Cryptocurrencies are popular. If you’re not lazy, old devil, you probably already have a lot. Even I, as rude as anyone, have a few.
Last year, the Financial Conduct Authority estimated the number of people in the UK who owned cryptocurrencies at around 2.3 million, and given the publicity around the different currencies, it makes sense to think that number is much higher.
Several studies confirm this. Research by Interactive Investor shows that about 45% of young adults (18-29) have made their first investment in cryptocurrency. Boring Money data show that 11% of young adults (18-44) say they own or have owned crypto assets.
Among those who have invested – in anything – in just a year or less, that number has risen to 16 percent. This is good, you might think, young people who are involved in money and markets.
Unfortunately, it’s more complicated than that. “An alarming number of new buyers are financing this through a cocktail of credit cards, student loans and other loans,” says Interactive. An FCA study shows that 58% of people who trade in this type of “high-risk product” accept their advice from “social media and their friends”, a strategy that is not a stellar financial success.
The Ministry of Finance is concerned. This week notes that as the number of people who own cryptocurrencies grows, “understanding of what cryptocurrency is actually declining, suggesting that some consumers may not fully understand what they are buying.”
This may be especially the case if they rely on social media and London Underground ads for their information. Think of one of the most discussed of them last year, Luno Money.
It read in very large letters: “If you see bitcoins in the underground, it’s time to buy.” This did not soften this call for fear of omission, even in very small print, with the information that this would buy an unstable, speculative asset that might come with a high chance of capital loss – and this could soon be banned by Russia. government.
There is a reason why control of cryptocurrency advertising has now been transferred to the FCA. Such advertisements now (like all other advertisements for financial products) must be “fair, clear and non-misleading”. I can’t imagine how a crypto advertisement would be all these things – in advance for lack of profitability, without obvious fundamental value and without an accepted valuation method, for example – and yet be convincing. Something to look forward to.
But here’s a question for you. Would more accurate ads make any difference? After all, when it comes to not understanding how investments work, it’s not just crypto.
Only if it was so. Last week, Interactive Investor did a survey that I liked. Here I often say that the retail investor must outperform the professional for the simple reason that we have something they do not have – time. We are not responsible to anyone for our quarterly performance, but only to ourselves for our long-term performance. Our retirees rely on us being more right than wrong.
That is why I was pleased to see that over the past year, the Private Investors Performance Index has shown that ordinary investors outperform professionals by a few percentage points. Younger investors, aged 18-24, have also performed remarkably well over the past two years – an increase of 22.8 percent, compared to 17.2 percent for the main index – the investment sector’s mixed-investment sector 40-85 percent.
And the “secret sauce” that leads to returns? Higher distribution of investment trusts.
Here’s a question. I love investment trusts. But do new investors or older investors who buy them know what they are buying? This is partly a question of the structure of investment trusts. Their share prices may move some distance away from their net asset value. You could buy them at a premium, something none of the investment platforms warns you about on their trading pages.
But if sentiment turns against them, you may end up selling at a discount to their net asset value. The result? You have lost a lot more money than the change in the share price of the main shares of the trust may suggest that you should have.
But it’s also about what’s in them. The leading holding company for the 18-24 age group is Scottish Mortgage. SMIT has many wonderful and exciting promotions with fascinating stories that you may want to keep in the long run.
Some are making real money now. Others do not. But they promise huge growth and huge profits in the (uncertain) future. These future gains are measured by discounting them at today’s interest rates. The lower the interest rates, the more future profits cost. So the lower the rate fell, the higher the stock prices rose. That’s one of the reasons SMIT, along with good stockpiling, is doing so well for so many people.
You will see the problem. You might think you’ve bought a great story about longevity, digitalization, artificial intelligence, space travel, or fossil fuel energy.
In fact, you may have purchased an asset that is hypersensitive to changes in interest rates, or what is known in business as a long-term asset, the price of which will match the discount rate used to estimate it.
“If inflation comes up – or rather looks like a realistic possibility,” said Jonathan Ruffer of Ruffer a few years ago, “you won’t see government bonds or technology dust stocks.”
Well, here we are. European stocks outperformed stocks by almost 10% in the first 17 days of 2022, while US stocks outperformed 6.4% this year, said Duncan Lamont of Schroders. Goldman Sachs’ index of unprofitable technology companies fell 14% from its peak earlier this week.
And the Scottish mortgage? I hold it and will continue to do so because I think the future usually comes well. But while you’re still up 230 percent in the last five years, if you came just three months ago, you’re down 23 percent.
Did anyone who invested their money in expensive growth stocks last year, when it was already clear that inflation was not transient, know what would happen to their long-term stocks when it was clear that interest rates would have to rise?
The ads for technology funds have told you that there is a risk, but this big one has not been highlighted. You may also be wondering about some of your other possessions.
How about all these ESG funds? What is actually in them? They may also rely too much on fixed assets – is it easier to include low-tech stocks or renewable energy stocks in your average ESG portfolio than a miner who pays a high dividend? Having extreme ratings is obviously different from having a portfolio of cryptocurrencies, but there are similarities. Think about how far the promise is and you can think of cryptocurrency as a long-term asset.
My point of view? Anyone who has giggled about naive novice investors and their 10 percent bitcoin losses so far this year may want to have a quick check to see if they really know what’s in their own portfolio.
Merin Somerset Webb is the editor-in-chief of MoneyWeek. The views expressed are personal; firstname.lastname@example.org; Twitter: @MerrynSW