Approximately nine million Britons possess the financial means for investment but are held back due to a perceived lack of emotional resilience towards risk-taking.
Millions of Britons Struggle with Investment Risk, Undermining Financial Resilience
A significant number of Britons are found to have a low emotional capacity for investment risk, which can lead to irrational financial decisions and weaken their long-term financial resilience. This emotional barrier prevents many from taking the right amount of risk for their long-term needs.
According to a survey by Interactive Investor, 58% of adults, or 31.4 million people, are unwilling to face short-term losses on investments due to low 'emotional' capacity for risk. This figure is further emphasized by the fact that around 57% of people still scored low for risk tolerance.
The emotional complexity in risk assessment is one of the key reasons for this issue. Many British investors find it difficult to predict how they will react to large market downturns, such as a 30%+ loss, which affects honest responses to risk questionnaires used by advisors. This emotional complexity leads to misaligned risk profiles and inappropriate investment choices.
Behavioral finance insights also play a role in this phenomenon. Fear or panic often leads to selling during downturns, which hurts long-term growth. If investors are emotionally unable to tolerate market fluctuations, they may shy away from equities or growth assets that, despite volatility, have historically delivered better long-term returns.
To address this issue, advisors should simplify risk assessments and frequently review actual client behaviors rather than relying solely on questionnaires. The 'targeted support' reforms, scheduled for next year, will provide tailored recommendations for investments based on similar financial circumstances.
The UK government is also taking steps to promote retail investing among ordinary people. The Chancellor, Rachel Reeves, has launched a campaign to encourage more people to invest. However, radical action is needed to address the issue of people not investing enough, or they risk struggling in retirement.
Despite the low emotional capacity for risk, many savers are missing out on higher returns due to their reluctance to invest. Even high-interest accounts like cash Isas can't prevent the value of cash savings from being eroded by inflation. In May, £280 billion worth of cash was sitting in UK bank accounts earning no interest.
Interestingly, 41% of people said they would invest if they had more money, while 16% said they would do so if they understood investments better. Only 3% of people said they would have a higher tolerance for investing if cash Isa tax benefits were reduced.
Britain has a problem with millions of people holding cash savings instead of investing. Only 12% of people have a high emotional capacity for risk. This situation calls for increased financial education and investment platforms that cater to various risk tolerances.
Some of the DIY investing platforms available include AJ Bell, Hargreaves Lansdown, interactive investor, InvestEngine, and Trading 212. These platforms offer a range of tools and resources to help investors make informed decisions and manage their portfolios effectively.
In conclusion, the low emotional capacity for investment risk among many Britons leads to underexposure to suitable market risks, suboptimal portfolio diversification, and ultimately weaker long-term financial resilience due to missed growth opportunities and a tendency to react emotionally rather than strategically during market volatility.
- Engaging in personal finance requires understanding one's risk tolerance, a factor that many Britons struggle with due to a low emotional capacity for investment risk.
- Without investing, many savers miss out on higher returns, even when using high-interest accounts like cash Isas, due to the erosion of the value of cash savings by inflation.
- To encourage investing, the UK government is taking steps to promote retail investing amongst ordinary people, with campaigns like the one launched by the Chancellor, Rachel Reeves.
- To address the issue of low risk tolerance and cater to various risk tolerances, investment platforms like AJ Bell, Hargreavs Lansdown, and Interactive Investor offer tools and resources for informed decision-making and effective portfolio management.
