In finance, there’s a lot of noise. This stock is up, that stock is down, this asset is crashing, that fund is bankrupt, etc. You hear about that which is most entertaining: the extremes.
But what about the 99% that occurs somewhere in the middle? In personal finance, we often hear about billionaires or people who retired aged 25 or the 14 who invested in Doge who now has a 7-figure net worth. These are not representative of reality. In reality, things are a lot more normal, stable, and homogenous. Everyone’s finances look roughly the same.
This is what we will be examining today: the average. By observing the situation from a broad perspective, we can get a better sense of true reality.
This chart displays the % of the UK population that have investments/savings in each of the categories shown: cash savings; property; pensions; and retail investments. This is where people invest their money.
Today we’ll be looking at each of these categories from an aggregated perspective to see what the average investor is typically working with.
The Other Guys
Before diving into retail investing, the other elements of the graphic warrant brief investigation.
The first thing most (sane) people do when they get their hands on a bit of excess cash is, well, leave it as cash. This results in the accumulation of cash savings in some type of bank account. Sadly the days of hoarding paper notes in secret locations are largely gone outside of not-strictly-legal circles. These deposits of wonga tend to be held with people’s main current account provider – 66% of consumers do this, to be precise7.
On average, we are saving nearly £7,00012. But this can be misleading. Wealth is fat-tailed, so a small % of people will do most of the saving. In fact, according to the FCA, 32% of total savings and investments are held by just 0.6% of the UK population7. That’s not a lot of people with a lot of the money. 9% have no savings at all. ⅓ have less than £600 saved (that’s only about 10 proper trips to the pub). Even more – 41% – don’t have enough savings to live for a month without income12.
The next place people tend to invest is in residential real estate. For whatever reason, this seems to be the financial dream for most people. This leads to lots of mortgages and actually a fair amount of homeownership, too.
About 63% of households in England were homeowners (14.6 million households)11. This comes off the back of a total of £1,527.3 billion of residential mortgage loans (at the end of 2020 Q3)12.
Thanks to the UK’s automatic enrolment/employer contribution pension policy, most people are lucky enough to find themselves with some kind of pension. It’s not quite the golden era of defined benefit plans that the boomers enjoyed (damn those boomers) but at least it’s something.
These pensions come in a variety of funds but you typically get some kind of choice in what investments you make as part of yours. This is your chance to shine. A chance to implement everything you have learnt from Reddit, youtube, books, excellent blogs, etc. to construct a portfolio that will thrive in the long term and ensure you are secure in retirement.
How do savers utilise this freedom to choose? By not making a choice. Research suggests that up to 98% of defined contribution beneficiaries invest in the default fund1. You are all a disappointment to me.
These funds typically invest “traditionally”. They invest in such a way that the fund manager will not lose their jobs, with out-performance not being prioritised. This normally looks like a classic 60/40 portfolio with a few extras sprinkled on top:
Leaving your money in a default fund will probably result in an allocation roughly akin to the above. One caveat is that we are seeing an increase in the use of alternative investments2 like hedge funds as some schemes seek to replicate the endowment model and capatalise on the illiquidity premium.
That stuff about cash, property, and pensions is nice to know but it’s not really why we’re here. Here at PP we are concerned with retail investing – so let’s get to the good stuff.
It’s pretty common knowledge at this point that everyone seems to be getting increasingly interested in retail investing. The FCA report found that the number of retail customer accounts increased by a whopping 2.2 million between 2013 and 20176 and now roughly 12.6 million of you crazy bastards use some kind of retail product7. That’s 1 out of every 4 people. I feel like a proud Dad. Revisit the image at the beginning of this post – £1.8 trillion is held in retail investments. This is more than the £1.5 trillion held in cash deposits and savings accounts7.
This trend seems to be predominantly infecting young people – the median age of a Robinhood user is just 313. The pandemic has only accelerated this effect as people are bored at home with extra cash on their hands. There also seems to be some kind of rebellious/risk-it-all attitude from many young people who are angry with the economic situation that they find themselves in. Some feel like they might as well take big risks – they’re economically screwed anyway.
