When the stock market rises everyone is happy and investors tend to invest more into stocks. But alarmingly, rather than investing directly, investors are choosing index tracking ETFs, so much so that we are seeing record levels of funds moving into these investments in much the same way we saw enormous sums of money move in managed funds prior to the GFC.
With the Australian stock market falling around 17% into June this year, investors became concerned about the possibility of a larger fall. These concerns have arisen again over the past few weeks with speculation of an impending crash. During times like this investors often make emotional decisions based on fear rather than rational decisions.
It is very common for investors to look at short term returns and run for the hills if their investments are down or they switch funds, investment managers or exit the market altogether. History shows that investors tend to make these decisions at the wrong time and, in doing so, greatly affect their returns.
While we are seeing record levels of money moving into ETFs, especially index ETFs, we are not seeing an increase in borrowings that was prevalent in the previous year leading up to the GFC. Given this, I don’t believe we are near the point of any major meltdown on our market. As such, now is not the time to be changing investment strategies or making knee jerk reactions, as you might just find yourself missing opportunities when the market starts to rise.
My prediction is that over the next few years, we will see a snowball effect of money moving into index ETFs at unprecedented levels, as well as investors borrowing heavily to invest in these funds. This will significantly increase the speed of the snowball effect, which will be alarming in years to come.
Many of you may remember during the GFC there were major concerns around index funds with many investors deserting them in droves after they fell heavily. Sadly, history is repeating itself and I can confidently say that Index ETFs will be at the forefront of the next major crash and not in a good way.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate YourWealth—It’s Your Money, Your Choice, which is available in all good bookstores and online at www.wealthwithin.com.au