Half Start Investing to Outperform Cash, as Youth Flock to ETFs
Understanding the Rise in Retail Investor Participation
Recent research highlights a significant shift in the mindset of British retail investors, with almost half of them stating that they began investing because they realized it could outperform the interest rates on their cash savings accounts. According to exclusive data from Blackrock, 42% of these individuals started investing to grow their money, reflecting a growing awareness of the long-term benefits of investment.
Blackrock emphasizes the importance of financial education in encouraging more people to invest, aligning with the goals of Chancellor Rachel Reeves. Over time, investing in a balanced portfolio typically outperforms cash returns. When considering a time horizon of 10 or 20 years, investment pots can significantly grow, while cash returns often lag behind inflation.
However, it's essential to recognize that investing isn't suitable for everyone. Cash savings remain the best option for funds that need to be accessed quickly, especially for money intended to be spent within the next five years.
For those who do choose to invest, the process has become increasingly straightforward, thanks to the availability of affordable digital platforms tailored for new investors.
Timo Toenges, Europe, Middle East and Asia head of digital wealth at Blackrock, stated: "This reflects a growing recognition that investing can be an avenue to help build long-term financial security. Yet £1.7 trillion is sitting in cash deposits across UK households."
"These findings highlight the enormous potential for people across the UK to make their money work much harder for them."
The Influence of Fear of Missing Out (FOMO)
Younger investors are particularly motivated by the fear of missing out on growth opportunities. According to Blackrock, Gen Z and millennial investors both cited FOMO as a primary reason for starting to invest, with 22% indicating this was their main motivation, compared to just 14% of those over 35.
Additionally, younger individuals are more influenced by friends and family. They are more than twice as likely to begin investing after being encouraged by those close to them, compared to older generations.
ETFs as a Preferred Investment Choice
Exchange-traded funds (ETFs) have emerged as the top choice for many new investors. These funds offer a low-cost way to invest in a diversified portfolio of stocks, requiring less prior knowledge than individual stock picking.
This trend is particularly evident among younger investors, with 90% of those likely to invest in ETFs in the coming year being under the age of 44 (including existing ETF investors).
The popularity of ETFs has surged in recent years, with approximately 2.1 million ETF investors in Britain. Despite this, 64% of adults have never heard of ETFs, which may hinder their investment participation.
ETFs consist of multiple assets, are cost-effective due to their passive nature, and offer flexibility. They are popular among investors seeking to minimize costs while maintaining diversification.
ETFs function by tracking a specific pool of stocks and can be traded on an exchange like individual stocks.
According to Blackrock, the UK is now the third-fastest-growing ETF market in Europe. This growth is driven by younger people and women, with ETF usage among women increasing by 86.2% since 2022, and among younger investors by 87.5%.
Toenges remarked: "The research shows ETFs are fast becoming the investment product of choice for younger generations. Their simplicity, low cost, and ease of access make them ideal for first-time investors, especially those driven by seeing others grow their wealth and not wanting to miss out."
"To help them invest with confidence, it's crucial to pair this convenience with straightforward, accessible education on risk and returns."
Reasons for Choosing ETFs
A third of investors view ETFs as a good way to start investing, while 59% say diversification is the main reason they choose these products. Additionally, 32% of investors select ETFs due to the ability to invest small amounts regularly.
