The rising risk of the lone wolf investor
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Illustration: Aïda Amer/Axios
Once called "dumb money," everyday investors — people trading via Robinhood, Schwab and the like — are now collectively big enough to have sway over the direction of markets.
Why it matters: That power can come with real risks for this herd of retail investors and potentially for the economy if they pile into an investment that goes terribly wrong.
State of play: Investments are taking on an increasingly bigger share of the wealth picture for everyday Americans, according to the JPMorgan Chase Institute.
- Retail investing makes up about a quarter of daily trading volume on average, according to Jefferies.
- Young people are also increasingly viewing investing as a source of income, according to a survey from the Oliver Wyman Forum.
Zoom in: Retail has enough buying power to reshape entire asset classes, which recently played out as investors rapidly bid up the price of silver.
- Amid a parabolic rise in silver prices last week, the precious metal became the second-most-popular trade on the Interactive Brokers platform, which is used by many retail investors.
- Then, silver crashed, falling 40% from its prior highs.
- "I lost a year's worth of post-tax salary today on my entire portfolio," one Reddit user posted about the crash, according to the Financial Times.
Yes, but: Silver rallied 8% Tuesday, in an example of the retail investors' favorite trade: buying the dip, or piling into an asset when the price drops.
- It's a trade that has worked for the group: The S&P 500 has recovered from every dip it's ever had, though the time horizon for that recovery can vary widely, and retail is often buying dips on single stocks or other assets.
- The risk of buying the dip is that it works until it doesn't. Many younger retail investors have never lived through a long market slump, in part because recent recoveries have been unusually fast, helped along by their own buying.
Zoom out: If these investors experience a prolonged downturn, they could get spooked and pull their money out of the market.
- It's an "unknown risk," George Eckerd, research director at the JPMorgan Chase Institute, tells Axios, adding that the group would lose interest in buying the dip if it lasted too long.
- That alone could make a market fall deeper: Morgan Stanley's latest retail investor pulse survey signaled a reliance on retail investors to continue putting a floor under U.S. stocks.
Threat level: It's not just investors who would be hurt. The "wealth effect" created by rising asset values, making people feel richer, is supporting consumer spending, the primary driver of economic growth.
- If the market tumbles, that could stifle consumer spending for this group, putting further pressure on companies and the stock market, pressuring the broader economy.
- Follow the money: Retail investors are also using a larger share of their investments as a form of income than they have at any point, according to data going back to the 1980s from BCA Research.
- If retail is relying on stocks climbing for income, they may be more keen to sell if they're worried a downturn will last for longer than they're used to.
The bottom line: The democratization of finance has given young people and everyday investors a real crack at wealth building.
- But without experiencing a downturn for themselves, it's hard to know how they'll react.
