Australians are investing less and more conservatively

The International Monetary Fund has just declared that Australians are under more mortgage stress than any other nation.

That’s hardly surprising given our poor housing affordability and a 4% jump in interest rates over the last year. Soaring rates mean home owners with the average mortgage need to find an extra $1,200 to $1,500 each month for loan repayments.

Add in a cost-of-living crunch, and it’s understandable that plenty of Australians are tightening their belts.

For many of us, scaling back on regular investing is a way to free up extra cash to meet household bills. And according to recent research by HSBC, many of us are doing just that.

At present, Australians are investing around 15.8% of their net income each month, down from 18.3% in 2022 – a fall of 2.5%.

Of course, this average figure doesn’t tell the full story. Younger Australians, who may be less likely to have a home loan, are contributing the most of their disposable income towards investing – 19.9% across Gen Z, compared to 10.9% among the Baby Boomers.

HSBC found one in four of us have also become more conservative, with an increased interest in bonds. More broadly, we are seeing rising enthusiasm for exchange traded funds and managed funds, which suggests investors are happy to let someone else make the decisions. Or as HSBC puts it, “concerns of an economic slowdown have dimmed self-directed investor confidence”.

The cost of cutting – or switching strategies

Cutting back on how much you invest can be a fiscal necessity during tough times. That’s okay, you can always pick up your contributions later on. But it’s worth understanding how this can affect your wealth – and whether it can have more of an impact than switching to a more conservative investment strategy.

Let’s say, for instance, that you have a $10,000 share portfolio to which you add $100 each month. Data from Vanguard shows that over the past 10 years, Aussie shares have generated returns averaging 8.80% annually[1].  If you kept up the $100 monthly investment, after 10 years your portfolio would be worth around $41,301[2].

If you reduce that regular investment by 2.5% (remember, that’s how much HSBC says investors have trimmed their contributions by), you’d invest $97.50 each month instead of $100. Even if the returns stay the same at 8.80% annually, after 10 years, your portfolio would be worth about $40,759. The difference is just $524, which is not such a deal breaker.

What if you switched to more conservative investments?

We’ll say you moved that $10,000 out of Aussie shares and into bonds, which Vanguard says have generated returns of 2.4% annually over the past decade. In that case, investing $100 each month would see your portfolio grow to $26,059 after 10 years. That’s over $15,000 less than if you had stuck with listed shares.

When you crunch the numbers this way, it’s easy to see that switching to conservative investment options can have a far more devastating impact on your portfolio over time than slightly scaling back how much you invest.

Is a more conservative strategy necessary?

I realise that right now we are seeing a steady stream of worrying media headlines. But realistically, there is always something to worry about in the world.

Moreover, despite some very concerning events globally, the past year has delivered strong results for sharemarket investors. As I write in mid-October, Aussie shares have risen 6.67% over the past year[3]. Add in dividends, and investors have pocketed total returns of 11.17%.

Past returns are no guide for the future, but if you have developed a long term investment plan based on your needs, tolerance for risk, age and lifestyle, chances are you don’t need to alter it in response to a short term bout of bad news.

As the analysis above shows, moving to more conservative investments has the potential to leave you shortchanged on long term compounding.

Two in five Australians have zero investments

One statistic from the HSBC report that particularly concerns me is that just 41%, or two in five Australians, own an investment that is not super, a savings account or their home. This is down from 47% in 2022 suggesting some of us are cashing in investments to make ends meet.

I realise that in many households, there is not much fat left to trim from the family budget. Fortunately, there are strategies we can use to invest even when cash is tight.  This includes apps that reward you with investments while you shop.  

The idea is that you download the app, get a reward on the value of purchases, usually about 5-7% of the purchases made, and the app converts the rewards into units in investments.

As a guide, if you buy something for $100 and get a 5% reward, instead of receiving this as cash in the hand, the $5 is invested for you. So, you invest as you spend.

Cashback rewards are not a new concept. They have been around for a while, what I like about this approach is that it is forced savings.  Most of these apps, such as Raiz Rewards, invest your money in exchange traded funds. It’s not a savings account, so returns are not guaranteed. Or apps such as Super Rewards invest directly to your super account.

Debunking the minimum investment myth

If you haven’t yet started as an investor, it is worth thinking about developing a regular habit of investing. A key message here is that you don’t need to be wealthy to invest.

HSBC’s research found Australians believe they need, on average, a minimum amount of $15,200 to start investing. Nothing could be further from the truth. Micro-investing apps can let you get started with as little as $5. You can become a direct shareholder or ETF investor with just $500.  

If you can afford to, it is worth taking action today. Waiting for a time when there are fewer worries, especially around interest rates or geopolitics, could mean a lengthy delay – and in the meantime, you will have missed out on valuable compounding returns.