In the past, retail investors were often viewed as the so-called ‘dumb money’ in the stock market (institutions were seen as the ‘smart money’). This is because they would typically buy stocks near the top of the market and sell near the bottom.
In recent years however, there’s been a major shift in the way retail investors go about deploying their capital. Here’s a look at why this class of investors is smarter than many professionals used to think.
Buying the dip
In the last few major stock market meltdowns, retail investors have stepped in to buy shares at exactly the right time. For example, in early 2020 when stocks were tanking due to concerns over the impact of the coronavirus, retail investors stepped up to buy.
At the time, there was a notable surge in activity from these investors, with many ‘buying the dip’ (some research indicates it was retail investors who actually stabilised the market).
More recently, when stocks crashed in April this year due to tariff concerns, retail investors stepped up to buy again (while many institutions were offloading equities). In the US, retail investors made $4.7bn worth of net equity purchases when stocks tanked on 3 April – the highest daily inflow in the past decade.
Big gains
On both occasions, those who bought during the market weakness would have most likely have done very well. For example, let’s say that a UK investor had snapped up some shares in the iShares Nasdaq 100 UCITS ETF (LSE: CNDX) when share prices were down.
This is an ETF that tracks the tech-focused Nasdaq 100 index and offers exposure to Apple, Amazon, and Nvidia and many other well-known tech stocks. I see it as a good product to consider as a long-term core portfolio holding (despite the fact that it lacks sector diversification and is therefore more risky than some other index trackers).
In March 2020, this ETF was trading for under $400. Yet by late 2021, it was trading above $900 – more than 100% higher. Meanwhile, in April this year, the ETF was trading below $1,000. Today however, it’s sitting above $1,200 – more than 20% higher.
So there were big gains on offer for those who were willing to buy when there was fear in the air, as many retail investors did.
Why have retail investors got smarter?
Why have retail investors suddenly got much better at investing? Well, I think it comes down to information. In recent years, investing websites (like The Motley Fool), YouTube channels, and podcasts have democratised investing. Today, it’s really easy to learn the basics.
Through these kinds of resources, retail investors have learnt that the best time to buy stocks is when there’s panic in the air. They’ve also learnt about other key concepts such as portfolio diversification and the importance of investing for the long term.
It’s great to see. Because when it’s done properly, investing in the stock market can be a great way to build wealth for the future.
