By Tony Kaye, Senior Personal Finance Writer, Vanguard Australia
The size of Australia's exchange traded funds (ETFs) sector is edging closer to $100 billion, with direct investors behind an increasing share of the record inflows.
There's also strong evidence, following the volatility on global share markets early last year, that a high percentage of investors are choosing to stay invested, rather than trying to time when to buy and sell.
But, at the same time, there's been a worrying increase in speculative trading activity on financial markets in recent times, with some investors taking extremely high risks in a bid to make quick profits.
I spoke with the Head of Vanguard Personal Investor, Balaji Gopal, about these and other current investment trends he's seeing.
We're seeing strong flows going into ETFs and managed funds.
A significant proportion of our direct investors are choosing to invest into ETFs. In general, our investors have reacted to the COVID-19 induced market volatility quite rationally.
Vanguard investors globally have also pleasingly stayed the course, with 99.6 per cent of investors having not sold down their portfolios into cash when markets fell sharply last year.
Retirees and pre-retirees have been forced to rethink their plans, particularly around income expectations and sources, and younger investors have responded by expanding and diversifying their portfolios.
Investors generally seem to be more accepting of short-term volatility on the way to meeting long-term goals. Yet they have also become more focused on diversification and risk management, as they seek to build sustainable portfolios for the future.
They are. People are taking more of a portfolio view and are staying diversified, using Australian and international portfolio building blocks.
We're seeing investors use both – single-market exposures such as our ETFs covering Australian shares or global shares, and also into our pre-packaged diversified fund and ETF offerings which offer low-cost multi-asset diversified portfolios rebalanced automatically.
Our diversified offerings, in particular, represent Vanguard's tried and tested investment thinking which has put many investors in good stead since they were launched in the late 90s.
Investors continue to see the benefits of investing in fixed interest ETFs because the diversification benefits of accessing fixed income through ETFs are proving attractive and efficient over direct bond investments.
We're also seeing a big surge in people considering investing in environmental, social and governance oriented products.
Fundamentally, people are interested in holding fewer ETFs and building mini portfolios as well as investing in truly diversified offerings.
There is, and also what we are seeing is a lot of the flows into international ETFs are increasingly being driven by retail investors, particularly SMSF investors, which is pleasing.
SMSF investors have historically been mostly invested in Australian shares, property and cash. But the trend towards international shares through ETFs is growing.
A general trend in ETF volumes, and particularly post the onset of COVID, suggests an increasing proportion of ETF flows are coming from direct retail investors.
That's pretty amazing, and shows how far ETFs have come to now be mainstream investment products for retail investors.
Irrespective of what's happening in markets, especially shorter-term fads such as the recent excessive trading frenzies in some companies, investors that stay diversified, invest consistently, who stay the course and ignore the noise have done exceptionally well over the long term.
That's based on our long-term assessment of investor behaviours across the 30 million customers that Vanguard serves globally, and it gets proven time and time again.
You always hear of stories where some people make extraordinary short-term gains. But these are statistical anomalies and often come at great risk – sometimes with the potential for investors to lose all of their capital. This is not investing, but speculation or gambling.
Also, when you look at some of the products being launched across the industry, it does beg the question as to why some investors are considering products that are risky, concentrated and short-term.
There's always a trend to chase products that have experienced recent gains. Vanguard has a strong focus on only introducing products that are diversified, have the ability to generate a real return (over inflation), are low cost and that can be used by our investors appropriately to meet their investing goals.
There are many products on issue in the industry, but not all products are created equally and have varying risk profiles.
We're going to see a lot of COVID vaccine developments and disappointments, quantitative easing action and inaction, governments pumping out money and not pumping money, interest rates going down further or going up.
The most important thing is to set realistic goals, stay diversified, ignore the noise, and this should see investors benefit over the long term.
Investors should really be thinking about what factors are in their control, and focus on those.
We should all brace ourselves for the fact that asset class return expectations are likely to be lower for longer. They might not be, but it's best to be prepared.
But what is in your control? You could work longer, spend less, or invest more. These are far more important attributes than trying to time markets, or chase income or very high-risk investments that are not based on sound fundamentals.
This is the consistent behaviour that we see from our more established individual investors.
They've been able to build their wealth over the long term by continually investing, staying consistently invested and ignoring the short-term noise, and this has borne fruit through the effect of compounding.
I think there are some great lessons there.
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