Research summary

Investor risk-taking, measured

March 11, 2024

Investors’ appetite for risk materially rose during the second half of 2023 but remained below long-term averages at year-end. Rather than chasing the best-performing segments of the financial markets, however, most investors and financial advisors remained disciplined and rebalanced their portfolios toward target asset mixes. As a result, investors benefited from the 2023 rally in markets.

Those are among the chief findings of our 2023 Risk Appetite Speedometers [12-page PDF], a semiannual publication of Vanguard’s Investment Advisory Research Center. 

Our Risk Appetite Speedometers gauge the level of risk taken by all investors in U.S.-domiciled open-end mutual funds and exchange-traded funds (ETFs) during the six- and 12-month periods ended December 31, 2023. Risk-taking is measured as the difference in net cash flow between higher- and lower-risk asset classes, relative to the average difference over the past five years. 

Investors’ risk appetite: Improved in the second half of 2023 but below average for the full year

Two half pie charts show a visual representation of 6- and 12-month risk speedometers. The pie charts go from 0 to 180 degrees. An arrow below each chart indicates that below-average risk moves toward the left side and above-average risk moves toward the right side. The charts are color-coded to indicate 1, 2, and greater than 2 standard deviations above and below the mean. The 6-month chart shows the current reading between 0 and -1 standard deviation while the prior reading is in the -1 to -2 standard deviation range. The 12-month reading shows the current reading in the -1 to -2 standard deviation range and the prior reading in the 0 to 1 standard deviations range.

Source: Vanguard’s Investment Advisory Research Center calculations, using data provided by Morningstar, Inc., as of December 31, 2023.

Notes: Vanguard’s risk speedometer measures the difference between net cash flows into higher-risk asset classes (U.S. equity, international equity, emerging markets equity, sector equity, alternative, and nontraditional bond, including funds that invest in high-yield issues, bank loans, and emerging markets) and flows into lower-risk asset classes (U.S. taxable bond, tax-exempt bond, and money market). The five-year reference period includes calendar years 2019–2023. The gray area represents one standard deviation from the mean, the green area represents one to two standard deviations, and the black area represents more than two standard deviations. It is worth pointing out that mutual funds and ETFs governed by the Investment Company Act of 1940 are not a closed system. Cash flows can come from other structures, platforms, and sources such as bank deposits, separately managed accounts, and direct pension and sovereign wealth funds, among others.

Investment trends continued, interrupted

In a continuation of two strong trends, investors in 2023 favored:

  • Indexed ETFs over actively managed ETFs and traditional mutual funds, both indexed and active. The preference extended to both equity and taxable-bond asset classes.
  • Money market funds over equity and bond funds. Investors added nearly $1 trillion of net new assets to money market funds in 2023. Still, money market funds’ 19.5% share of all ETF and mutual fund assets as of year-end remained well below investors’ median 24.3% allocation since the beginning of 1993.

Given the strong equity market returns during this time, these flows are likely indicative of portfolio rebalancing by investors and their advisors. 

In a trend reversal, fund flows in the second half of 2023 strongly favored U.S. equity over non-U.S. equity funds. Investors and advisors may have been expressing concerns about their non-U.S. equity allocations, given the magnitude and duration of underperformance by non-U.S. markets. 

Stocks in 2023: Negligible cash flows into funds but strong market returns

Net 12-month cash flow into equity funds, including ETFs and mutual funds, was basically flat (positive $500 million) despite strong equity returns (+26.0% for U.S. equity and +15.8% for non-U.S. equity1). 

Beneath the fund-flow headlines

In addition to offering perspective on investor behavior across broad asset classes and fund types, our Risk Appetite Speedometers consider 100 sub-asset classes, durations, styles, sectors, and thematic investment categories. They present leaders and laggards across various periods based on both absolute dollar flows and cash flows as a percentage of beginning-of-period assets.

For additional details, read our 2023 Risk Appetite Speedometers [12-page PDF].

1 Returns are for the 12 months ended December 31, 2023. Our proxies for U.S. and non-U.S. equities are, respectively, the CRSP US Total Market Index and FTSE All-World ex US Index. Source: Vanguard. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

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All investing is subject to risk, including the possible loss of the money you invest.

Morningstar data ©2024 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

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