Despite uncertain times, a record number of retail investors are viewing market turmoil as an opportunity to buy equities at a cheaper price.
Retail investors are taking the opportunity to 'buy in the dip'. Such investors appear undeterred by warnings of recession, stagflation, or heightened geopolitical conflict.
On 7 April, the S&P/ASX200 Index (ASX: XJO) recorded its biggest one-day loss since May 2020, falling 4.2% after US President Donald Trump unveiled tariffs on almost every country.
That same day, the Australian Financial Review reported that digital platforms such as Nabtrade had experienced record trading volume. Retail investors sought to take advantage of lower share prices. Among the most popular trades were US technology stocks, global exchange-traded funds (ETFs), and gold.
Repeating a strategy that has paid off
Since 2009, buying the dip has been a winning strategy for investors.
Over this period, there has been a bull market. Retail investors under the age of 40 have only ever known short-lived market pullbacks.
The period between 2009 and 2020 was the longest bull market on record, lasting 11 years.
In March 2020, the COVID-19 crash was the fastest 30% decline in the US stock market's history. It was also the shortest S&P 500 bear market on record, lasting just 33 days. The ASX 200 Index followed a similar trajectory, falling sharply and recovering shortly after. For investors, the pandemic was the buying opportunity of a lifetime.
Investors who bought Commonwealth Bank of Australia (ASX: CBA) or Westpac Banking Corporation (ASX: WBC) during March 2020 made more than 50% on their investment in the space of a few months.
Similarly, market corrections in 2022 and 2024 were short-lived. Investors who bought their favourite stocks on sale were soon rewarded, with share prices recovering shortly after.
Since 2009, investors have been conditioned to believe market pullbacks are short-lived.
Bloomberg attributed this mindset to pop culture stock market promoters such as Barstool Sports founder Dave Portnoy, who amplified a "Stonks Only Go Up" mantra during the COVID rebound, drawing many retail investors in.
A different experience for other investors
Investors above the age of 40 have lived a different experience.
The US bear market triggered by the 2007 Global Financial Crisis (GFC) lasted 17 months. During this time, many investors lost a lot of money, with the S&P 500 Index (SP: .INX) losing approximately 50% of its value. For those who stayed invested, it took 17 months to recover their money. However, many investors also sold out during this period, resulting in a permanent loss of capital.
While a 17-month bear market may seem lengthy to younger investors, according to historical standards, this was only an average-duration bear market. The longest bear market lasted 61 months and ended in March 1942.
Investors who have lived through the GFC may view volatility as the beginning of an extended bear market.
In stark contrast to retail investors, current sentiment amongst institutional investors is growing increasingly pessimistic.
A recent survey by Bank of America of 164 fund managers with more than $386 billion of assets under management showed the most pessimism in 30 years. A record 82% of respondents expect the global economy to weaken, driving them to reduce exposure to US equities. In April, respondents were a net 36% underweight in US equities, representing a sharp reversal from 17% overweight in February.
Foolish takeaway
A significant discrepancy in how different groups of investors are responding to economic uncertainty has emerged. Recent data suggests that retail investors are taking advantage of market volatility to add to their portfolios. For many younger retail investors, bull markets and short pullbacks are all they've known. For better or for worse, recency bias is influencing their investing. However, those who invested through the GFC have lived a different experience. Such investors may be investing more cautiously, which is showing up in institutional investor surveys.
Only time will tell which group of investors has made the right call.
