Individual investors, once dismissed as “dumb money,” have grown into a force capable of influencing market direction. Enabled by platforms like Robinhood and Schwab, their collective power now represents a significant weight in financial markets.
According to Jefferies data, retail investors execute approximately one-quarter of average daily trading volume. The JPMorgan Chase Institute notes that investments are becoming an increasingly substantial component of the wealth composition of ordinary Americans.
A recent survey by Oliver Wyman Forum, as reported by Axios, indicates that younger generations are increasingly viewing investment as a source of income.
Silver’s Volatile Surge
The purchasing power of individual investors has reached a level where it can reshape asset classes. A recent example is the dramatic movement in silver prices.
Last week, during a parabolic rise in silver prices, the precious metal became the second most actively traded asset on the Interactive Brokers platform. However, silver prices subsequently retraced 40% from their peak.
One Reddit user shared, following the decline, “Lost a year’s post-tax salary in my entire portfolio today.”
‘Buy the Dip’ Strategy
Despite this setback, silver rose 8% on Tuesday, a demonstration of the “buy the dip” strategy popular among individual investors. This strategy involves reinvesting in an asset when its price falls.
While the S&P 500 has historically recovered from every decline, the recovery periods vary significantly. Individual investors often employ the “buy the dip” strategy with individual stocks or riskier assets rather than broad market indices.
Experts suggest that the “buy the dip” strategy works “until it doesn’t.” A significant portion of younger investors have not experienced a prolonged market downturn, and recent rapid recoveries have been partially fueled by retail investor purchases.
The Risk of a Prolonged Downturn
George Eckerd, Research Director at the JPMorgan Chase Institute, identifies the potential for individual investors to withdraw from the market if faced with a prolonged downturn as an “unknown risk.”
Eckerd suggests that investor appetite for “buying the dip” may diminish if the downturn persists. A recent retail investor survey by Morgan Stanley points to the role individual investors play in establishing a floor under declines in U.S. Equities.
A weakening of this support could deepen market declines.
The risk extends beyond investors themselves. The increase in asset prices creates a “wealth effect,” whereby individuals feel wealthier and increase consumer spending, a key driver of economic growth.
A sharp market decline could lead individual investors to curtail spending, creating additional pressure on corporate earnings and equity markets, and negatively impacting the broader economy.
Investment as Income
Data from BCA Research, stretching back to the 1980s, indicates that individual investors are increasingly relying on their investments as a source of income, to a greater extent than in the past.
Investors who depend on equity market gains as income may be more inclined to sell quickly if they anticipate a prolonged downturn.
The rise of retail investing, fueled by accessible platforms and social media, has fundamentally altered market dynamics. While their “dip-buying resilience” has provided support during downturns, the potential for a shift in behavior during a sustained market correction presents a significant, and largely untested, risk. The increasing reliance on investment income further complicates the picture, potentially accelerating outflows if market conditions deteriorate. This evolving landscape demands close monitoring as individual investors solidify their position as a formidable force in the financial markets.
