DIY Investor Magazine Issue 41

May contain nuts…  

When DIY Investor Magazine launched in 2014, it was in recognition that people would inevitably have to take more personal responsibility for securing their financial future. 

In the newly post-RDR world, asset managers were getting to grips with speaking directly to retail investors, with varying levels of success; we once carried a 1,000-word article sponsored by a leveraged ETF issuer, replete with a 1,500-word disclaimer.   

The last ten years has delivered us of a flock of black swan events that will have been manna from heaven to more overzealous compliance departments, but recent experience calls us to question whether the blunt, one-dimensional risk warnings that come with investment products are doing more harm than good. 

In concert with our corporate partners, we have been working to help members of SAYE schemes to transition from being savers to investors, and thereby benefit from the higher returns that can potentially be achieved from investing.                   

By a country mile, the biggest single factor preventing their engagement is the fear of losing their money.    

The need for financial self-determination has never been greater, and we believe that now is the time to move the risk warning from being the financial equivalent of a diseased lung on a cigarette packet, to something that becomes an integral part of the process to engage and educate investors to make better informed decisions. 

Risk should be contextualised and presented as a tradeoff between the possibility of making a loss and the potential of seizing an opportunity; as you climb aboard, there is a chance that the plane you’re on will plough into a mountainside, but the massively overwhelming probability is that you’ll have a cracking couple of weeks in your budgie smugglers in total safety. 

The timing for a shake-up could hardly be better as it coincides with the FCA ‘s Consumer Duty that requires firms to act to deliver good outcomes for retail customers; part of that is ensuring that they fully understand the products they are investing in. 

A study conducted by the University of Nottingham for TISA (here) concluded that ‘if you can help people to better understand the risks of investing in stocks and funds, they are more likely to invest’. This is because many perceive the probability of making losses to be higher than it often is. 

Improved messaging can help – the study showed the group a ‘standard’ risk warning – ‘the value of investments can fall as well as rise. There is a chance you might not get back what you put in’ – and for a second group added – ‘But over longer periods of time (e.g. 5 years or more), riskier investments such as stocks, shares and funds usually give you higher returns compared to cash saving’. The second group invested 14% more. 

Improved financial education unquestionably has a big part to play, and in our pursuit to help people ‘get rich slow’, maintaining a well-diversified portfolio and having a long investment horizon takes some of the venom out of risk. 

OK, so ‘past performance is not…’, but it should be possible to show a range of potential outcomes for an investment, again in the context of an overall opportunity, and these ‘what-if’ scenarios can be powerful, energising and potentially comforting.  

Where some are pinning their hopes on AI, we believe that until a machine can feel sick to its stomach and sweat in porcine fashion at 3 am when their portfolio is out of whack with their appetite for risk, we’ll stay with our ‘someone like you’ approach – real people with real money, facing challenges like yours.  
 

• What do investors need in retirement?
• What does Schroder Japan Trust’s new dividend policy mean for investors?
• All weather investment trust: Brunner Investment Trust
• The long and the short of it
• Riding the supercycle
• An active investment approach for long-term wealth creation
• Catching the wave
• Going for gold
• Investing Basics: Growth or value investing?
• 3 ETF portfolios, £10,000 and ten years: Which portfolio wins?
• Market volatility could encourage a shift back into bonds
• Why we’re adding another UK fund to our portfolios
• DIY investors back FTSE bull run
• Why we’re reducing our exposure to the US
• My H1 2024 portfolio review
• Dividend royalty: Four investment trusts for dividend seekers
• Investing Basics: Three risks ou need to know before investing in stocks