Retail Investors Almost Back to Even Despite Bull Run, Making Same Mistakes Again

investing.com:

After over two years, retail investors, also known as the“dumb money,” are almost back to breakeven.

A recent chart by Vanda Research shows that the average retail “dumb money” investor portfolio still sports a drawdown despite the markets making new all-time highs.

Such is unsurprising, given that retail investors often fall victim to the psychological behavior of the “fear of missing out.”

The chart below shows the “dumb money index” versus the S&P 500. Once again, retail investors are very long equities relative to the institutional players ascribed to being the “smart money.”

The difference between “smart” and “dumb money” investors shows that, more often than not, the “dumb money” invests near market tops and sells near market bottoms.

We can confirm the “smart/dumb money” analysis by looking at the allocations of retail investors in stocks, bonds, and cash.

With markets overvalued and hitting all-time highs, it is unsurprising that retail investor equity allocations are at very high historical levels with low holdings of cash and bonds.

Of course, it isn’t that retail investors are chasing the markets higher; it is what the “dumb money” is chasing that is most interesting.

Last week, I discussed the relationship between the NFIB data and the Russell 2000 index. As I noted:

“The recent exuberance for small-cap equities is also unsurprising, given the long period of underperformance relative to the S&P 500 market-capitalization-weighted index.

The hope of a “catch-up” trade as a “rising tide lifts all boats” is a perennial bet by investors, and as shown, small and mid-cap stocks have indeed rallied with a lag to their large capitalization brethren.”

We see that exuberance in capital inflows into