Retail investors are not panicking

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what wanderlust Wall Street this week erased all losses from its nightmare start to August, prompting jokes that summer really is better spent at the beach than watching market dramas too closely. However, even during the selloff, there was one group that held their nerve, whether they were wearing sunglasses or screen-reading specs, and that was retail investors.

Mom and pop traders are usually considered the last to join an investment group, which means they should be the first to panic when, after buying near the top, their profits are threatened by any wobble of the market. As smaller investors have become a larger share of day trading in recent years, encouraged by online-focused platforms such as Robinhood and Interactive Brokers, their behavior matters more to the broader market as well.

So should their recent decision be seen as an example of steeliness or a risky trust that pays off only to the point where it goes wrong?

A quick update: Stocks fell sharply in the first two days of trading in August, sparking a panic that wiped 12 percent off Tokyo’s benchmark index when trading resumed on Monday. That triggered even more selling in New York, pushing the S&P 500’s losses to more than 7% in just three days. Since then, markets have mostly moved higher, albeit unevenly.

However, even during the deepening sell-off, small investors were undeterred, it seems.

“Our customers were buying before the market went down. They bought while it was down and they’re buying now that it’s coming back up,” said Steve Sosnick, chief market strategist at Interactive Brokers. “Their faith was not shaken at all.”

Data this week from investor flow specialists Vanda Research showed that family inflows into US stocks this month rose to their highest levels in more than a year, and even after easing slightly in the last few days, they are still close to those peaks.

“Rarely have we seen historical retail trends gain so suddenly, especially in the second half of the year,” said Marco Iachini of Vanda Research. Typically, retail investors put the most into stocks in January, and the pace of net inflows eases more or less steadily from there.

There is potentially an element of recovery after months of reduced flows from small retailers. But Robinhood clients put more money into buying stocks on Monday, when the declines were the deepest, than in any other trading session this year, according to brokerage director Steve Quirk.

“If a retail investor wanted to buy Apple or a broad-based ETF at an attractive level, the market just gave them a wonderful opportunity and they took advantage,” he said.

Apple fell nearly 5 percent that Monday, and at its lowest point, was down 17 percent from its peak three weeks ago. Chipmaker Nvidia, another favorite of small investors, fell 31% over the same period.

There is also an argument that changing behavior among retail investors could encourage a buy-the-dip mentality, particularly as a result of fractional share trading. This allows traders to invest smaller amounts than the price of a share, allowing for regular savings-like investments. Without this, a potential shareholder with limited means may have to wait until he can pay $400-500 for a single share in, say, the Meta platforms, holding Microsoft or Facebook, for example.

“Our clients look at historical precedent and say, ‘Sure, I might see some volatility over my 25-year investing career, but if I buy them for the long term, there’s no way that’s going to happen. it doesn’t work. to be advantageous,’” Quirk said.

If buy-on-dips is also buy-and-hold, that’s also good for the markets and probably for those shareholders’ returns.

But it doesn’t eliminate one big risk — and that is that small investors, even more than the big ones, seem to have doubled down on the same top tech names as before.

VandaTrack’s Iachini noted the biggest flows were to popular tech names, with Nvidia and Tesla leading trading at Interactive Brokers, followed by a hedge fund designed to boost earnings of short-term stocks through leverage.

“It works for them, I can’t argue with that,” Interactive’s Sosnick said. “My concern is that they have been rewarded for following the first part of Warren Buffett’s mantra about being greedy when others are afraid, but they may not so much follow the second part about being fearful when people they are greedy.”

This summer’s slump was brief and has so far avoided turning into anything worse. Investors of all sizes may not be so lucky the next time their nerves are tested.

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