TD AMERITRADE: Retail money isn't dumb money
Kinahan is an expert in retail investing. As the chief market strategist at TD, he has a unique window into 7 million brokerage accounts with more than $750 billion in assets.
This piece of the interview was edited for length and clarity.
Greg Hoffman: Can you explain what the TD Ameritrade Investor Movement Index does?
JJ Kinahan: It's a way to measure retail investor's engagement with the market. The reason we started it is, we got tired of hearing people say that "retail is dumb money." So what we did is set up an index measuring brokerage account holders that make at least one trade a month. We have found that people who trade pretty regularly tend to make pretty good decisions compared to somebody that trades let's say, once every two years. You can see that our clients have made some really good decisions over the last two years if you compare the IMX to the S&P 500.
Hoffman: Have you been able to prove or disprove if "retail is dumb money?"
Kinahan: Well if you look at the IMX chart against the S&P 500 it shows that our clients sold just before the last selloff and that they bought back in and have been highly engaged in this latest market run over the last year and a half to two years, as stocks have continued to rally. So I do think that it shows that people who engage regularly are fairly astute.
Hoffman: Could you compare the IMX to some other method of measuring retail investor engagement?
Kinahan: There are a lot of surveys out there and yea surveys mean something, but not a lot. People can lie in surveys. What people say they are going to do and what they actually do are two different things and the IMX shows what people actually are doing. We think the IMX is the most accurate measure of what the retail investor is doing. Also, we don't just measure stocks in the IMX, we measure options, bonds, ETF's, their full engagement.
Hoffman: I see in your latest report that the IMX dropped for the first time in April in the last three months. However, your colleague Victor Jones, director of trading at TD, said, "Although this is the first decline in recent months, market optimism appeared to remain strong as our clients were net buyers for the fifth month in a row. We saw a similar trend a year ago, where retail clients lowered their equity exposure and the IMX broke a seven-month high streak." Can you explain the conflicting ideas of a lower IMX with stronger market optimism?
Kinahan: It's not just buying and selling stocks, it's also volatility. We in a low volatility market and the index measures the stocks against the overall volatility so the drop was a very small one. Overall our clients were staying pretty engaged. One thing the index shows is that they were buyers of stocks with lower volatility and sellers of stocks with higher volatility if compared to the S&P 500 because we put a beta factor in there.
Here is Victor Jones's analysis of the April IMX move: