Markets plunged, panic was widespread, even Warren Buffett was selling – yet we saw uncharacteristic response by retail investors - they were buying. This phenomenon has been a global one, with record brokerage account openings for online platforms like Robinhood in the US, but also those in New Zealand. So why the sudden interest and is the enthusiasm well placed?
Retail share trading spikes
Most prior market crashes saw retail investors lose enthusiasm for the share market and flock to cash. That was true after the 1987 share market crash in New Zealand, and globally in the aftermath of the 2000 dotcom crash and the global financial crisis. For many investors it took years to build up the courage to invest in the share market again.
Despite witnessing one of the most dramatic market sell-offs in history in February and March this year, many retail investors have been enthusiastically piling in. The chart below shows the number of stock positions by retail investors using the popular Robinhood trading app in the US. It shows that retail investor interest surged during lockdown, and right at the height of market panic. This time a number of retail investors weren’t cutting their losses and running for the hills when stocks were beaten down – they were doing just the opposite.
The typical take on this by professional investors is that these retail investors are speculating in volatile stocks (airlines, oil and gas companies, rental car companies) and that this is likely to end in tears. But this view is a generalisation and unfair.
Retail investors aren’t just piling in to speculative stocks, they are investing across a broad swathe of the market, including in managed funds and ETF's. They are essentially doing what professional investors have been advising for decades, which is to buy low when other investors are panicking. In this regard many retail investors may have acted in a more rational way than the pros.
There are lots of potential reasons for this surge in interest. Perhaps it is in response to the sudden drop in interest rates and low returns elsewhere. Perhaps there is the view that central banks will jump in and provide a backstop whenever markets fall. It has even been mooted that recent fee reductions on share trading platforms and the lack of sports betting during lockdown has driven the increased interest.
My take is that, for many investors, it has been a sensible response to take advantage of lower prices in a world where record low interest rates mean there few real alternatives that provide acceptable expected returns. Savers are facing the reality that money in term deposits is likely to see wealth erode over time when inflation is factored in. Whatever the reason for this recent investor behaviour, it has interesting implications – both good and bad.
It has long been said that people need to start investing and preparing for retirement at a younger age. In this regard, recent trends are promising. Many of the people flocking to these share trading platforms are younger investors, and it is great to see more interest from these investors.
The right advice for most new investors is to start early, contribute funds regularly, invest in growth assets (shares and property), and stick to a plan - even in difficult markets. By following these measures many of these new investors are on the right track, but they do need a game plan and the wherewithal to stick with it through thick and thin.
We hope that the recent surge in share market investment by retail investors will result in a new wave of investors that are proactively preparing for retirement and taking a real interest in how their money is being managed.
But not all of the recent uptick in share ownership will end well. We are also seeing irrational and speculative behaviour in parts of the market, which new players need to watch out for.
As an example, in early June US retail investors were piling into the shares of bankrupt rental car company, Hertz. When investors flocked in and pushed the price from $1 to $5 per share in just one week, others rapidly followed suit. Blindly hoping the gains would continue. They didn’t. The company is bankrupt and being run for the debt holders. Investors that ignored this and followed the crowd have now lost most of their money.
The point here is that while this new enthusiasm for investing is generally a positive thing, investors do need to be wary. Only invest in things you understand and don’t blindly follow the herd.
For many people picking individual companies may be a step too far – unless they have the skill, time and inclination to do the detailed research required. For those with better things to do with their time, you can outsource this to professionals like the team at Fisher Funds.
All of this new interest in investing is a great thing.
Returns on bank deposits are likely to be low for the foreseeable future. They are not going to help younger investors meet their retirement goals. Investing in the share market provides an opportunity for investors to build wealth over the long term - something that is likely to be harder going forward than it was in the past.
We would advise savers to start investing early and contribute regularly.
The share market provides a great way for investors to build wealth over the long term. It is great to see more interest from investors and a more proactive approach to preparing for retirement.