Retail investors become a larger group of players and gain influence as a lot of new, particularly young participants join the stock market. Certainly, they are not the primary driving force of the entire market. Nevertheless, retail investors are becoming a more important source of liquidity and a more important driving force for prices of the stocks they pick.
As Joe Mecane, the head of execution services at Citadel Securities, stated in an interview on Bloomberg TV, estimated share of retail made about 10% in 2019, and this percentage increased towards 20% and even in the peak days closer to 25% of the market in 2020. There may be various reasons for that: covid related volatility, zero interest rate policies, boredom during the lockdown, decreased market entry burdens, fear of missing out.
Unfortunately, many inexperienced individual investors make a great deal of mistakes and usually achieve returns which are often significantly below the overall market results.
Some investors try to make money on day trading. With day trading, they try to benefit from short-term fluctuations. However, they take a huge risk. A lot of studies prove that the majority of day traders are losing money. Stocks are very volatile on a daily basis. We have analyzed the performance of the stocks which are currently components of S&P 500. We have found out that an average of only 53% of them had a positive daily performance during the last 5 years. On average, 67% of them added value after a year. And 73% of the stocks were positive after 5 years. Time horizon really matters. True investors have long-term thinking and own their instruments for the long haul.
Diversification is another important thing sometimes forgotten by retail investors. Single stocks are more volatile than diversified portfolios. For example, if you bought an S&P 500 stock in the end of September 2019, you lost money with almost 50% probability one year later as ½ of those stocks had negative annual performance. However, the index added 13% in the same time.
It happens very often that investors put more money in the stock market when it goes up and pull the money out when in goes down. They over-react to both good and bad news. Here and there they hear stories about breathtaking stock performances and do not want to miss out. However, it is good to remember that past performance is no guarantee of future results.
Young investors tend to pick stocks of a few companies whose products they know and love. Social approval is often the reason for the choice rather than a deep analysis of financials. This may lead to a widening gap between fundamentals and valuations. Also chasing cheap stocks is not always a smart idea, as stocks often are cheap for a reason.
What is our takeaway? A retail boom is providing additional liquidity to the stock market in the tough times. Retail alone is not able to drive the valuation of the entire market, but can cause over-valuation of some stocks and lead to some corrections in the future. Retail investors usually underperform the benchmarks due to a variety of reasons. Still, a broadly diversified and professionally managed portfolio coupled with long-term thinking and calmness will help investors achieve their return goals and avoid losses.
Risk Warning: The information in this article is presented for general information and shall be treated as a marketing communication only. This analysis is not a recommendation to sell or buy any instrument. Investing in financial instruments involves a high degree of risk and may not be suitable for all investors. Trading in financial instruments can result in both an increase and a decrease in capital. Please refer to our Risk Disclosure available on our web site for further information.