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Are ASX retail investors ‘dumb money’?

business man wearing box on his head with a sad, crying face on it representing bad investment in asx shares and fall in asx share price
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Retail ASX investors — meaning ‘small money’ investors like you or I — have often been looked down upon by institutional investors (read fund managers, pension funds and the like) as ‘dumb money’. That’s because small investors tend to do silly things with their share portfolios, such as selling shares in the middle of a market crash, or so the stereotype goes.

But a Firstlinks interview with Gemma Dale, Director of SMSF and Investor Behaviour at nabtrade, the online investing platform of National Australia Bank Ltd (ASX: NAB), sheds some interesting insight on the matter.

First, Ms. Dale notes that retail investors using the nabtrade platform had cash stockpiles at “record highs” in January and February – a period coinciding with global share markets at record highs. Doesn’t sound too dumb to me.

Second, Ms. Dale notes that during March and April (during the share market crash), “clients were buying like mad”, swinging nabtrade’s normal 50/50 buying and selling ratio to between 70/30 and 80/20. Following this period, Ms. Dale notes that June saw some mild profit-taking activity from ASX retail investors, but activity has been “more normal” ever since, albeit with relatively large cash piles on the side, a sign that many retail investors are “not sure that markets will stay at this recovered level”.

Some ASX shares investors have been buying

Interestingly, the article also supplies a table of the 10 most traded ASX shares over the year, sorted by investors’ age.

It tells us that Baby Boomers (those investors born before 1964) were heavily investing in ‘traditional’ blue chip ASX 200 shares, with the big four banks all at the top of the list, accompanied by BHP Group Ltd (ASX: BHP) and Woodside Petroleum Ltd (ASX: WPL). There were also some ‘speculative shares’ like Qantas Airways Ltd (ASX: QAN), Webjet Limited (ASX: WEB) and Zip Co Ltd (ASX: Z1P).

The patterns are largely similar in the Gen X category (born between 1965–1980), with Afterpay replacing Woodside on the top 10 list, and Qantas commanding a higher position.

However, for Gen Y (1981–1994) and Gen Z (1995–2005), a different pattern emerges. NAB shares remined the most purchased stock for both groups (as well as for Gen X and Baby Boomers). However, we see a far greater interest in the speculative shares like Qantas, Zip, Flight Centre Travel Group Ltd (ASX: FLT), Afterpay and Webjet. Interestingly, both Gen Y and Gen Z’s lists also featured exchange-traded funds (ETFs), specifically the Vanguard Australian Shares Index ETF (ASX: VAS), whereas Baby Boomers and Gen X’s list did not.

Ms. Dale commented on this observation:

It’s fascinating that the generations are almost identical, except very young people invest in twice as many ETFs as all other people, at about 12% of trades.

Foolish takeaway

It appears that ASX investors’ love of the big four bank shares did not take a beating in 2020, even though those banks’ share prices did (continuing years of underperformance). Old habits die hard, it seems.

On the whole, it was very encouraging to find that retail investors weren’t making the mistakes they are apparently infamous for during the intense market volatility we saw earlier in the year. That iron law of investing — buy low, sell high — seems to still hold sway.

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Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. 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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