Smart Money vs Dumb Money: A Guide to Investor Sentiment Index

August 30, 20236 min read
Smart Money vs Dumb Money: A Guide to Investor Sentiment Index
Share on facebookShare on TwitterShare on Linkedin

Key Takeaways

  • Smart-money indicators such as SMI are used to assess institutional investors’ stock buying behavior for insight into the actions and approaches of such seasoned and informed investors.
  • “Dumb money” indicators – retail buying, for example – uncover the movements of investors who are less knowledgeable or more emotionally driven.
  • Smart-money investors also tend to have longer-term investment horizons and be professionals at mutual funds, hedge funds, and pension funds.

The term “smart money” has been bandied about for ages, chiefly in gambling as in, “the smart money is on …” whatever. But there is what is called a smart money index used in investing that can demonstrate investor sentiment based on intra-day price patterns.

Smart Money and Dumb Money Demystified

While there is no hard and fast definition, most so-dubbed smart-money investors are privy to a wealth of valuable information and have a number of analysts who conduct due diligence on investment opportunities. Such exploration may include a company’s financials and their competitive position and management team. 

Such professional investors also tend to have longer-term investment horizons and have positions with mutual funds, hedge funds, or pension funds. In addition, they frequently focus on industries or sectors expected to experience marked growth and make relatively large investments.

Note that the “smart money” label does equate with success or wise decisions. It is merely how such investors and conduct are labeled.

By contrast, the term “dumb money” refers to investors who are generally viewed as relatively less informed and are often more emotional when it comes to investment decisions. These are typically individual part-time or retail investors who lack the expertise and knowledge of their professional counterparts. For example, such investors may regularly base investment decisions on “hunches” rather than due diligence.

But here, too, “dumb money” is simply a designation, since there are many retail investors who fare better than “smart money” types. Many are trend followers who – by whatever means – often position themselves properly amid major trends.   

The Birth of the Smart Money Index (SMI)

In general, smart money indicators are used to assess institutional investors’ stock buying behavior for insight into their actions and approaches.

On the other hand, “dumb money” indicators – retail buying, for example – uncover the movements of investors who are less knowledgeable or more emotionally driven.

One major “smart money” tool, the Smart Money Index (or Indicator), was developed by Don Hays. It may be calculated for any security. Its formula is:

  1. Calculation of the gain or loss of the Dow Jones Industrial Average following the first half hour of trading.
  2. Repetition of the first step during the final trading hour.
  3. The SMI = yesterday’s SMI – the market’s gain or loss in the first half hour of today’s trading plus the today’s market’s gain or loss in the last hour. Use yesterday’s closing price of the Dow on that day for the SMI first value. 

To illustrate, consider that the value of yesterday’s SMI was 100. If the Dow gained 20 points in the first half hour and lost 40 points in the final half hour, the SMI’s latest value would be 100 – 20 + (-40) = 80.   

Investor Sentiment: More Than Just a Buzzword

“Sentiment.” However vague or even inconsequential the term may seem, paying attention to the conduct of professional investors can be beneficial: it can lead to better returns.  

Ultimately, the question is not whether investor sentiment impacts stock prices, but how to best gauge such sentiment and quantify its effects. SMI is one way to do that.

The Flip Side: Criticisms of SMI

Some contend that the Smart Money Index is not wholly understood and that it falls short of being empirical. 

Others complain that the indicator assumes that it is mainly retail or part-time investors who trade during the market’s open, while professionals just trade the close. Oftentimes, they contend, this is simplistic and not always correct.

Consulting Investor Sentiment Resources

Resources to help track smart money in the financial markets can include:

  • Volume analysis. Analyzing trading volumes from various derivatives and securities can turn up large trades by smart-money investors. Analysis can determine whether smart money is buying or selling.
  • Commodity Futures Trading Commission filings. The CFTC requires institutional investors, hedge funds, and other large traders to report their positions in what are known as Commitments of Traders reports, which can provide valuable information.
  • Volume analysis. Large trades by smart-money investors can be uncovered through the analysis of trading volumes from varying derivatives and securities.
  • 13F Filings. Institutional investors who have north of $100 million in assets under management must each quarter file a 13F with the U.S. Securities and Exchange Commission. Insights may be gleaned from such reports.   

Investments with Less Volatility

There is an asset class that, due to its low correlation to constantly fluctuating public markets, are less volatile than stocks – and thus less subject to impact from investor sentiment. 

These are “alternative assets” — art, real estate, transportation, private equity, private debt and more. Such private-market opportunities can provide steady secondary income, even during poor market conditions. In fact, private markets have performed better than stocks in every market downturn of almost the last 20 years.

Another key benefit of alternative investments is diversification – spreading one’s investments among, as well as within, varying asset classes. Diversifying holdings can decrease overall portfolio risk and is fundamental to long-term investing success.

Start Investing Today

Diversify your portfolio with private market investment offerings.

Alternative Investments and Portfolio Diversification

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

Despite the limitations of the Smart Money Index, investors would do well to gauge investor sentiment when making decisions. There are resources that can provide the most up-to-date information.

Investors should also remember that alternative assets are less susceptible to such sentiment and are also generally less volatile than stocks.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022

844-943-5378

No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Plaid, Orum.io and Footprint and none of such entities is affiliated with Yieldstreet. By using the services offered by any of these entities you acknowledge and accept their respective disclosures and agreements, as applicable.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure