Power To The People – 28th June 2021

I read an interesting article the other day that mentioned that retail (i.e. personal) investors now own over 35% of US stocks and account for more than 1/5th of all trading activity.

This is interesting for all sorts of reasons:

1. It shows the increased ‘de-centralisation’ of finance facilitated by technology (a trend which I imagine will continue exponentially for some time to come). No longer is ‘investing’ only the preserve of the ‘elite few’ managing multi-billion-pound portfolios in the towers of Wall Street and Canary Wharf – nowadays, a university graduate with £25 to invest can open an online trading account in seconds and purchase shares from as little as £5 a time. 
2. It begins, just slowly, to put some ‘power in the people’s hands’. Individual investors are starting to have a larger influence on company behaviour and their votes are starting to count.

3. It shows that a significant number of people are taking a greater interest in their own personal finances and their investment portfolios, which can only be a good thing.

However, changes like these in the market are not without their risks;

First of all, just because individual retail investors can invest, doesn’t always mean they should invest. The stories of individual investors bidding up the prices of shares like GameStop and AMC in the US shows some of this playing out.

Although trading in these so called ‘meme stocks’ started with a group of relatively knowledgeable and experienced investors gathering together and coordinating trades in forums to ‘stick it to the man’ (by buying shares that were being shorted by the big Wall Street investment banks and therefore causing them to lose money), very quickly these stories get picked up by the mainstream media, attracting less experienced investors to join the party who then often get burnt when the bubble inevitably bursts later on.

Another very concerning trend is the increased risk that retail investors (especially younger ones) are taking on. The Financial Conduct Authority (FCA) has raised significant concerns about the number of UK adults now investing in Bitcoin and other Cryptocurrency without a great deal of knowledge or understanding of what they are getting themselves into.

There are a generation of people who the FCA are concerned have been lured into the ‘get rich quick’ world advocated by Instagram and TikTok stars. These exceptional stories of people who have made a fortune are luring others to join them and invest in everything from Bitcoin and Pokemon cards to Banksy Art and NFTs (Non-fungible Tokens – you will have to Google it!).

My concern is that these people are leaving behind the wealth generation lessons that have served people so well for millennia – spend less than you earn, invest the rest to earn in excess of inflation and wait … a long time.

There seems to be an insatiable appetite for huge returns – I recently had a conversation with a ‘younger’ prospective client who described a proposed 15% annual return as boring!

I think in targeting triple (and in many cases quadruple) digit annual returns, people who would call themselves ‘investors’ are actually ‘gamblers’ and we all know that the house always wins!

My fear is that this story can only end one way – badly.

So, while the increased engagement from a generation of people in their financial future is undoubtedly a good thing, I think what’s highlighted above is a huge need for additional education on things like risk, reward and long-term investing.