Small investors play market for ‘entertainment’, says behavioral expert

Behavioral finance expert Dan Egan (pictured) says retail investors are practicing “entertainment investing”, as trading platforms and online brokerage firms see a surge in investor deposits during the pandemic.

The managing director of behavioral finance and investing for Betterment said that this trend is primarily driven by people staying at home with little else to do, as sports and other activities remain shutdown.

“We are definitely seeing people treating it a little bit like a form of entertainment, where they want to come in and be able to talk about what they have and haven’t invested in and how it’s been doing”, Egan told CNBC’s ETF Edge on Monday.

The expert said a rise in cash savings resulting from lower spending during the pandemic have prompted people to turn to stock trading as a way to entertain themselves with the prospect of being able to use the extra cash to make some short-term gains.

A survey of 5,005 US investors conducted by Betterment found that 78% did not take money out of the markets from March to mid-April. Of the 20% who did, nearly half said they would only reinvest when the market was either fully corrected or had begun to correct.

Other market veterans have warned that retail investors should be careful in how they pick stocks, as risky plays such as buying a bankrupted firm’s stock of the likes of Hertz or GNC, which filed for Chapter 11 protection on Wednsday, could end up resulting in big losses for those who are unaware of the risks.

John Davi from Astoria Portfolio Advisors said: “A lot of retail investors that come into the market not really for a long-term strategic allocation tend to buy very low-priced stocks, penny stocks. It is concerning”.

He added: “I do think that as the economy opens up, sports open up, a lot of these investors that would typically trade for a quick day trade … will go and find other ways to kind of utilize their efforts and their time and their money”.