The ASX Australian Investor Study 2020 report explores how product innovation is helping more investors – including younger people and those with little capital – build wealth.

2020 has certainly been eventful, with the effects of the global pandemic working their way through investing markets at home and abroad, resulting in record levels of market volatility. All Australian investors – retail and professional – have felt the force of these events. Whether by choice or circumstance, many people have had to adjust their behaviour, preferences and risk appetite for this new investing environment.

At the start of 2020, ASX and Investment Trends embarked on a journey to better understand a key participant within the Australian investment market – the individual retail investor. 

Building on previous iterations, the 2020 study looks even deeper into what Australian retail investors are doing and planning to do, as they contend with the ongoing fallout from the pandemic. With the help of more than 5,000 respondents, the online survey (initially conducted in January and followed up in May) gives a snapshot of Australian investors today – who’s investing, where they’re investing, their decision-making process, and their investment goals. 

The study explores the strategies used by investors to navigate these unusual times, and observes the next generation of Australians who intend to start investing, whose distinct preferences and needs will shape markets of the future.

Investing in 2020

Australia continues to be a nation of investors, with 9 million adults (46%) of the total adult population) holding investments outside their home and super, but including their Self-Managed Superannuation Fund (SMSF). 

Of these, 6.6 million (35%) hold ASX-listed or quoted investments, ranging from direct shares to Exchange Traded Funds (ETFs), Listed Investment Companies (LIC), Australian Real Estate Investment Trusts (A-REITs) and mFunds (unlisted managed funds available to investors through the mFund Settlement Service).

Fuelled by a string of company de-mutualisations and privatisations, and the rise of online broking, the proportion of Australians who invest in ASX-listed investments increased through the late 1990s and peaked in 2004, as Figure 1 below shows.

Figure 1: Proportion of the Australian adult population with on-exchange investments, ASX Australian Investor Study 2020

Although share ownership has stabilised, the inflow of first-time investors remains strong. Even before the upswing in trading activity during the COVID-19 lockdown, close to a quarter of current investors (23%) said they had begun investing less than two years ago.

Existing investors are predominantly male (58%), but the next few years are set to see a growing number of females and younger Australians actively investing – among the estimated 900,000 Australians who intend to start investing in the next 12 months, 51% are female and 27% are under the age of 25. 

(Editor’s note: see other stories in this edition of ASX Investor Update on female share investors).

Product innovation 

Efforts by product providers have also spurred retail participation. Product innovation, lower minimum investment sizes and cheaper brokerage are encouraging more Australians to invest, particularly younger, less wealthy individuals. The median “intending” investors (current non-investors) who intend to invest via ASX in the next 12 months] believe they need just $4,300 to start building a portfolio, down from $6,800 in 2017.

At the other end of the spectrum, the group of High Value Investors – the top 20% of investors by wealth and trading value – are making full use of the current product set. 

Compared to mainstream investors, these investors are much more likely to hold direct Australian shares (74% say so vs 55% among mainstream investors), international shares (27% vs 13%), ETFs (25% vs 13%), A-REITs (22% vs 5%) and mFunds (6% vs 2%). They are also more likely to use exchange-traded options (ETOs) to manage risk and capitalise on opportunities. 

For product issuers, these investors constitute an important segment – affluent, engaged, diversified, and actively seeking new opportunities on the ASX market.

Risk tolerance rising

Regardless of demographics, Australians with greater investment experience are noticeably more risk tolerant. Asked to rate their attitude to risk in January 2020, current investors said they were much more likely to accept higher variability for the potential of higher returns compared to lapsed investors, intending investors or non-investors. 

The increase in volatility in early 2020 has led current investors to re-examine their attitude to risk, and the experience from navigating volatile markets has made at leaset some more resilient, rather than less so, as Figure 2 shows.

Figure 2: How would you describe your attitude to financial and investment risk? (All respondents), ASX Australian Investor Study 2020

COVID-19 impact

Unsurprisingly, the extreme sharemarket volatility and sudden decline in asset values caused by the COVID- 19 pandemic has had a considerable impact on investors. 

As this report goes to press, much of that impact is playing out, with the full economic consequences of the pandemic yet to become fully clear. For some investors, the fallout has been considerable. Retirees and those approaching retirement have been most affected. Many have been forced to rethink their retirement plans or lower their retirement lifestyle expectations. 

Responses to the pandemic vary significantly by age, with sudden market falls underlining the importance of investors considering sequencing risk – the risk of investment underperformance just when they are about to retire, giving them less chance to recover from their losses. 

Over a fifth of respondents between the age of 35 and 64 said they planned to delay retirement. And 29% of 55 to 64-year-olds intended to live on less or rely on social security (see Figure 3, below).

Figure 3: Impact of COVID-19 on retirement plans, ASX Australian Investor Study 2020

Positive signs

Many investors have responded to the dramatic sharemarket shifts by becoming more focused on diversification, risk management and the sustainability of returns. Many have also sought to capitalise on falling prices by creating or building larger portfolios.

As the COVID-19 market disruption unfolded over the three months to May, over half of investors (54%) said they had made changes to their portfolios. Younger investors are most likely to have made significant shifts while older ones were more inclined to stick with their existing strategy. 

Investors were more likely to increase their holdings of growth assets like shares, rather than reduce them. 

Among the 54% who made changes to their investment mix:

• 17% took advantage of lower asset prices to invest all their spare cash, including 34% of next-generation investors (aged 18-24) and 18% of wealth accumulators (aged 25-59). 
• 17% of investors increased their allocation to Australian direct shares, with just 3% saying they had sold down their shareholdings (see Figure 4, below). 

This suggests few investors sold into a declining market and crystallised their losses. Instead, many viewed market volatility as a buying opportunity. 

However, it also raises the possibility that at least some new market entrants have been engaged in short-term speculation rather than on long-term wealth creation, potentially putting them at risk of losses if the recent volatility continues.

Figure 4: Portfolio changes after COVID-19, ASX Australian Investor Study 2020

Risk-reduction strategies

At the same time, events of early 2020 have prompted investors to put a higher priority on risk-reduction techniques, such as diversification, hedging and liquidity management. 

Questioned about the effects of the COVID-19 outbreak on their investment priorities, 31% of respondents said they now placed a greater emphasis on the impact of diversification on volatility and returns. Investors under the age of 25 especially prioritised this strategy (64%).  

These younger investors appear to have been particularly willing to learn from the crisis. One in three said hedging strategies [to protect against market falls] were now a higher priority than before. One in five were more focused on liquidity and defensive assets. 

Meanwhile, investors in all life stages said they would focus more strongly on the future sustainability of dividends. Investors are also keen to continue taking advantage of lower asset prices by building their holdings of listed assets. 

Asked about their intentions for the next 12 months, the majority of investors plan to invest in Australian direct shares (57%), more so among those under the age of 25 (83%). 

Looking forward

While the global pandemic has adversely impacted financial markets, it has also demonstrated the resilience of Australian investors and their ongoing desire to build wealth through ASX-listed investments.

Many investors have taken advantage of current valuations to further expand and diversify their portfolios. Although the recent rise in trading activity does raise the risk that some are attempting to time the market – not always successfully – our research suggests many investors have become more attuned to the benefits of diversification and risk management.

Looking beyond the impact of the COVID-19 crisis, the future of Australian retail investing looks promising. 

The last few years have seen a large influx of new investors, with more set to enter the market. Many are younger Australians, including a growing number of young women, seeking to create the foundations for financial security with years of investing ahead of them. 

For these investors, the accessibility and affordability of ASX-listed securities is appealing cementing their place as Australia’s most popular investment choice.