Mum and dad investors a ‘train wreck waiting to happen’: ASIC

New and returned stock market ‘players’ buying up big as super funds were selling hard.

hand playing a poker machine

Warren Hogan, University of Technology Sydney; David Michayluk, University of Technology Sydney, and Gerhard Van de Venter, University of Technology Sydney

The COVID-19 pandemic has led to a dramatic surge in ‘mum and dad’ retail investors playing stock exchanges across the world.

In Australia, retail investors were net buyers of $9 billion of Australian stocks between late February and mid-May, according to corporate advisory firm Vesparum Capital. In contrast, the professional institutional investors – superannuation funds and the like – were net sellers of $11 billion of stock.

The amateurs are, therefore, likely responsible for most of the market’s rebound since its 23 March low.

An Australian Securities and Investments Commission analysis of retail investor trading shows from 24 February (the day after the market peaked) to 3 April, retail investors’ daily buying and selling of stocks was double that of the months before ($3.3 billion to $1.6 billion). More than 20 per cent of that activity was from new or reactivated accounts.


The securities regulator has expressed concern this rush of amateurs into the stock market is a train wreck waiting to happen. Its report notes retail investors are, on average, “not proficient” at predicting short-term market movements.

While markets generally recover over the long run and tend to grow with economic fundamentals, short-term trading and poor market timing can be a major risk for investors in volatile markets. Therefore, retail investors should be wary of trying to ‘play the market’ for short-term price movements by day trading.

COVID and risky behaviour
There are several possible explanations for why people are taking a risk on the stock market.

Some might see this as an opportunity to get into the market at a low point, with a view to long-term gains. Others might be out of work and looking to ‘day trade’ – buying and selling shares on short time frames – as a source of income. Yet others may be taking the opportunity of working from home to watch the market through the day.

But another explanation is also worth considering. This is an alternative to gambling. So, while it’s risky, it’s arguably no riskier than sports betting, casinos or poker machines.

Risk tolerance
This theory (that this is gambling by another means) explains why the appetite for risk among retail investors has ballooned when the natural response to severe economic uncertainty would be to reduce trading.

The financial risk individuals are happy to tolerate – known as financial risk tolerance – is mostly determined by personality. A person’s risk appetite is unlikely to change substantially over their life, even with changing economic conditions.

Most people, however, are adept at making different risk decisions with money allocated to different ‘accounts’. In behavioural finance this is known as ‘mental accounting’.

How they think about and use their different accounts isn’t necessarily ‘rational’. For example, someone might be very prudent with money from their regular budget account while spending frivolously from a discretionary account.

So extreme risk-taking can occur when opportunities arise despite a person generally being risk-averse.

Gambling trends
In the first three months of the year, pollster Roy Morgan estimates about half of all Australians gambled in some form.

Its figures indicated 8.4 million adults spent about $625 million on lottery tickets, 2.4 million spent about $2.2 billion on poker machines, and 2.1 million spent about $1 billion on betting – horses, sports, etc.

In Australia, the closure of pubs, clubs and casinos during periods of lockdown has severely curbed these forms of gambling. Between late March and late April, for example, the Alliance for Gambling Reform estimates gamblers saved more than $1 billion on poker machines. The cessation of many sporting events has also reduced betting opportunities.

Pros and cons for society
Does this imply people see the financial markets as just another form of gambling? If so, is this necessarily a bad thing?

If a significant number of people are seriously looking to ‘day trading’ as a way to make money in the short term, the securities regulator’s concerns are valid. There is a good chance most will lose money.

But if these new investors are driven by their interest in gambling, substituting financial markets for poker machines and sports betting, then surely most must be prepared for losses. Very few gamblers are consistent winners from betting on games of chance or sports.

In this context there may not be so much to worry about – albeit acknowledging a small percentage will be ‘problem investors’, losing more than they can afford.

Compared to the almost certain likelihood of losses on gambling, those rushing into the stock market might just find it more rewarding than casinos, sports betting or pokies.The Conversation

Warren Hogan, Industry Professor, University of Technology Sydney; David Michayluk, Professor of Finance, University of Technology Sydney, and Gerhard Van de Venter, Associate Professor in Finance, University of Technology Sydney

This article is republished from The Conversation under a Creative Commons licence. Read the original article.

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    COMMENTS

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    leek
    29th Jul 2020
    3:44pm
    My ex bought and sold stocks during the Pandemic through his superannuation. he has done quite well. I think made about $22K. I looked at doing that(same company) but decided i wasn't clever enough, but I did move most of my super out to cash, and every business day I watched the unit price go down. When I thought it had hit rock bottom, I moved it back and made a really nice amount of money thank you.
    I don't think it will hit those lows again. the Superannuation managers have got a bit more wiser now I think.
    Lookfar
    29th Jul 2020
    5:25pm
    This is crazy, that our economy and currency can so flippantly be abused for private gain, - surely we can make it better!!
    Eddy
    29th Jul 2020
    5:52pm
    Maybe an alternate reason is that 'mum & dad' investors, who may not be 'proficient in predicting short term market movements' are not in it for the short term, they do not have to demonstrate short term profits to justify an inflated remuneration packages. They see the opportunity to pick up some quality shares of well performing companies at lower prices than usual, in the almost certain expectation that when the market returns to 'normal' those shares will be worth a lot more than they paid and, in the meantime, pick up some nice dividends.
    Greg
    30th Jul 2020
    4:13pm
    The problem is the market is artificially high, too many small players, the institutional buyers aren't there because they know the economic outcome of this virus will be horrific. Yes things look rosy at the moment due to stimulus measures by countries but that can't go on forever and the debt levels, both private and public are enormous.

    The market had a major downturn and rebounded as is usual but there should/will be a larger fall below the recent lows before a sustained bull market can return.

    Basically share prices are way too high, the US and Aus markets aren't far off their highs yet the US has massive unemployment, where will the business over there get their profits from when so many are out of work and, most likely, more will be out of work as this virus is far from over.

    I always believe one of the keys to buying is to do so when the institutional buyers are there and currently they are not.
    KSS
    29th Jul 2020
    8:39pm
    I wonder how many of those withdrawing super funds then 'reinvested' in shares? gainst the rules of course and they will be found out through the ATO and their tax returns if this IS what they did.
    Mariner
    30th Jul 2020
    9:05am
    The law is quite fluid there as one does not have to prove financial hardship to withdraw money from Super. I don't think there would be a case for prosecution even if caught out. ATO is really only interested in correct taxes being paid. I would have been tempted to withdraw the $10'000 as well when younger - 67 is really far away when you are 30. Was never interested in money way into the future and now in my 70s!! Hindsight - should have saved more.
    Greg
    30th Jul 2020
    4:14pm
    Easier to just switch the super investment over to a different fund investing in the share types they want but I guess they wouldn't be smart enough for that.
    Circum
    29th Jul 2020
    10:01pm
    Two comments.The market hasnt hit the bottom yet.The economic effects of covid have months if not years to play out. So anyone who thinks they have bought a portfolio of bargains may get a shock.Point two is that the professional fund managers arent very proficient in predicting the direction of the market either
    Greg
    30th Jul 2020
    4:19pm
    Definitely agree on where the market will go short term, DOWN and lower than the recent lows.

    Government stimulus measures is what's keeping people a little more positive at the moment but that can't last.


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