For the longest time, everyone thought that a huge portion of the population has either direct and/or indirect exposure to the Australian stock market.
So, it came as a surprise when we read the 2014 Australian Share Ownership study which states the following::
- Out of the 18 million aged 18 and up, only 36% or 6.48 million has direct and/or indirect exposure to the stock market
- Out of the 6.48 million: 4.68 million (72%) has directly held shares, 540,000 (8%) has indirect exposure through funds, and 1.26 million (27%) has done both
- Those who prefer to directly hold shares has steadily increased. From 2000 to 2014, this group has increased by 49.52%
- Those who prefer to indirect exposure to the stock market has drastically declined. From 2000 to 2014, this group has decreased by 68.42%
- Owning residential and investment properties comprise the second largest type of investments that the 18 and above owns
Now, to the concerning part of the study:
- Of those who directly held/hold shares: 18% described themselves as ‘not at all knowledgeable‘, 37% as ‘not very knowledgeable‘, 39% as ‘somewhat knowledgeable’, and 6% as ‘very knowledgeable’. 55% of this group doesn’t have any idea what they are doing and yet they have held/still hold shares.
- Of those who opted to have indirect exposure: 31% described themselves as ‘not at all knowledgeable‘, 34% as ‘not very knowledgeable‘, 39% as ‘somewhat knowledgeable’, and 6% as ‘very knowledgeable’. 65% of this group doesn’t have any idea what they are doing and yet they have held/still hold shares.
- Of those who have direct and indirect exposure: 8% described themselves as ‘not at all knowledgeable‘, 25% as ‘not very knowledgeable‘, 39% as ‘somewhat knowledgeable’, and 6% as ‘very knowledgeable’. 55% of this group has an idea what they are doing with their investments.
The two points above holds the saddest information of the 2014 Australian Share Ownership Study.
What has brought this group into this sad situation?From the time you start your career up until your golden retirement years, your investment preferences will change depending on your current situation.
The things you highly regard in your 20s will be radically different when you are in your 50s or 60s. On top of that, the time horizon and appropriate investment options will be different as you age. That is why it is imperative that you understand the options available to you; options that are suited to your personal circumstances.
However, when you try to consult a financial adviser, the advice that you will be receiving will be primarily shaped not by your personal circumstances but by a piece of paper containing a standardised test (administered in a few minutes) that will dictate the ‘appropriate’ investment mix of your portfolio. Here are the common investment mix (as discussed by the Australian Securities and Investment Commission) given by default to you and to other Australians, 18 years and above:
- Growth: invests around 85% in shares or property. Aims for higher average returns over the long term. This also means higher losses in bad years than those you would experience with lower risk options. You may also be able to invest in a ‘high growth’ option with 100% (of capital) in shares and property.
- Balanced: Invests around 70% in shares or property, and the rest in fixed interest and cash. Aims for reasonable returns, but less than growth funds to reduce (the) risk of losses in bad years. Those losses usually occur less frequently than in the growth option. You may also be able to invest in a ‘moderate’ option with around 50% (of capital) in shares and property.
- Conservative: Invests around 30% in shares and property with the majority in fixed interest and cash. Aims to reduce the risk of loss and therefore accepts a lower return over the long term. There is less chance of having a bad year than in the balanced or growth options.
- Cash: Invests 100% in deposits with Australian deposit-taking institutions or in a ‘capital guaranteed’ life insurance policy. This option aims to guarantee your capital and accumulated earnings cannot be reduced by losses on investments.
After tallying the results of the test that will dictate the outcome of your investments for years to come, you shake hands with your adviser, and sadly (and in most cases) never see the adviser again.
Even though you have unique circumstances and is in a different stage of life (compared to the rest), a piece of paper just categorised you, along with your needs, as same with everyone else.
Worst, the investment mix generated by the test might fail the test of time since it did not factor in your future needs and other things such as inflation (especially medical and health related inflation).
At Kings Road Wealth, we believe that there is no such thing as a ‘one size fits all’ approach to your financial goals and aspiration. Our size allows us to spend the time needed to get to know you and understand goals and aspiration. This, in turn, will help us create a personalised financial solution catered to your own goals and aspiration.
