Are ‘ineffective’ investing warnings holding your money back?

Would seeing a warning like ‘capital at risk’ or ‘you could lose money’ put you off investing?

A review by the Investment Association (IA), commissioned by Chancellor Rachel Reeves, has found that for too many savers, the answer is yes. 

Or, alternatively, the warning is ignored completely and useful information about how much your money is put at stake is lost.

The report, which aims to boost an investing culture in the UK, called for an industry-wide change to warnings on investments.

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Please note that this article is for information purposes only and does not constitute advice. Please refer to the particular terms and conditions of an investment platform before committing to any financial products.

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Do current warnings make investing sound worse than it is?

The review recommended a change to language that is more natural and easier to understand, and makes more sense in the context you see it.

Instead of a generic warning that ‘you could lose money’, the IA says warnings should better balance the risks and the rewards of investing. Only focusing on the negatives can be misleading in itself and overstate risks.

There are no current requirements for specific wording about mainstream investments (things like stocks and funds), only that communications ‘explain the risk of loss clearly, fairly and in a way consumers are likely to understand'.

Sarah Pritchard, Deputy Chief Executive of the regulator, the Financial Conduct Authority (FCA), said: ‘We want to see a stronger investment culture in the UK, so consumers are better supported in navigating their financial lives. That culture relies on consumer confidence, which is built by clear, balanced information about the potential rewards and risks. 

‘We welcome the review’s push to make the way risk and reward is communicated clearer to consumers, rather than a tick box exercise.’

Is this the end of 'capital at risk'?

If you’ve watched TV or been on public transport, you’ve likely seen an advert using the phrase ‘capital at risk’.

This has been a shorthand for conveying that investing is not risk-free, but the report says this has acted as a barrier to people getting more from their money.

Despite being so widespread, this wording is not currently required by the FCA. In fact, its research in 2022 suggested the warning is often ineffective, and either ignored by people who see it or is seen as overly alarming and off-putting.

• Find out more: a beginner's guide to investing

When will change come?

Some change can be immediate, as the FCA has previously clarified that a change in language is allowed within existing rules.

A few of the biggest investment platforms in the UK, for example, Hargreaves Lansdown and AJ Bell, are already using more straightforward language and give a balanced view of the risks.

Part of Hargreaves Lansdown’s warning for their stocks and shares Isa, for example, reads: ‘Investing for 5+ years increases your chances of positive returns compared to cash savings. But investments rise and fall in value, so you could get back less than you put in.’

While AJ Bell opts for: ‘Investing is an opportunity to grow your money, typically outperforming cash savings over the long term. However, investing comes with risk as well as reward, and the value of your investments can go down as well as up.’ The AJ Bell note also links to further information that explains the risks in greater detail.

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How risky is investing?

There is not a set level of risk when it comes to investing – it depends massively on what you invest in. 

If you invest in one stock, you risk losing money if that company underperforms or is affected by circumstances like a recession.

But, if you spread your investments across different sectors, parts of the world and types of assets (for example, a mix of stocks and bonds), you will be able to balance out some of the losses in one part of your portfolio with gains in another.

This is different from some types of investment, such as crypto or contract for difference (CFDs), which are considered high-risk investments and leave you with a high likelihood of losing the money you put in. You would see further warnings for a product like this, for example, you'd see what proportion of investors lose money when trading CFDs on a specific platform.

While leaving your money in a savings account might feel risk-free, in most cases, the value will drop over time as inflation rises and the same amount of money has less buying power. 

• Find out more: how to balance your investment portfolio