Another week, another story about the stock market. The Australian Stock Exchange (ASX) can’t keep itself out of the headlines at the moment, and there’s a hell of a lot more people reading as new investors enter the market.
You wouldn’t be blamed for thinking that with all the uncertainty in the market, people would be shying away from investing… But that’s not the case. Record numbers of Australia’s are becoming first-time investors, opening online broker accounts and diving into the market.
The market’s started heating up so quickly that the Australian Securities and Investments Commission (ASIC) had to issue a warning to new investors in a report that focused on investor activity during Covid-19.
ASIC made a statement that “The average retail investor was not proficient at predicting short-term market movements over the focus period” and they went further to say “Even market professionals find it hard to ‘time’ the market in a turbulent environment, and the risk of significant losses is a regular challenge,”
New Investors Activity in the Market
So just how much new investor activity is in the market? ASIC does a bit of surveillance and takes a peek at the data of new client account associated with retail brokers (Think of your bank’s online broker platform). They specifically look for new clients that are appearing in their data for the first time, A good indication that they are a new investor.
The data revealed that during their focus period there were 140,241 new investors in the market. This accounts for 4,675 new investors per day.
To put this into perspective, during a benchmark period of the same length, ASIC observed 34,502 new investors enter the market or 1,369 per day. That’s about 3.4 X higher!
Day Trading vs Long Term Investing
The real worry of ASIC is that retail investors are trading more frequently during this crisis. Investors are trying to “time the market” and make a quick return on their investment.
The data showed ASIC that the average retail investor was not proficient at predicting market movements during the focus period. They also have fears that investors would turn to higher risk investments such as Geared Exchange Traded Products.
ASIC warned potential traders that “While markets generally recover over the long run and tend to grow with economic fundamentals, short-term trading and poor market timing can be a major risk for investors in volatile markets. Therefore, retail investors should be wary of trying to ‘play the market’ for short-term price movements by day trading”.
This is not to say that all investing during this period is bad. It appears that even ASIC agrees that over the long term, the market will generally grow. If you’re interested in long term investing, maybe give this a read – Why I’m still Investing During Coronavirus.
Why are people investing now?
Why is everyone deciding to jump into the market now? Well, it’s going to be different for everyone. But perhaps a few things are going on in the economy that pushing people towards shares.
Interest Rates are at an all-time low – I just had a look and the front page of ANZ’s website, there’s an offer for a home loan at 2.29%! That’s pretty cheap! People whos income remained stable during Covid-19 may have just saved some extra cash on their home loan and now it’s time to invest.
Bad term deposit return – With low interest rates comes low returns on cash stored in savings accounts or term deposits. While home loan rate might be low, ANZ’s highest term deposit is returning just 1%, if you’re willing to lock your money away for 8 month’s.
Markets at an all-time low – Since the GFC, the markets have had a pretty good run. Some may have said that we’re due for a correction! Perhaps there is an influx of investors who have been waiting on the sideline with a pile of cash ready for such an event.
Gambling – Covid-19 shut of the flow to pokie machines, sports betting and almost every form of gambling available. Gamblers may have traded casino room floors or sports betting apps for betting on the ASX 200.
One thing is for sure, nobody can predict the future, and nobody can predict what will happen to the market or any individual share. Everybody needs to be comfortable with their own financial decisions.