Iona is a panellist at The Scotsman’s free Annual Investment Conference on Tuesday 30th March in association with Martin Currie Global Portfolio Trust and Rathbones. Register here.
Other webinar panelists include David Coombs, Head of Multi-Asset Investments, Rathbones and Zehrid Osmani, Portfolio Manager, Martin Currie Global Portfolio Trust
Investing platforms have seen an explosion of interest from young people in the past year.
We have been stuck at home, bored, saving more and spending less: ideal conditions for a spot of trading.
The rise of digital trading apps like Robinhood in the US has spawned imitators on this side of the pond, like Freetrade and Wombat. They have transformed the options open to young investors who live on their phones and who with a tap can invest in familiar shares, typically lifestyle brands, and pay no commissions.
The investing apps typically show demo portfolios stuffed full of tech companies, gold and Bitcoin, as if these were the obvious, one-way-bet choices. The recent sell-off in tech shares, and the high volatility of both gold and Bitcoin in the past 12 months, suggests this game is not quite so easy.
In January, the WallStreetBets forum stoked up a buying spree in a US share, Gamestop, which saw it rocket from $50 to $483 before crashing back to $50 in the space of a few days. Investing, or crazed speculation?
Bitcoin too is deeply problematic, I believe. Cryptocurrency has become the Pied Piper of money, enticing young people away from a flawed economic system into a cave of financial wonders, filled with (seemingly) guaranteed riches. Who wants to be the little kid left behind in the town with all the stupid adults?
It’s being treated far more as a get-rich-quick scheme – gains from Bitcoin rely purely on being able to sell your currency for more than you paid for it. There is also no regulation and the danger of having your digital wallet hacked.
But more concerning than all this is the dark world of social media influencers.
Individuals post pictures of sports cars, designer handbags, lavish houses and luxury holidays, which they claim to have bought with cash earned from trading foreign currency. They urge followers to sign up for expensive courses that will teach them how to make it rain. Their snake oil is ‘signals’: supposedly accurate, informed tips on how to trade forex. It’s rubbish – and illegal rubbish at that.
Worse still, scammers have shamelessly exploited the Covid-19 crisis, luring in desperate young people who have lost jobs or income with promises of pots of gold at the end of the forex rainbow.
The other big lure is derivatives in the shape of spread betting or contracts for difference, where the chance of loss is usually between 75% and 90%.
There would be far tighter regulation of this whole area if it were reclassified as gambling. But that would require a legal change and, despite pressure from campaigners, the government has no plans to change course at time of writing.
Derivative trading primes investors to be speculative, to focus on the short term, and push all their chips towards a few spots on the roulette table. We know this is the antithesis of effective investing. Young people should be thinking long term, and investing in an informed and cool-headed way in a variety of assets to spread their risk.
More generally, respectable trading apps frequently offer demo accounts to help you practice investing, but play-acting is a very different state of mind compared to having actual money at stake, which can cause traders to take fright and make poor decisions.
Investing is about striking the right balance. We can get much more out of life and move forward by taking calculated risks: fortune does favour the brave. But it doesn’t favour the reckless or those chasing highs in crazy places.
When it comes to money, there are no risk-free choices. While putting cash in the bank is the safest thing you can do, these days we will probably lose money in real terms as inflation erodes our cash. Or if we invest our pension in assets that are too cautious, it will leave us with a big shortfall in our retirement income. Whatever your attitude to risk, you will always need to take basic precautions, like diversifying your portfolio across different assets and markets.
The philosophy of my book Own It! is not about getting rich quick. It’s more about young people fighting back by having a stake in the real economy, and driving positive change in their lives and their world.