More than half of Britons have low ‘emotional’ capacity for risk, leading them to underinvest, according to interactive investor.
The investment platform said 58% of Brits, around 31.4 million people, are unable to cope emotionally with the prospect of incurring short-term losses on investments, with just 12% of people having a high emotional capacity for risk.
The proportion of people with a high-risk tolerance – the ability to accept the possibility of losses for a greater chance of higher returns in the long-term – was slightly greater at 19%, however, the majority (57%) still scored low for risk tolerance, meaning they are not willing to take risks even if they are financially in a position to do so.
The research showed almost a third (31%) of people have a high financial capacity for risk, meaning they should be in a good position to withstand shocks like market volatility. A further 41% of people have a medium financial capacity for risk.
Richard Wilson, CEO of interactive investor, said: “Our research has unearthed a safety-first instinct among savers that presents a serious challenge for the UK. Millions of people have the financial capacity to invest, but don’t believe it’s worth the risk. Over a lifetime that’s likely to have a serious impact on their financial resilience.
“If we are going to inspire a culture of healthy retail investment participation, we need to pull all the levers we can to avoid a looming pensions crisis and that means examining how we encourage and support more people to take a balanced approach to financial risk.”
The research, developed in consultation with behavioural finance experts Oxford Risk, comes at a time when the Government is seeking to unlock an investing culture in the UK, after its own analysis showed Britain has the lowest levels of equity ownership of any G7 country.
Interactive investor is calling for the Government to simplify the ISA regime and abolish stamp duty on UK shares and trusts.
Dr Greg Davies, head of behavioural finance at Oxford Risk, added: “Most people invest too little and take less risk than they could safely afford. This isn’t about logic, it’s about emotion. Emotional discomfort with short-term market ups and downs leads even financially resilient investors to underinvest.
“You don’t need to be highly anxious for this to bite; almost everyone feels some resistance, and it costs nearly all investors some returns. For those with high financial capacity, the emotional gap is often greatest: they could afford to aim higher, but their feelings hold them back.”
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