Mom and Pop retail investors, known on Wall Street as “dumb money”, are always the last ones to the party. That holds especially true today. In the case of the recent stock market crash, the dumb money retail investors are the ones getting crushed.
After sitting in fear on the sidelines for years after the credit crisis, retail investors have recently raced back into the market.
In January, there were record in-flows into stocks and Exchange Traded Funds, ETFs, largely by retail investors. They felt the Fear of Missing Out – FOMA – on the market gains of the past several years. They wanted back in. Urgently.
Turns out that recent move into ETFs and stocks was definitely ill-timed and most likely too late to capture the stock market’s historic gains.
Retail investors are probably hearing the usual refrains from their brokers to shift to so-called “defensive stocks” or to “buy on the dips” and “dollar cost average” their investments.
Meanwhile, talking heads on financial news shows are blaming the market crash on machines and the unpredictable nature of the stock market.
No doubt the market has been calamitous. From January 26 through Wednesday, the Dow Jones Industry average is down 6.4%, and lost more than 1100 points on Monday, the largest single day drop in terms of price, ever. The broader S&P 500 stock index is down 6.6%.
Furthermore, how many of the same dumb money investors that bought stocks in January had FOMO on the Bitcoin boom and bust? Bitcoin recently soared to $20,000, only to fall to less than $6,000 in the last couple of weeks.
Throwing fuel on the fire, many of these investors borrowed money in margin accounts or added leverage in order to juice their returns and buying power.
Despite the market collapse, most investors will probably not stick to the sound principles of asset allocation and diversification between asset classes and stock sectors.
As Warren Buffet famously noted , a rising tide lifts all boats, but when the tide recedes, you can see who’s naked and who’s wearing a bathing suit.
It appears that retail investors are once again going to get hosed. Either they never learned or perhaps recently forgot the lessons from the excesses of the 2008 financial crisis. History seems to be repeating itself. Fear of missing out, unfortunately, has left the retail investor holding the bag once again.
Zamansky LLC is a New York law firm which represents investors in court and arbitration cases against securities brokerage firms and issuers. The firm may represent investors in cases against companies mentioned in this blog.
Zamansky LLC also represents investors in arbitration cases against UBS and other brokerage firms regarding Puerto Rico bonds and UBS closed end bond funds and other investments.