Investment platforms are becoming the dominant force in retail investing – the market has doubled since 2013 from £250bn to £500bn6 in assets under administration (AUA). In 2019, these platforms had a 49% share of total gross sales4. The gains of this trend seem to be accumulating to the top platforms as they build trust, familiarity, features, etc. and benefit from word-of-mouth: the top 4 platforms are predicted to hoover up 75% of market share by 20225.
Some important notes here. First is the fact that 62% of AUA were on platforms catering to independent financial advisers, not actual people (I don’t classify advisers as actual people). Most of the action is B2B, not D2C9. Second is the presence of tax-free investment products like ISAs. These also play a role in the investment landscape: the number of adult ISAs in the UK was over 11 million in 2018-201912.
What are people actually investing in?
As you can see, it’s mostly traditional. One thing that does stand out is the move away from UK equity. People are apparently realising that other countries exist and may offer more tantalising investment prospects.
Another trend has been the use of specialised funds and portfolios. This includes both outcome and allocation funds – to which the proportion of net sales has increased from 23% in the decade before the GFC to 43% since 20094 – and the use of native platform model portfolios.
Investments in these model portfolios (for example, IG’s) increased from £5bn in 2011 to £38bn in 20176.
Of course, the index revolution continues it’s long, steady march to victory. They may look like a rounding error here but note that the pace of their growth in popularity has been accelerating: in 2012 these funds accounted for just 8% of funds under management (FUM) but made up 18% in June 2020. Actually, since 2014, half of total retail sales have been to index funds4! As well as index funds, the popularity of ‘responsible’ investing is inevitably growing as young people, who actually seem to care about being good blokes, become a larger % of the market.
Young people are also playing with alternative assets. Many are dabbling with, and getting burnt by, options. A fifth of brits have bought crypto. Whether these are just phases or trends is currently hard to foresee. Crypto is still not a regular portfolio component – less than 4% of the general population hold it and 75% of those who do hold under £1,000.
Even of those who do hold it, only about a quarter cite portfolio composition as a reason for doing so.
Generally people don’t really engage in retail investing that much. Over half trade fewer than once per year. This is probably due to the fact that most make contributions in the form of lump-sums from time to time, or no contributions at all.
Although people aren’t trading that much, the average holding period is decreasing, meaning that we might be seeing an increase in the frequency of trades. This low frequency also doesn’t mean that investors are not aware of their investments and interested in learning about retail investing (my heroes).
It’s also important to point out that retail investors aren’t one homogenous group. Those who are making direct debit contributions to their account, looking at excellent blogs regularly, and trading extensively are very different from those no longer contributing to their account and never checking the value.
We even see a difference in the way people invest when dealing with different assets. Investors seem to invest differently in active funds vs. passive funds, for example.
Passive seems to be automatic and consistent whereas the users of active funds seem to be more likely to try and time the market.
- UK Pension Schemes and Alternative Investments (2019 aapg Report)
- UK pension funds – Where have you put my money?
- Retail-investor euphoria will come to tears and cause a long-term cultural, political and regulatory reckoning for financial engineering.
- INVESTMENT MANAGEMENT IN THE UK 2019-2020 (2020 The Investment Association Report)
- Top 4 Fund Platforms to Take 75% of Cash by 2022
- Investment Platforms Market Study (2019 FCA Report)
- Sector Views (2017 FCA Report)
- Investment Platforms Market Study Consumer Research (2018 NMG Consulting & boobook Report)
- UK investment platforms: sharpening the competition among asset managers
- Mortgage Lenders and Administrators Statistics – 2020 Q3
- Home ownership
- Savings statistics: Average savings in the UK | 2020
- Cryptocurrency statistics 2021
- Cryptoasset consumer research 2020 (2020 FCA Report)