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Gains of a lifetime reward new retail investors

Despite the major players being mostly anonymous Reddit users, the GameStop frenzy in late January 2021 caught the attention of news outlets and commentators. The challenge of a new breed of retail investors has been discussed in broadsheets, online and among regulators not just in the US, but across the globe. Added to the strange Davey Day Trader-Robinhood excitement of 2020, the modern equivalent of column inches given to new investors has been far from glowing.

They may be new but they have done well so far

Despite this, or in concert with it, hundreds of thousands of novice Australian investors chose close to the perfect time to start their portfolios in 2020.

At nabtrade, total accounts increased over 30% following the collapse of the market in March 2020, as new investors flocked to share investing. When the S&P/ASX200 fell 30% in just three weeks, investors rushed to open accounts at five times the usual rate. As the year progressed, new accounts were continuing at two to three times the usual number. Other online brokers had similar experiences.

The big fear of regulators and commentators was that this influx would be mostly driven by newly-minted day traders and novices buying speculative investments.

Instead, the top 10 stocks bought included the big four banks, well known travel companies, an ETF and two high-flyers from the Buy Now Pay Later sector.

nabtrade analysis has revealed that all of the top 10 stocks bought by new investors have generated a positive return since they were purchased. Not surprisingly, Afterpay was the most profitable trade, returning an average of 173% for new investors in 2020[1]. NAB shares generated the next best return, with 38%, and NAB was bought by 25% more accounts than the next most popular, Qantas.

NAB

Qantas

CBA

Westpac

Flight Centre

Zip Co

ANZ

Webjet

Afterpay

VAS

38%

30%

32%

19%

23%

1%

33%

33%

173%

20%

New investors generated returns of over 30% for three of the big four banks, and greater than 20% for the most popular travel stocks. With the exception of Zip Co, the minimum average return was 19%. This analysis does not include any gains since 31 December 2020.

Fortune favours the brave

To be frank, new investors had an astonishing year in 2020. The S&P/ASX200 returned over 50% from its lows, and new investors have captured, on average, more than half of that return, meaning most of them bought in before it started to flatten out in June. Buying in a pandemic shows a great deal of confidence for inexperienced investors.

It’s very difficult to pick the bottom of any market, and most investors didn’t pick the absolute bottom when they bought. Many have also sold into rallies, which has reduced their return as the market has continued to recover. Over half, however, have not sold any of their investments during the period.

Overall, the average new investor has done far better than the average expected annual return for the S&P/ASX200 of 8-10% (including dividends), and remember that the benchmark was almost flat over the whole of 2020.

This was not simply a punt into tech stocks commonly portrayed in the media. Investors chose to go with well-established companies, such as the banks, and recovery businesses, like the travel sector, believing that they were oversold, and would rally strongly as the world recovered from the pandemic.

Holding onto good buys was key to maximising gains in 2020. Young investors, known as Gen Z, showed the strongest tendency to buy and hold, and have therefore generated a stronger average return than older investors. Ironically, this group, often deemed as takers of the riskiest positions, was the least likely to actively trade their new investments.

Investors who bought outside the most popular stocks were less successful on average. This was particularly true of the Buy Now Pay Later sector. Although Afterpay was one of the best-performing companies of the year, investors were down an average 32% on Openpay, 25% on Laybuy, 19% on SplitIt and 13% on Sezzle. Three times more accounts bought Afterpay than SplitIt and Openpay, and five times more bought Afterpay than Sezzle. Laybuy was bought by just 69 accounts of 10,000 analysed. New investors showed a strong tendency to stick to strong brands, even in hot sectors.

Hoping this is the start of good experiences

The returns most new investors have generated in 2020 are rare for new and even experienced investors and are unlikely to be repeated in a more normal market. Far from punting away their life savings or speculating with stimulus cheques as has been hypothesised in the US, most new investors have bought wisely and held on. May we all have such good fortune in the market in 2021!

 

[1] Even casual followers would be aware that Afterpay fell to a low of $8, and currently sits at over $150, so 173% probably seems a modest return. It should be noted that the vast majority of investors fail to buy at the absolute lowest point, some have taken profits, while others have added to their holdings at higher prices. The average buy price for Afterpay on nabtrade in 2020 was $40. Most investors are still holding at least some of their APT investment so their overall return would be much higher than when this analysis was produced in late 2020.

 

Gemma Dale is Director of SMSF and Investor Behaviour at nabtrade, a sponsor of Firstlinks. This material has been prepared as general information only, without reference to your objectives, financial situation or needs.

For more articles and papers from nabtrade, please click here.

 

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