Investors do not understand commonly used risk labels, according to research for robo-adviser Scalable Capital, as the regulator finds millions of Brits believe they have been mis-sold financial products or at risk of being badly treated by the sector.
A survey conducted by YouGov on behalf of Scalable Capital has found investors still do not grasp the reality of investment risk, 10 years on from the global financial crisis.
One in five British investors do not know the potential level of loss they could experience in a cautious, balanced or aggressive portfolio.
Adam French, chief executive at Scalable Capital, said: “If investors don’t understand or over or underestimate the risk of their portfolio, they may be in for a rough ride when the markets fluctuate.
“Our research shows that investors tend to sell their portfolios too quickly when the going gets rough.
“At Scalable Capital, we address these problems by making risk completely transparent, and by managing our clients’ portfolios so that their level of risk remains stable, even in times of market turmoil.”
This comes as new research by the Financial Conduct Authority (FCA) found that 50 per cent of UK adults display one or more characteristics of being vulnerable, including being unbanked, having no investable assets, no qualifications or being single.
The research also found that at least 1.3m people claim they were mis-sold a pension or investment product by a financial adviser.
This means 13 per cent of those who received regulated advice in the past year have, recently or in the past, been mis‑sold a product.
The research by Scalable Capital found the value of a fund can fall a lot more than investors expect. According to the data, 71 per cent of investors thought that a balanced portfolio should not fall more than 20 per cent in a bad year.
In reality, Scalable Capital’s 10-year data showed the worst-performing balanced fund would have lost 43 per cent had an investor entered the market at the peak and sold at the bottom.
The survey, which polled 2,000 people, also found that private investors considering a buy and hold strategy may be wise to re-think because just 17 per cent of respondents would not sell regardless of loss.