Ordinary investors find it hard to stay away from the market for long, at least in the current environment.
This spring, tariff turmoil triggered market fluctuations, prompting individual investors to enter the market to buy the dips. They not only propelled the U.S. stock market back to record levels but also revived meme stock trading. For many Wall Street professionals, this is particularly seen as a signal of market bubbles, especially as tech giants' valuations are at historical highs, reminiscent of the internet bubble era.
But the resilience of retail investors may not just be blind optimism. Their determination to stay in the stock market may be more enduring than many seasoned professionals expect, and this trait may, to some extent, buffer the mean reversion process of high-flying stocks.
Why say this is not a temporary trend? The primary reason is that the investor group has undergone a generational shift. Fewer and fewer people remember the bursting of the internet bubble or the financial crisis. In contrast, the current generation of young investors has mostly experienced a favorable market environment since opening their first brokerage accounts. They came of age in an era of ultra-low interest rates, witnessing a continuous upward trend in the market.
The experience of reaping rich rewards from early investments encourages many to take on greater risks and cultivates their composure in holding positions during turbulence. During the Fed's rate hike period in 2022, the S&P 500 index plummeted by 19% (the worst performance since 2008), but this did not change retail investors' inclination to buy the dips. EPFR data shows that U.S. equity mutual funds and ETFs (often a safe haven for retail investors) still recorded a net inflow of $27 billion that year.
Those who held their ground quickly reaped rewards: the following two years became the best-performing period for the S&P 500 in 25 years. A more recent example is the market downturn triggered by disappointing employment data in early August, which quickly stabilized. Data from JPMorgan shows that after Trump announced 'liberation day' tariffs in April, the S&P 500 fell about 5% cumulatively over two days, during which retail investors made record purchases. EPFR statistics show that for the week ending April 9, U.S. equity funds attracted $31 billion, including the period of severe volatility after 'liberation day.'
Unlike the younger group, older millennials and their predecessors have experienced more subdued market periods. Taking the financial crisis as an example, EPFR data shows that investors withdrew nearly $50 billion from U.S. stock funds in 2008, and even after the market bottomed out in March 2009, they continued to withdraw funds for four consecutive years. These sellers missed the start of the longest bull market since the inception of the S&P 500 index. After the internet bubble burst, it took about seven years for the index to return to a new high.
Today, those who persist in staying in the market are witnessing the growth of wealth. The S&P 500 index has become a real-time barometer of wealth growth for many Americans, outperforming assets like real estate or bonds. According to Fidelity Investments, as of the end of 2024, the number of millionaires in its 401(k) platform reached 537,000, setting a record. Ned Davis Research's chief U.S. strategist Ed Clissold points out that the proportion of stocks in household financial assets surged to 36% in the first quarter of this year, the highest level recorded since the 1950s.
"Successful experiences have given people courage," said Jim Paulsen, a senior market observer and former chief investment strategist at Leuthold Group. "You start to feel, 'This is how the game works, I can withstand the pullback.'"
This change is accompanied by a broader social transformation: for many Americans, trading and investing have evolved into a form of entertainment. Group chats are filled with discussions about sports events and popular stocks, and it seems everyone knows of cases where people became rich overnight through cryptocurrencies. Along with the shift in attitudes towards gambling is technological advancement—trading various assets has become more convenient and cost-effective. Some brokerages are even trying to 'gamify' the investing experience, embedding casino-like visual designs in their apps while offering high-leverage trading tools such as options and prediction markets.
This keeps retail investors active and occupying an important position in the market. Data from JPMorgan shows that recently, retail investors accounted for about 20% of total options trading, even surpassing the peak during the meme stock frenzy in 2021. Statistics from Jefferies Group indicate that they account for about one-fifth of stock market trading volume, slightly below the 2021 high but double the level of 2010.
Of course, all bull markets will eventually come to an end. The higher the valuation, the more severe the impact often is when it falls. However, if the investor psychology undergoes a fundamental change, there may be an undervalued buffer mechanism in the market—these new bulls may, like the former bears, go against the trend and enter the market when others are selling. A recent survey by Charles Schwab shows that about 80% of clients plan to increase their positions in the coming months if the market is volatile. This impulse to stick with investing may be more intense and lasting than many market participants imagine.