Why traditional investor stereotypes are dead (and the top picks by generation)

According to the latest data, it's about time we retired the 'typical' investor stereotypes. The idea that retail investors are skittish and quick to sell in a downturn, or that young investors are inclined to take on ridiculous amounts of risk, is simply not the reality today.

The evidence suggests that investors are actually following the wisdoms like looking past market noise and holding the course, or seeking quality and value options for the long term. This is remarkable in itself, particularly in a period when markets have been uncertain. 

In the past few years we’ve lurched from covid, to the great lockdown release, followed by persistent inflation and rapid hiking of interest rates. Late last year, we endured an unsettling period where equities and fixed income suddenly became correlated, and all equity sectors finished calendar year 2022 in the red. Then the situation changed again. We saw a great resurgence of tech stocks courtesy of AI at the start of this year, whilst questions remain over the most anticipated recession ever.

Just over a decade ago, the GFC saw investors desperately sell down their portfolios. What makes the investor of today so different and able to hold their nerves?

I spoke to Gemma Dale, Director of SMSF and Investor Behaviour for nabtrade, to learn more about the trends she is seeing in nabtrade’s investor base, including some unexpected lessons about how different generations invest and the stocks they favour.

Investor behaviour in 2023

When it comes to the more consistent and stable investment patterns of today’s retail investors, Dale believes that it is a combination of education, along with greater access and technology for investing.

While investors surged into the market after the initial falls in March 2020 as covid made its mark globally, this time, trading volumes are down and cash levels are up across nabtrade’s investor base.

“It’s not that people no longer believe in investing. They just can’t see any meaningful incentive to turn over their portfolios frequently at the moment. The opportunities aren’t presenting themselves to the same extent,” says Dale.

After all, we’re not seeing the 30% price falls of a few years back. Investors have been somewhat spoilt.

“There’s less ‘fun’ stuff to drive really active behaviour. The market has gone sideways. It’s not much changed from the levels of three years ago and that is reflected in behaviour. Volumes are down,” she says.

Another key trend Dale has watched build over time is what she terms ‘the barefoot investor trend’ – though she notes there are a range of influencers offering a similar approach.

“It is consistent buying of ASX200 ETFs over time and this trend has been strongest in the younger population. They have gotten their heads around the idea that you will build wealth in the market over time and the easiest way to do that is not to trade away your life savings but to quietly and consistently accumulate a diversified portfolio. Don’t worry about trying to pick winners,” she says.

Off the back of that, the Vanguard Australian Shares Index ETF (ASX: VAS) is the most traded investment on nabtrade’s platform and rarely sold, typically a buy-and-hold investment.

Building into August reporting season

Just like the broader retail investor base, Dale says that some nabtrade investors are more opportunistic and responsive to prices and reporting season, while others are more focused on their longer-term buy-and-hold strategy.

Dale isn’t expecting this reporting season to generate a substantial volume of trades, particularly compared to the past.

“The biggest challenge for people is that it’s not throwing up dramatic opportunities. We’ve been spoilt by covid where you could wait for a 30% sell off and then, happy days, you can buy everything you like and it will bounce back. It was a once in a lifetime opportunity,” she says.

“There’s a cohort who will absolutely move during reporting season if they feel it is a bit toppy or will bounce further. But some people just want to build up their portfolio over time. Or they’ve been sitting on their portfolio for over 20 years and have no reason to sell regardless of how high prices go. They are living on the dividend anyway,” Dale says.

Investing by generations and top picks

It’s not entirely surprising that four of the top 10 investments selected by people under 25 years (Gen Z) are ETFs – including the earlier mentioned Vanguard Australian Shares Index ETF.

It’s a way for young investors to build diversified portfolios quickly and efficiently at a far lower budget than buying multiple direct shares.

“All the news stories about young day traders blowing up stocks is not what we’re seeing in our investor base. Young people are far more prudent and predictable in their behaviour. Far more so than older investors,” says Dale.

In fact, you might be surprised that Argo Investments (ASX: ARG) features in the top 10 stocks favoured by this age group, whilst Harvey Norman (ASX: HVN) is more popular than it used to be. These are hardly the exciting speculative stocks you might stereotypically expect a younger investor to hold. That said, Dale speculates that some of these investors are introduced to the platforms by their parents and perhaps that’s where these stocks are coming from.

On the whole though, Dale has found the younger investor base are behaving completely contrary to expectations (or to how previous generations behaved in terms of riskier decisions or poor financial savvy).

“They’re effectively applying a blue-chip strategy to their portfolio. They’re looking for something that is going to be consistently profitable, or do well on a regular basis. It’s not going to blow them up,” says Dale.

ETFs also feature in Gen Y portfolios, though Dale points to an interest in direct shares – particularly lithium stocks in this generation and Generation X.

Pilbara Minerals (ASX: PLS) and Core Lithium (ASX: CXO) both feature in the top 5 investments. It’s more of a speculative play for growth and exposure to the energy transition which Dale has seen less of in younger investors.

Gen X also feature Woodside Energy (ASX: WDS) in the top investments, a step closer to the vastly different top selections in the Baby Boomer generation.

“ETFs aren’t typically in the top list for Baby Boomers – they’ve already got their diversification domestically and might use it for international exposure. The top stocks include BHP (ASX: BHP), Fortescue (ASX: FMG), NAB (ASX: NAB), Pilbara Minerals (ASX: PLS), Whitehaven (ASX: WHC), Woodside (ASX: WDS), South32 (ASX: S32), New Hope Corporation (ASX: NHC) and Coles (ASX: COL),” says Dale.

It’s also an audience that is less likely to sell out of positions. As Dale puts it, if you got into companies like BHP or Commonwealth Bank (ASX: CBA) years ago, you’re likely to keep holding it rather than crystallise your gains. Chances are, you also hold them now for their dividends.

The unexpected most popular international share across generations

If you were to pick the most popular international direct share across the nabtrade investor base, who would you pick? Undoubtedly US tech. Perhaps a close call between Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN) or Microsoft (NYSE: MSFT).

The answer is Tesla (NASDAQ: TSLA). By a country mile. Though obviously the rest of the big US tech feature in the top picks.

In fact, at one stage it was more popular than Woodside and the 11th most held stock on the nabtrade platform.

“It’s such a massive holding that people were building years ago. It’s been top of the pops for three or four years now. I used to think it was the Elon Musk Effect but it’s obviously more than that now,” says Dale.

Dale notes that Nvidia (NASDAQ: NVDA) is also one of the top holdings for Baby Boomers – though surprisingly not as embraced by younger investors given its leading role in AI (and link to gaming). That said, perhaps it comes down to the approach younger investors are taking to date – more broad-based ETF-focused, more blue-chip.

Some things to consider from investor behaviour

There are some different patterns of behaviour according to generation, but investors should take notes from each other. There are pros and cons to each generation’s approach. It’s hard to fault Gen Z’s prudent and measured approach to investing – though those who are keen on the FIRE movement may need to take a few more measured risks in their decisions to get there.

Many Baby Boomers have demonstrated how time in the market can be a critical way to build wealth – that’s a lesson in itself.

Gen Y and X’s interest in ethical investments (and speculative plays into lithium) can be a model of how to invest in themes you believe in – while noting the value of deep research and investing selectively (and not your entire basket).

Finally, despite the differences, it’s clear there’s common ground across generations. Long-term wealth building and consistency of approach – education has clearly been effective in the last decade.