The UK’s investing scene may not be as disastrous as politicians want us to think if figures from Vanguard’s British Money Mindset report are to be believed.
It estimated there is some £218bn in surplus cash – identified as money held by people who have sufficient emergency savings – that could be used to invest.
Yet there are signs that people are becoming more confident with investing. Some 68% of savers without investments say they plan to start investing in the next two years, rising to over 90% among Gen Z and more than 80% among Millennials.
I would argue much of this is because markets have been rising sharply in recent years, although chancellor Rachel Reeves may try to convince us that it is due to government initiatives (including changes to the cash ISA rules) on her way out of Number 11 Downing Street.
It is not just plans though. Younger generations have been actively getting more involved with markets. The report found that more than a third (37%) of Gen Z investors – equivalent to almost 780,000 people – took their first steps into investing within the past two years.
The biggest issue, however, is that they’re buying the wrong things, in my view, with cryptocurrencies the most popular first investment among Gen Z. Next is individual stocks. Third comes funds, with ETFs in fourth and bonds in fifth.
Compare this to first-time Gen X investors, who prioritise shares, then funds, then bonds, with cryptocurrencies in fourth. This suggests older heads are less likely to get caught up in the fads of the day – even those who haven’t invested before.
The report opined that this generation “may be disproportionately exposed to the volatility of crypto-assets”. I think that’s putting it mildly. It’s a disgraceful indictment of our financial education system.
People are essentially setting themselves up for failure by investing in Bitcoin, which is valued against nothing other than what people are willing to pay for it.
Individual stock selection as the second most-common choice is not much better. Take the Magnificent Seven in the US and emerging market giants like TSMC or SK Hynix in Asia, which have been hugely popular.
Yes, these stocks have been fantastic performers in recent years and investors have made a lot of money from backing them, but is now really the time to get involved, given how far they have risen? Or are investors buying now putting their money in a trap?
That is before we get to the large IPOs such as SpaceX, which was described by one US manager this week as a “large-cap meme stock”. SpaceX had its buyers early on, with the share price rising on launch. This bodes well for the others set to list in the second half of the year, such as Claude designer Anthropic and ChatGPT parent company OpenAI. But there is a big difference between a good few weeks and a good investment over the long run.
These firms are all scrambling for money, with private equity likely to sell out at the first opportunity after listing, passing their shares on to retail investors who will ultimately be left high and dry when the market turns and the euphoria ends. Indeed, SpaceX is now down 5.5% already since its IPO, showing the enthusiasm was short-lived.
Will this happen anytime soon? Probably not. But it certainly feels like we are closer to the end of this part of the market cycle than the beginning.
The report noted that “negative early experiences can discourage participation and reinforce misconceptions about investing”.
With so much risk being taken, the issue for the government isn’t whether people have too much cash or if they are investing in UK stocks – it is making sure they are educated enough to know what they are buying and selling and the associated risks.
Judging by what the youngest generation is buying, it does not seem like they do.
Jonathan Jones is editor of Trustnet. The views expressed above should not be taken as investment advice.