As a new wave of investors enter the Australian share market, new trends begin to emerge.
ASX recently published its annual investor study which this year surveyed over 5,000 investors on their investment preferences and priorities. The study provides a fascinating insight into the evolution of our investment markets and how investor behaviour is changing over time.
One of the key findings this year is that there's been a marked shift in who is investing. Long perceived as the domain of older folks, investing (particularly in listed investments) have seen a growing uptake from younger Australians.
Younger investors (25 and under) now account for 10 per cent of total current investors and 27 per cent of intending investors (those who plan to begin investing in the next year).
But age is not the only aspect that sets younger investors apart. Investment preferences also differ to those of older investors, notably that younger investors favour ETFs and are more inclined to seek information from a variety of sources, including social media.
ETFs are particularly popular with younger investors who may not have as much capital as their older peers. ETFs therefore provide an easy, low-cost option that provides diversification benefits in just one trade.
The growing number of different ETF offerings on the market serves as a timely reminder for younger investors to truly understand the product before purchasing. In the world of ETFs, there is an increasing choice of “flavours” from the plain vanilla to outright exotic, many often niche and attention-grabbing.
Examples of exotic ETFs include those that have been constructed around a very specific theme, such as cryptocurrency ETFs, robotics ETFs and physical gold ETFs. While certainly topical and exciting, these exotic or thematic ETFs often come with higher risk and less diversification benefits than their vanilla counterparts, and their risks should be well researched.
Although ETFs are favoured by younger investors, they are still a very much sought-after investment product among all investors, particularly those seeking diversification. Australian Securities Exchange data shows more than $1.6 billion of new capital flowed into ASX-listed ETFs in June, bookmarking one of the strongest periods on record for the local sector and taking total assets under management to around $65.5 billion.
While the internet provides instant access to a wealth of general investment advice and information, it is not always prudent to follow them all.
18 per cent of younger investors surveyed by ASX use social media as an information source, with many turning to online groups or forums for stock picking tips and investment guidance.
ASIC has warned of the potential danger in heeding unlicensed advice found online that does not take into account the investor's risk tolerance, sophistication or product understanding. Many inexperienced retail traders are being swept up in what has been coined as ‘herd momentum': buying into popular shares or penny stocks because everyone else is.
Penny stocks are public shares of small listed companies often outside of the ASX300 and traded at a low price. These shares are generally seen as speculative or high-risk investments because of their volatile earnings and valuations, and little guarantee for returns.
The surge in retail trading activity has shone a light on the risks of day trading, leading ASIC to caution inexperienced investors against market timing and seeking investment advice online from unlicensed sources.
Tune out the noise
Getting started with investing is a great first step in itself, but it's worth understanding that trading is not the same as investing. Following the crowd by jumping into the market to capture short term market opportunities without a plan is highly risky. It can also mean you end up with little diversification and a collection of assets that have been accumulated over time without regard to how they fit together as a portfolio.
The key to successful investing is to set realistic goals, stick to your plan and tune out the noise, no matter what the market is doing or what your peers are saying.
Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
15 September 2020