2020 Was a Big Year for Individual Investors

Individual investors made their presence felt in 2020. According to Bloomberg Intelligence via The Wall Street Journal, individual investors made up an estimated 19.5% of U.S. equity trading volume. This was a jump of over 4% compared to 2019 and a doubling compared to 2010. We'll look at what drove the surge and what it means for the market.

Easier Than Ever

Plummeting costs and improving online brokerage platforms have definitely helped increase the number of individual investors in the market. Robinhood is often singled out for posting strong account growth, but accounts are up at all the major online brokerages. With the ease of opening a new account and the ability to invest with only a smartphone, the barriers to getting started are lower than ever before. Many of us have also had more time on our hands to commit to researching and trading stocks due to pandemic-related restrictions.

Overall, this is a positive development as, anecdotally, it appears that many of the new investors entering the market are younger and have the advantage of time on their side. It is also interesting that individual investors piled into a very choppy market where, traditionally, retail investors would have been trimming exposure to protect their portfolios. Part of this increased risk tolerance may be generational – we just don't have the data to be able to make that judgement right now.

Name Recognition Matters

With more individual investors in the market, the headline effect seems to be amplified. Many commentators have pointed to the rally in Hertz Global shares after the company filed for Chapter 11 bankruptcy as a type of backhanded condemnation of individual investors trading for themselves. While investing in a company going into Chapter 11 isn't a common approach, there is nothing wrong with a bit of contrarian thinking in the markets. Moreover, almost all of those same commentators have a bone-headed call in their own past. That is how many of us learn what not to do in choppy markets – through experience. 

The early recovery or even overperformance of popular stocks that are well known wasn't solely due to individual investors, however. Institutional funds and tracking funds also have large positions in the narrow band of big tech firms that individual investors have been buying. Amazon.com, Inc. (AMZN), Alphabet Inc. (GOOG), Apple Inc. (AAPL), and Facebook, Inc. (FB) have all benefited from the core users of their products also becoming shareholders through fractional purchases.

In fact, no less a market guru than Peter Lynch taught individual investors that investing in what you know was a critical first step. Hopefully these same investors continue on their learning path and absorb Lynch's lessons on valuations and the price/earnings-to-growth (PEG) ratio.

Eerily Familiar Territory

The surge in individual investing does have some uncomfortable familiarity to it. Stock picks are being discussed across social media platforms in the same way that internet stock picks were proliferating in message boards leading up to the bursting of the dotcom bubble in the late '90s. Certain stocks have also appeared to have become unmoored from traditional valuations, which is a cause for concern.

There is also a lot of froth in the initial public offering (IPO) market, with special purpose acquisition companies (SPACs) putting lipstick on the old blank check company pig. Here again, though, it is not just individual investors causing the market to froth. Many of the institutional investors – for all their data, analysts, and algorithms – are in just as deep on this rally. The worry here is that, if we suffer a dotcom-like correction, the individual investors who get burned may pull back from the market again.

The Bottom Line

Taking control of your investment portfolio is easier than ever, and it looks like more people are doing just that. Right now there are some odd and even concerning things in the market, but that owes to the actions of all market participants, not just new individual investors.

Ideally, the market evens out as the pandemic is brought under control and any adjustments in valuation run-ups are gradual. Even if a sharp correction is in our future, individual investors new and experienced will hopefully dust themselves off and move on a little wiser and warier rather than pulling back entirely. Investing works best when you approach it as a lifelong habit rather than a phase.