Why many young people are making risky investments

The emergence of apps and platforms that allow anyone to make investments, whether on the stock exchange or in cryptocurrencies, has generated a boom in small investors, especially among young people who started investing during the pandemic.

A recent survey by the BBC Business Daily radio show revealed that many of these investors have one thing in common: they are under 35.

The phenomenon occurs in many parts of the world. In India, for example, the number of small investors has doubled in the last two years, with around 20 million new investors, many from humble beginnings and with no experience in the stock market.

Nachiket Tikekar is 23 years old and studying business administration. Since the pandemic began, he has invested all of his savings and those of his parents – about US$30,000 (approximately R$165,000) – in stocks.
“The Covid crisis has made people realize that passive income is very necessary. That’s what drove me to invest,” he told Ed Butler, host of Business Daily.

Nachiket said the Indian stock market has seen two sharp drops since he started investing, but that hasn’t discouraged him. Quite the opposite.

“I think the market declines represent an opportunity, because there are very good stocks at a very good price,” he said.

“It takes resilience. If you want to succeed as an investor, you have to stay calm while the market gets back on track,” he said.

This strategy, he said, allowed him to achieve profits of between 30% and 40%.

the risks

But experts and officials fear that this growing interest in online investing and financial speculation could trigger 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 will risk their savings, whether on the stock market or buying cryptocurrencies, and lose all their money.

In the United Kingdom, the Bank of England, the country’s central bank, has issued explicit warnings about the increase in the number of risky investments.

Sarah Pritchard is executive director of markets at the UK Financial Conduct Authority (FCA), which is trying to alert these newbie investors through platforms like Instagram and TikTok.

She told the BBC she was scared by the growing number of young people looking to pursue risky investments.

“Our findings show that people between the ages of 18 and 40 are twice as likely to resort to high-risk investments, but when you ask about risk tolerance, you find that it’s actually low,” she said.

“For example, 70% of the young people we met believe that buying cryptocurrencies was safe, so any loss would be compensated, but it’s not.”

The expert stressed that many inexperienced investors do not know that their assets can decrease rather than increase.

“Almost half of those who invest without being financially advised do not realize that they may 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 increase income through investing, but “what’s new is the speed at which you can do that, with the increasing digitization of our lives.”

According to FCA research, many young people are starting to make risky investments as a way to compete with friends or family, or motivated by what they see on social media and other means.

While these new venture capitalists started in this area during the pandemic, Pritchard doesn’t believe this phenomenon will end when the coronavirus is no longer a threat.

“We know that a million people (in the UK) bought or increased their high-risk investments in the first six months of the pandemic, but we believe this is here to stay as the market changes.”

This is bad?

But is it so bad that young people are taking more risks with their savings? After all, it’s common to take more risks when you’re younger.

And from a financial perspective, it might be better to take more risk when there is less to lose and more time to recover.

Lesley-Ann Morgan led a global study that analyzed investment trends in more than 20 countries for investor Schroders Wealth Management.

She told the BBC that many young people discovered during the pandemic that they had more money on hand than usual.

“Many said they saved more than they expected and 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 increased during the pandemic as a result of state aid” .

Many of these young investors have ignored traditional strategies, betting on shares of technology and internet companies.

“This did not surprise us, because this type of company did well during the pandemic”, stressed the expert.

Young people have also shown a lot of interest in other innovative investments such as electronic cars, biotechnology and cryptocurrencies.

Morgan agreed with the FCA report which noted that social media plays an important role in promoting this type of investment.

“I believe that many people are being bombarded with information on social networks to invest in this type of business,” he said.

Regarding the damage these high-risk investments can cause, he believes that betting on riskier assets when you are younger and have a lot of time to retire is “normal and very acceptable.”

However, it says that “the real question is how many of your assets are in these venture investments and whether they can handle a 20%, 30% or 40% drop, as we have seen in the cases 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 a gamble, that’s a problem.”

“But generally speaking, if you have more time to wait to make a profit, riskier assets make sense when you’re younger,” he acknowledged.

However, he says that according to his study, many of the younger investors don’t seem to have the patience to reap these long-term gains.

“We asked investors how often they check their investments and many do this at least once a week.”

“This makes me think that these people are trading on the stock market more than investing in the long term, which causes me some concern,” he said.