Do you manage your own investment funds? If so, you're in a club that continues to grow in size, despite the fact that the recent market rally has left many investors unconvinced. Recent data found that online brokers, the most common home for retail investors, have gained three percentage points of market share, representing a 19% annual growth rate, while wire houses like Morgan Stanley and Goldman Sachs have lost 1.1 points. Other retail brokerages, companies that manage money on behalf of clients, lost four percentage points in the same period.
If more individuals are electing to invest their money on their own, why is this happening on such a large scale?
2008 and 2009 proved to be a wakeup call for consumers. They found that their money was at serious risk and the people they trusted to guard their funds were just as surprised as they were. In their mind, they were paying big fees for very little protection, leading them to believe that they could do a better job managing their own money.
With the events of the Great Recession still fresh in their minds, according to an article in Investment News, a trade publication for financial advisers, retail customers feel like they are in better control of their money if they manage it on their own.
Thanks to the Internet, retail investors have access to more information than ever. The information not only includes earnings reports and stock quotes, but educational content from the world's top investors. Not only does the individual investor have access to much of the same information as the pros, finding relevant information is easy. If you don't know where to look, there are plenty of educational articles that tell you how to sift through the huge volume of information.
Love it or hate it, the amount of media outlets dedicated to the financial markets continues to increase, and they have become a 24-hour-per-day presence. Even if you're not close to a TV, their smartphone apps and breaking news notifications allow the investor to stay up-to-date, regardless of where they are.
Some experts argue that the financial media encourages irresponsible behavior like noise trading, without the knowledge to be profitable, but there's no doubt that this relatively new source of information has caught the eye of investors of all levels.
Popularity of ETFs
There are now more than 1,000 exchange traded funds on the market. ETFs offer the retail investor a low-cost way to diversify their portfolio without having to use mutual funds. There are ETFs for all sectors of the market, allowing broad diversification to be achieved without professional level knowledge.
How would you like to run your trades past other traders or well-known professionals? Social media has allowed for great communication amongst traders. Social media has allowed for greater communication between individuals in the market. Most discount brokers now have robust message boards and real-time chat platforms, allowing the trader to gain valuable input before committing real money. Other social media platforms like StockTwits and Facebook provide real-time information.
The Bottom Line
The retail investor is gaining ground, but a tool is only as effective as the person using it. Many discount brokers offer virtual or paper trading accounts where the new investor can trade fake money until they have the experience to manage their own funds. Some argue that the oversimplification of stock market information leads investors to believe that managing assets is easy and that may lead to significant losses. Retail investors without the knowledge and experience to effectively manage their investments should still leave retirement funds to those who understand portfolio management.