Like many people, I fancy myself as a bit of an amateur investor. Over the years I’ve interviewed countless research analysts, fund managers, financial advisers and chief investment officers. It has given me access to knowledge and insights about markets you’d pay an awful lot of money for. It has also given me an appreciation of risk and my own risk appetite and how easy it is for those who fancy themselves as savvy investors to lose money quite easily by thinking they know better than market participants.
Trading platforms have revolutionised access and reduced the costs for retail investors. Thanks to technology the world of investing has been brought to a bigger audience than ever before. What technology has not fully done is bridge the knowledge gap between institutional and retail investors. That is still the preserve of professionals who have access to data and knowledge that amateurs don’t.
If you watch any of the main US financial news channels, it’s hard to avoid the debate about so-called meme stocks – companies whose share price soars as a result of social media hype. The phenomenon is exemplified by the valuation surge earlier this year of struggling high-street video game retailer GameStop from under US$2bn to over US$20bn in a matter of days as investors on the Robinhood trading app flocked to buy. A couple of taps on your smartphone and you can buy not only equities, but all kinds of assets, including cryptocurrencies.
Thanks to technology the world of investing has been brought to a bigger audience than ever before
Knowledge gap
Indeed, part of the selling point of trading apps is that you too now have the ability to trade and invest like an institutional investor. The advertising – and it is particularly ubiquitous online – around some of these trading apps is very alluring. Low-cost (often zero-commission) trading is a powerful selling point. What we’ve not seen alongside the rise of these tools are efforts to educate would-be investors about the dangers and risks. Nor have regulators been quick to catch up and step in with rules to prevent inappropriate products being sold.
Economics, accounting and business studies are all taught in schools. However, providing basic knowledge on investing is missing. There’s probably quite a few people out there who don’t realise that those profits they’ve made investing are subject to capital gains tax. Once upon a time an intermediary was needed – your financial adviser or broker would probably caution against taking risk – but that is no longer the case. As the GameStop saga showed, there’s an army of retail investors (and quite a few of them are millennials) who think they can outwit the markets.
As much as democratising investing is a laudable goal, the protection we afford to other kinds of financial products has been missing. Banks are required to know exactly who their customers are and whether the product they are selling, such as a mortgage, is suitable for them. And for very good reasons.
We prevent people from making mistakes with money they cannot afford to lose. If we apply that principle to investing, then we need both to increase the knowledge of risk of significant losses and put in place measures to stop trading in inappropriate assets at the push of a button. We also need a longer-term goal of educating people about their finances.
