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How much are we willing to risk? Italians' investments according to the latest Consob report

16 August 2024

August 2024 kicked off amid turbulence in the financial markets. In particular, on 5 August 2024, one of the most important indices of the Japanese stock market, the Topix, fell by more than 12 per cent, one of the sharpest daily drops in the history of the stock markets. Things were not as bad for Western stock exchanges, where losses were still significant, but much smaller.

The Tokyo Stock Price Index (Topix) is one of the most important stock indices in the Japanese financial market, alongside the Nikkei. It is a very diverse index (it contains more than 2,000 stocks) and tracks the majority of the stocks listed on the Japanese stock exchange (Tokyo Stock Exchange). Unlike the Nikkei, where stocks with the highest prices have the greatest weight, the Topix is a classic 'capitalization-weighted' index, where companies with the highest market value weigh more, even if their share price is relatively low.

The events of 5 August on global stock markets are a perfect example of the risks we accept when we invest in stocks to chase higher returns over time. To put it simply, if on 2 August we held €10,000 in a fund or an ETF that track the Topix index, by the end of the day we would have had €8,800. We would have lost €1,200 in just a few hours! But, had we purchased the same number of shares of the fund or ETF back in March 2020, they would have cost us only €4,400 and, by the end of that terrible day, we would have had €8,800, twice what we initially invested!

This simple example reminds us that if we want to invest in stocks, we must be prepared to endure significant fluctuations in the value of our investment, and that riskier investments are better suited for long-term horizons, even though the risk is always there.

What attitude do Italians have towards risk?

We can find the answer to this question in the annual report on the financial knowledge, habits, and investment choices of Italian households published by Consob, the authority responsible for regulating the Italian financial markets.

The most common financial products among the Italian investors interviewed for the survey are low-risk instruments - whose value is not subject to market fluctuations - such as certificates of deposit and postal savings bonds, held by 48 per cent of respondents. Stocks are still featured in the portfolios of 32 per cent of respondents. There has also been a significant increase in investors seeking very high risks: 18 per cent of respondents reported holding crypto‑assets, compared with 8 per cent in 2022.

Looking at the general attitude towards risk, the report shows that Italians seem to be willing to accept risks: 37 per cent of the respondents declared that they are inclined to take risks when making decisions, while 10 per cent are more cautious. Italians are also generally more present-oriented, with 70 per cent of the sample having short-to-medium-term investment goals: 32 per cent say they have an investment time horizon of less than three years, and 38 per cent of three to five years.

The report also looks beyond risk attitude and into other habits. A third of investors hardly ever consult official documents about the issuer, such as financial statements, and nearly a quarter of investors do the same with product-related information documents, including the KID.

The KID (Key Information Document) is a two-tothree-page document that describes the characteristics of a specific financial instrument in terms of risk and investment goals. When possible, it also includes past performance, usually in comparison with target performance, to provide an estimate of potential future returns.

When we don't feel confident enough to invest on our own, we can seek financial advice from financial intermediaries or independent consultants registered with the Supervisory Authority and Register of Financial Advisors (OCF). Among the respondents, 40 per cent rely on professional advisory services, at least for some of their financial decisions. Even though it is not advisable to rely on so-called 'informal advice', the Report shows that about a third of investors do so, basing at least some of their financial decisions on suggestions from relatives, friends, and/or colleagues who are not financial experts.

While it is a professional financial advisor's job to help investors, there are still a few simple rules that can help us invest our savings more wisely:

  1. Nothing is free: if we want higher returns, we have to accept higher risks;
  2. Investing in different asset classes (stocks, bonds, commodities, real estate, etc.) and in instruments from different issuers lowers our risks (this is the basic principle of diversification);
  3. Riskier investments are generally more suitable for longer-term horizons;
  4. Information is key: before investing, it is always a good idea to take our time and carefully assess the characteristics and risks of various instruments to understand if they truly suit our needs. We can do this more easily by reading the documents that intermediaries are required to provide to us, e.g. the KID.

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