Investors who got into the market early in the pandemic are backing away from do-it-yourself stock picking after equities started tanking last year.
That’s one of the big changes these investors underwent in the last two years, according to a survey published this week by The FINRA Investor Education Foundation, NORC at the University of Chicago, and the U.S. Securities and Exchange Commission, which compared results from a similar survey they conducted in 2020.
When asked what information sources they use when making investment decisions, new investors relied less on “other personal research” — down nearly 10 percentage points versus 2020 — and more on financial professionals — up 9.3 percentage points versus 2020.
“The shift away from personal research and to the use of financial professionals may be driven by the significant drop in the markets between the first survey and the second survey,” Gary Mottola, research director at the FINRA Foundation, told Yahoo Finance.
The first survey was fielded from Oct. 26 to Nov 13, 2020, when the S&P 500 index was up between 5.3% and 11% year to date then. In a follow-up study conducted in September of 2022, all of the major indexes were down at least 21% at the end of that month for the year.
“A lot of our newer clients– and our team added more than 90 new client households since the beginning of 2021–didn’t necessarily have a holistic, thoughtful way of handling their investments,” Rachel Elson, a wealth advisor at Perrigon Wealth in San Francisco, told Yahoo Finance. “Most of our clients work in tech; they think a lot about process in their day jobs. And at some point, they realize that they have enough assets that they don’t want to put them at risk by not having a game plan in place.”
Investors are staying put
Despite the market volatility, most new investors were still investing. Just over three-fourths (75.2%) of investors who opened accounts in early 2020 were still in the market two years later.
In addition to remaining in the market, many of these newer investors were adding funds to their accounts. Nearly 4 in 10 (39%) new investors added funds to their accounts, lower than the percentage of experienced investors (46.1%) who increased their contributions to their accounts without withdrawing funds at any time during the period tracked by the researchers.
“In some ways it is encouraging that this drop didn’t result in these new investors, for the most part, leaving the market but rather to an implicit acknowledgement that investing may be more challenging than they initially believed…and that in some instances professional help is needed,” Mottola said
Testing investor acumen
New investors have improved their investing knowledge since 2020, but the base level was still painfully low, according to the FINRA report.
On average, investors correctly answered 1.71 out of 5 questions in 2022 versus 1.61 in 2020. This increase was driven by new investors, who improved from an average of 1.33 correct answers in 2020 to an average of 1.45 in 2022.
Questions ran the gamut of asking about particular investments.
For example, “You invest $500 to buy $1,000 worth of stock on margin. The value of the stock drops by 50%. You sell it. Approximately how much of your original $500 investment are you left with in the end?
Possible answers:
Another was: “Which is the best definition of “selling short”?
Choices:
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Selling shares of a stock shortly after buying it
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Selling shares of a stock before it has reached its peak
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Selling shares of a stock at a loss
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Selling borrowed shares of a stock
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Don’t know
Finally, “Which of the following makes cryptocurrency transactions susceptible to fraud?”
Potential answers:
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Cryptocurrency is now the most commonly used form of payment in the U.S.
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Cryptocurrency relies on blockchain technology, which is easy to hack
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Cryptocurrency does not trade on exchanges
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Cryptocurrency transfers usually cannot be reversed
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All of the above
“While investing knowledge is low for new investors, it is also low for more experienced investors — albeit a bit higher than new investors,” Mottola said. “So this is not necessarily a new investor issue, but an investor issue.”
The crypto factor
Meanwhile, in 2022, more new investors held cryptocurrencies in their portfolios versus experienced ones, 28.1% to 22%, respectively.
Not surprisingly, cryptocurrency holders were younger on average (37.9 years old vs. 46.1 years old), according to the findings. Also, Black/African American investors (45.8%) and Hispanic/Latino investors (40.3%) much more frequently held crypto compared with non-Hispanic white investors (16.9%. Male investors more frequently reported cryptocurrency holdings (33.6%) versus female investors (14.6%).
“Given the sharp rise in the valuation of cryptocurrencies in 2021, it is likely that the jump in crypto ownership was driven, at least in part, by market dynamics,” Mottola said.
Future FINRA findings will peel this back.
“This is supported by research from a forthcoming study we are working on which found that fear of missing out was cited as a top reason among crypto investors for purchasing crypto for the first time,” Mottola said. “Perhaps more importantly, the rise in crypto ownership may be due, again in part, to crypto owners’ higher risk tolerance.”
And for those of you keeping score, here are the correct responses to the FINRA questions: $0; selling borrowed shares of a stock; and cryptocurrency transfers usually cannot be reversed.
Kerry is a Senior Reporter and Columnist at Yahoo Finance. Follow her on Twitter @kerryhannon.
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