Investing, particularly in a cost-of-living crisis, can feel daunting and the thought of losing any hard-earned cash might seem terrifying. However, findings from a new study by Virgin Money may leave Brits reconsidering their attitude towards investing.
To put risk into perspective, the study of 1,000 people investigates attitudes towards risk and confidence, by comparing real-life danger with how risky people think a range of everyday and financial activities are. The research comes as Virgin Money launches a new, straightforward investment service designed with simplicity in mind, to make investing easier to understand and give customers the confidence to make smart decisions when it comes to managing their money.
To help make investing seem a little less scary for first time investors, Virgin Money has teamed up with Alice Tapper – financial educator, behavioural economist and the founder of Go Fund Yourself – who has used data from economist Robert Shiller to calculate the chances of a return on an investment. Her findings show that when looking at the Standard and Poor’s 500 (the S&P 500 -one of the most followed indexes tracking the stock performance of the 500 largest companies listed on stock exchanges in the United States) investments made over the last 10 years carried only a 6% chance of losing money. Although past performance is not a sure indication of future returns, over the past 91 years, around 94% of 10-year periods have been positive ones.
Alice’s research also highlighted that if consumers had invested £1,000 in an S&P 500 fund back in 2013, and continued to invest £100 each month, the final value of their portfolio would now be £23,765, meaning they would have made an £11,765 profit. This contrasts with the risks perceived by consumers, as Virgin Money’s survey found that Brits rated investing their money 10 years ago as a 5 out of 10 on the risky scale (where 1 represents no risk of something bad happening and 10 represents a high risk of a bad outcome).
To help people shake off the fear surrounding investing and get the most from their money, Katy Simpson, money expert at Virgin Money, has teamed up with Alice to identify three mental biases that might be putting people off and offers tips for overcoming them.
Firstly, what are mental biases?
Alice explained: “Mental biases are basically errors or glitches in our thinking that can lead us to make less-than-ideal decisions, which are often driven by fear. By understanding the ways in which our minds can create fear around investing, we can take steps to counteract these biases and make more informed decisions about our money.”
Loss aversion
Alice clarified: “Most humans naturally look to avoid taking risks, which is why investing seems particularly scary because there is always a chance of losing money. The irony is that by not investing, they also risk losing money to inflation, while missing out on the possibility of growing their wealth.”
What can be done about it?
Katy said: “To beat inflation, the most effective way of making money work harder is to invest over a longer time period, say around five or ten years, which minimises the impact of short-term market fluctuations whilst helping to grow money over time.”
Confirmation bias
Alice expanded: “This is the tendency to seek out information that confirms our existing beliefs while simultaneously ignoring any information that contradicts them. For example, hearing that a friend of a friend lost money with an investment might reinforce a person’s belief that they’re better off not investing.”
What can be done about it?
Katy added: “Our study shows that Brits need to have a good understanding of any potential risks associated with an activity to give them the most confidence to conquer a challenge. To counter confirmation bias, they could take some time to get to grips with the fundamentals of investing from a few reliable sources to help them form their own opinion.”
Fear of missing out (FOMO)
Alice said: “The fear of missing out (FOMO) can sometimes lead people to make impulsive decisions and take action before they’re ready or up to speed on the potential outcomes. When it comes to investing money, it’s important for customers to feel comfortable with the idea of investing and not to let FOMO steer their decisions, especially if this is their first time.”
What can be done about it?
Katy suggests: “FOMO can be hard to overcome, and it might feel tempting to jump into investing if there are promises of quick returns without looking at the bigger picture. That’s why it’s important for new investors to make sure they understand what they’re doing first. Spend time researching the basics of investing, and perhaps start by investing smaller amounts to get the hang of it, before potentially moving on to making bigger investments when you feel more comfortable to do so.”
Takeaway
investing doesn’t have to be as daunting as it seems, especially in the midst of a cost-of-living crisis. Virgin Money’s new study sheds light on the perceptions of risk and confidence in investing, challenging the common fears associated with it. By teaming up with financial educator Alice Tapper, Virgin Money aims to make investing more accessible and less intimidating. Tapper’s research reveals encouraging statistics about the chances of a positive return on investments, and her partnership with Virgin Money provides valuable insights and guidance.
Overcoming mental biases such as loss aversion, confirmation bias, and the fear of missing out is crucial for building confidence in investing. By understanding these biases and taking steps to counteract them, individuals can make informed decisions and unlock the potential for long-term financial growth. Investing wisely and gradually gaining knowledge and experience can help individuals overcome their fears and take control of their financial futureI
