In other words, as the sell-off progressed, Wall Street pros panicked and sold while moms and pops stayed calm and bought. Some of this is attributable to different timelines between investors and traders, or between short-term and long-term. But one can’t help but think that some of this is explained by psychology: The professionals are the ones whose bonuses and perhaps even their jobs are on the line. Retail investors looked to take advantage of a price drop.
But we can guess how this will develop, based on the latest data from Vanguard Group. According to the firm’s most recent measures of money flows, every single day of February and the first week of March all saw a net gain for equities.
This is very similar to what former Vanguard chairman and chief executive officer William McNabb observed during the financial crisis in 2008-’09: The pros sold and the amateurs bought.
Retail investors are the dumb money? I don’t think so.
Most investment assets today are still managed actively. However, as we noted in 2017, the active part of the money-management industry is still being downsized — or more correctly, right-sized. The active management world still has not yet come to grips with the sea change that followed the financial crisis.
Passive indexing and ETFs have provided a counterweight to the active traders who seem to be panic selling. Remember that the next time someone warns you of the dangers of passive investing.
Barry Ritholtz is a Bloomberg Opinion columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He is the author of “Bailout Nation.”