It is important to understand what you’re investing in, as well as where you’re getting your information.
How are Australian investors approaching portfolio construction?
ASIC recently released research exploring the motivations, attitudes, and behaviours of Australian retail investors, including the most common product types held by investors.
Australian shares were the most popular investment, followed by cryptocurrencies and international shares.
While the concept of risk might feel intuitive, interestingly, all respondents found risk difficult to understand or articulate. Just one in three cryptocurrency owners considered that they owned products that were risky or speculative. Additionally, those who only owned cryptocurrency were even less likely to consider their investments risky, despite the lack of diversification and crypto’s volatile nature.
When it came to researching investments, ASIC data showed that some 80% of investors do their own research. However, half of all investors agreed that they’ve only invested in things because they didn’t want to miss out. Over a third of all investors agreed that they only invested because their friends did.
Understanding investment risks
When it comes to thinking about investment risk, a good way to start is to view investing as part of a continuum that gets progressively riskier as you seek a potentially higher reward.
Growth assets like Australian shares and international shares carry higher risks than defensive assets like bonds or cash – while they may have the potential for greater returns, they also tend to be more volatile. Cryptocurrencies on the other hand are typically even more volatile than traditional growth assets, and experience wider fluctuations than traditional assets and some have had dramatic short-term drops.
Diversification is the best way to manage these investment risks. Holding a balanced mix of assets that gives your money enough of a chance to grow while also creating a buffer that can help shockproof your portfolio when markets fall.
Tuning out the noise
Investment information is streamed across the internet, while social media is also full of investment recommendations. But while they play a significant role in today’s world, social media forums in particular require you to apply a healthy dose of scepticism - do your own research and take personal responsibility for the decision to invest.