Last week, Wall Street managed to erase all the losses from its rough start to August, leading to jokes that summertime might be better spent at the beach than worrying about market turmoil. However, even during the sell-off, one group remained steadfast—retail investors, whether they were enjoying the sun or glued to their screens.
Retail traders are often seen as the last to jump on an investment trend, making them the first to panic when the market wobbles. But in recent years, as platforms like Robinhood and Interactive Brokers have attracted more retail investors, their behaviour has gained greater significance in the broader market.
To recap: Shares plummeted during the first two trading days of August, causing a panic that slashed 12% off Tokyo’s benchmark index when trading resumed on Monday. This sell-off triggered further declines in New York, with the S&P 500 losing more than 7% in just three days at its lowest point. Since then, markets have mostly recovered, albeit unevenly.
Yet, throughout the downturn, retail investors remained undeterred.
“Our customers were buying before the market fell. They bought while it fell, and they’re buying now as it climbs back up,” said Steve Sosnick, chief market strategist at Interactive Brokers. “Their faith hasn’t wavered.”
Data from Vanda Research revealed that retail investor inflows into US stocks surged to their highest levels in over a year this month. Although these inflows have slightly subsided in recent days, they remain near those peaks.
“We’ve rarely seen retail investors buck historical trends so abruptly, especially in the second half of the year,” said Vanda Research’s Marco Iachini. Typically, retail investors make their largest stock purchases in January, with inflows gradually slowing throughout the year.
There may be an element of catch-up after months of subdued inflows from small traders. On the Monday when the market was at its lowest, Robinhood customers invested more money in stocks than on any other trading day this year, according to Steve Quirk, chief brokerage officer.
“If a retail investor wanted to buy Apple or a broad-based ETF at an attractive level, the market just offered a great opportunity, and they seized it,” Quirk said.
Apple dropped nearly 5% on that Monday and, at its lowest, was down 17% from its peak three weeks earlier. Nvidia, another retail favourite, had fallen 31% over the same period.
Some argue that changing retail investor behaviour might be fuelling a “buy-the-dip” mentality, especially with the rise of fractional share trading. This allows investors to buy smaller portions of expensive stocks, making it easier for those with limited funds to invest regularly. Without this option, someone might have to save up to buy a $400-$500 share of Microsoft or Meta.
“Our clients look at historical precedents and think, ‘Sure, I might see some volatility over my 25-year investing career, but if I’m in it for the long run, this will pay off,’” Quirk added.
If buying the dip also means holding onto the investment, that’s good for the market and likely beneficial for investors.
But one major risk remains—retail investors, even more than institutional ones, seem to be doubling down on the same top tech stocks as before.
VandaTrack’s Iachini noted that the biggest inflows were into popular tech stocks, while Nvidia and Tesla topped trading at Interactive Brokers, followed by a risky ETF designed to amplify short-term gains in chip stocks through leverage.
“It’s working for them, I can’t argue with that,” said Sosnick. “But I worry that they’re following Warren Buffett’s advice to be greedy when others are fearful, without considering the part about being fearful when others are greedy.”
This summer’s market downturn was brief and didn’t spiral into anything worse. But next time, investors of all sizes might not be so lucky when their nerves are tested.