watch it fitfully grow, and repeat the process.”

Our passive funds expert Ben Johnson thinks the GameStop drama, Bitcoin mania etc all add up to one conclusion: the stock market is in manic mode and many investors are scared of missing the fun (including our have a go newbies). What should a sceptical investor do in this phase? “Doing a whole lot of nothing might be the ultimate contrarian approach in a market that’s gone manic,” he says.

Morningstar Investment Management’s Dan Kemp, meanwhile, says investors tend to make similar behavioural mistakes – and this applies particularly to new investors. One of these is the “endowment effect” which means you assign a greater value to an asset if you own it; another is “recency bias”, which means you assume an investment’s latest performance will continue. This is similar to the “hot hand fallacy”, where investors assume that an asset or stock on a winning streak is more likely to be successful in the future.

Don't follow the crowd

It’s never been easier to be a DIY investor, with a range of platforms offering competitively priced access to a range of financial products – and this has been described as a “democratisation” of investing, one fuelled by advances in technology. This should increase transparency, widen the investor base and hopefully drive down trading costs. Making mistakes early in your investing journey should in theory be beneficial, as long as they don't wipe you out. The challenge for financial advisers, regulators and platform providers, is how to engage with this new tech-savvy group of investors who are used to doing everything themselves.

How can new investors protect themselves?

Susanna Streeter, senior investment analyst at Hargreaves Lansdown, says trading apps have opened up the world of investing but need to be used thoughtfully: "If you are trading on the go, you need to ensure you give each trade as much consideration as you would if you were sitting in a quiet place at home."

Here are some questions investors can ask themselves before taking the plunge:

  • do I understand what I'm buying?
  • am I comfortable with the level of risk? 
  • am I protected if things go wrong? 

is senior editor for Morningstar.co.uk

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