Millions of Britons’ finances held back by national aversion to risk-taking

• Polling 3,000 people nationally, interactive investor found that more than half (58%) of Britons, around 31.4 million people, have low ‘emotional’ capacity for risk (meaning they are unwilling to face the prospect of incurring short-term losses on investments) 
• Despite this fact, 32% of these – over nine million people – have the financial resilience to take on risk, but are held back by this emotional capacity for risk leading people to ‘underinvest’
• “This isn’t about logic – it’s about emotion,” says Oxford Risk

In an in-depth study of the UK’s public risk appetite, interactive investor (ii), the UK’s second-largest platform for private investors and leading flat-fee platform, has identified a safety-first attitude to saving and investing that is hampering the nation’s long-term financial resilience, despite often high levels of cash savings. 

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Within investment, people’s financial capacity for risk and risk tolerance describes the degree of losses an individual is prepared to take on to grow their wealth. However, interactive investor’s research suggests that low emotional capacity for risk is leading people to “underinvest”. In other words, people often choose lower-growth assets due to fears about short-term volatility, potentially harming their future financial security.

While the losses incurred through investing are visible and can sometimes be painful, the ‘real terms’ losses incurred through an over-reliance on cash savings are much harder to see. 

Unlocking a UK investment culture

This newresearch, developed in consultation with behavioural finance experts Oxford Risk, and with polling by Opinium Research, comes at a pivotal time, with retail investment in the political spotlight as the government looks for ways to unlock an investing culture in the UK.

interactive investor has long called for bold reformto help UK savers feel more confident to invest, and the platform reiterated the urgent need for this after the government’s recent Mansion House speech.

Underpinning reform is the importance of financial education, but interactive investor would specifically like to see a simplified ISA regime and the scrapping of stamp duty on UK shares and trusts.

The UK’s ‘safety-first’ instinct

While higher interest rates in recent years have undoubtedly encouraged more interest in cash-focused products, the research findings remain stark.

Polling 3,000 people nationally, interactive investor found that more than half (58%) of Britons, around 31.4 million people, have low ‘emotional’ capacity for risk - meaning they are unwilling to countenance the prospect of incurring short-term losses on investments.

This is despite the fact that 32% of these – around 9.2 million people - have a good financial capacity for risk, meaning they are in a good position to take on investment volatility because of their income and savings.

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.

“The dangers of not taking any risk are fast climbing up the political and regulatory agenda, and analysis shows that Britain has the lowest levels of equity ownership (outside of pensions) of any G7 country, with a disproportionate amount in cash and property. 

“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.

“Targeted support will help but we need a multi-pronged approach from government to lay the foundations for a broader cultural movement. A functioning stock market: scrap the Stamp Duty on UK shares! Better financial education. There are some hard yards ahead if we seriously want to foster a UK investing culture.”

Craig Rickman, personal finance expert at interactive investor, added:“While people should only take on as much risk as is right for them, short-term emotional barriers often mean we don’t take the risk that’s right for our long-term needs. We urgently need radical action to address this or risk more people scraping by in retirement. 

“Targeted support could prove to be revolutionary in providing people with a better understanding of investment risk – the next big behavioural 'nudge' within finance. But we still need to find new ways to encourage more people to engage with their finances in the first place, ideally as early as possible.”

The research

In consultation with Oxford Risk, interactive investor assigned a score for each of three categories:

1. Financial Capacity for Risk – how well-placed people are financially to take on investment risk, including the size of their emergency savings and the stability of their income
2. Risk Tolerance – how willing people are to accept the possibility of losses for a greater chance of higher returns in the long-term
3. Emotional Capacity for Risk – how well people can cope emotionally with short-term stock market volatility and losing money on the investment journey

Respondents ranged from the ages of 18-55+

Key findings included:  

• Three-fifths of people (58%) have a low emotional capacity for risk – meaning that they cannot cope with the idea of incurring short-term losses on investments.
  Just 12% of people had a high emotional capacity for risk.
• The proportion of people with a high-risk tolerance was slightly greater (at 19%). However, the majority (57%) still scored low for risk tolerance i.e. they are not willing to take risks for the potential of higher rewards – even if they are financially in a position to do so.
• Almost a third (31%) of people have a high financial capacity for risk – grossing up to 16.9 million UK adults. A high score in this category means that individuals should financially be in a good position to withstand shocks like market volatility.
  A further 41% of people have a medium financial capacity for risk and 28% score low on financial capacity for risk.
• People who received high scores for risk tolerance and emotional capacity for risk are more likely than average to have investments and pensions and typically hold more in them too.
• 71% of respondents have no investments outside of their pension.
• The median amount that people have in investments is £17,500. But among those with high emotional capacity for risk, this jumps to £62,500 – or £45,000 more.

When asked what would help to increase their risk tolerance for investing, the most common answer (41% of respondents) was “if I had more money”, followed by “if I understood investments better” (16%). Only 3% of people said they would have a higher tolerance for investing if the tax incentives on cash ISAs were reduced.

Dr Greg Davies, Head of Behavioural Finance at Oxford Risk, said: “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.”