Many of us, when we think of “stock Buyers” envision people like you and I purchasing stocks. Maybe they go out far enough to contemplate retirement vehicles, such as 401Ks. Let’s open up and adjust that mindset a little bit.
There are two subsets of buyers in the equity markets, Retail and Institutional. Retail investors purchase for themselves, and Institutional investors purchase for others.
Retail investors include you and I and everyone else, purchasing equities (or bonds) for themselves.
Institutional investors however, are the elephants in the room. They include all the mutual funds, pension funds for states, large cities and corporations, insurance companies, endowment funds, trusts, banks, and other types of “accounts” where the money manager is investing for others.
Retail investors behave with much more volatility. Not only do they include day traders, or investors who purchase and sell their stocks all in a single day, but usually there is more emotion involved, fear involved, and investing according to trends.
Institutional investors, contrarily, are much more staid. The money manager, obviously, has a huge say in equity selection and allocation, but they also have to abide by certain rules and criteria as published in the fund, trust, or other account’s prospectus. They invest based on earnings and statistics, and time tested practices. What they don’t do is move money based on emotion.
The first half of last year was great. It’s been pretty volatile since the Pandemic came to visit, but in general, it’s been a very nice ride. Because of that, the retail investors have come out strong, and last year, about 25% of investments were from the Retail side. Now the going has become a little rougher, and a portion of the retail side has sold out of their positions, currently down to approximately 18% of equity investments. This is closer to what we normally experience, and it’s not a bad thing. It can bring a sense of stability to the markets.
Because Institutional investors have certain rules they have to invest by, when Retail investors create enough volatility, it forces Institutional investors to react. Now… there’s less Retail investors, which means less emotions, and a little more stability in the markets. You would hope.
You never really know for sure how closely history will repeat itself. Things can fly in the face of what’s normally expected and go completely off the tracks, but usually, water seeks its’ own level, and Institutional Investing will bring some semblance of normalcy to the markets. This doesn’t necessarily mean the markets can only go up with more Institutional investing. Inflation, interest rates, international relations and everything else will play a role in how even the Institutional investor will react. But at least there’s more rationale and process behind their decision making.
In the meantime, we’ll keep paying attention, and we’ll keep communicating with you. If you have any questions or concerns, always feel free to call.