Investors Prefer Cash over Investments Due to Perceived Risks
In the UK, a significant number of savers are shying away from retail investing due to perceived risks. According to a recent survey, three in five UK savers believe any form of investing is too risky [1]. This apprehension is largely driven by fears over falling stock prices and disclaimers such as "capital at risk. You may get back less than you invest" [2].
To address this issue, industry figures, including Michael Healy, UK managing director at IG, are calling for a change in the perception of investing. Healy emphasises the need for a balance between the risks and potential rewards of investing, rather than focusing solely on fear [3].
One area Healy suggests addressing is the way risk is framed for both cash and investments. He proposes that cash accounts should carry the same proportionate risk warnings as investment products [4]. This could help savers better understand the potential risks associated with their savings, particularly the impact of inflation.
Research indicates that young people in particular lack a significant understanding of the impact of inflation on cash. Over 50 per cent of people were unaware that cash loses value over time due to inflation impacting the purchasing power of money [5].
The call for balanced risk disclosures is not limited to investment products. Industry figures are also urging regulators to enforce these disclosures across liquidity accounts to avoid overdependence on liquidity and achieve higher overall returns [6].
Encouragingly, the trend towards investing is on the rise. Stock and shares ISA subscriptions rose by 11% to £31.1bn, with 4.1m open accounts in the year [7]. Despite this, the number of cash ISA subscriptions grew by 67 per cent to £69.5bn in the same year, with 9.9m open accounts [8].
However, there is potential for this trend to grow further. A survey found that 30% of respondents said they would be more likely to shift their money from savings accounts to the stock market if cash accounts detailed the inflation risks [9].
In conclusion, by providing clear and balanced risk disclosures, regulators could help encourage more UK savers to benefit from the wealth-building opportunities of investing. This could help bridge the gap between fear and the potential rewards of investing.
References: 1. [Source 1] 2. [Source 2] 3. [Source 3] 4. [Source 4] 5. [Source 5] 6. [Source 6] 7. [Source 7] 8. [Source 8] 9. [Source 9]
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