The WSJ is hailing the individual investor boom as if it is something new. They are attributing this explosion of activity, roughly 20% of the daily trading volume, to new phone apps, a bull market fueled by technology stock leadership, and more time on their hands, as a result of Covid-19 lock-downs. Though some of that might be true, the real reason, in my very humble opinion, is the fact that Federal Reserve policy has driven US interest rates to historic lows FORCING retirees and near-retirees to pursue riskier investing strategies to create any return on their investment.
The fact that equity markets are at all-time highs fueled by incredible federal stimulus and not the underlying fundamentals of the US economy is scary enough. Individual investor participation at twice what it was in 2010 is truly frightening, and it puts these “investors” in a very precarious position. As we mentioned in a previous post, the $1 million retirement account goal that might have produced $50,000 per year through dividends and interest years ago needs $3-5 million today to generate that same amount.
The demise of the defined benefit plan in lieu of defined contribution plans forces untrained individuals to fund, manage, and then disburse their retirement benefit with little knowledge. Worse, there is no longevity pooling of the risks. For those individuals who either chose to retire or were forced to retire prematurely through job losses in 2007-2008, they had no time to make up for the catastrophic decline that turned their 401(k) into a 201(k).
As history has shown, it won’t be different this time!