Are you a ‘risky’ investor in ASX 200 shares?

Aussie retail investors have been piling into ASX 200 shares in the last few months, but can they really outperform the smart money?

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ASX 200 share investors have been betting big in recent months. That’s the message that’s coming out of new academic research according to an article in the Australian Financial Review (AFR).

The AFR has seen an unpublished research paper suggesting retail investors were “aggressive purchasers of high risk highly leveraged stocks”.

Investors also reportedly piled into “large market capitalisation stocks” and “stocks exhibiting large price declines prior to the lockdown”.

The new research findings come after ASIC reported an increase in retail trading between 24 February and 3 April. A lot of first-time investors have been buying and selling ASX 200 shares, but how have their investments performed?

Are you a risky ASX 200 share investor?

According to the AFR, the paper suggests that “retail investors have fundamentally altered their participation in the stock market during the COVID-19 lockdown period.”

So, what constitutes a “high risk highly leveraged stock”?

I think there are a few ASX 200 shares that spring to mind. They’re more likely to be concentrated in the hardest-hit industries amid the coronavirus pandemic. A few of those sectors include travel, hospitality and energy.

We’ve seen Virgin Australia hit troubled waters in 2020 and default on its debt. There’s also other big names like Sydney Airport Holdings Pty Ltd (ASX: SYD) and Santos Ltd (ASX: STO), which have significant debt balances.

To be clear, that’s not always a bad thing. In fact, the use of leverage can often be a good thing for ASX 200 share returns.

However, in times like these, cash is king. Less debt means fewer obligations to meet covenants and make lenders happy.

It’s OK to buy “high risk highly leveraged stocks” – as long as you’re aware of the risk. These ASX 200 shares have often dropped for a reason, as institutional investors sell down their positions.

Will retail investors outperform?

The answer so far appears to be yes. The S&P/ASX 200 Index (ASX: XJO) has rocketed 32% higher since 23 March.

That means many of these retail investors, including first-timers, have been on a hot streak.

However, it’s worth remembering that investing in ASX 200 shares is a long-term game. Short-term trading is fraught with danger, let alone the taxes and transaction fees that need to be paid on entry and exit.

That could be a warning sign that the smart (and big) money in town is betting against your average Joe in the market.

In fact, the AFR article reported that retail investors were net buyers of $3.5 billion in assets, while institutional investors were net sellers of $3.2 billion.

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Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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