The individual investor was the big loser in the stock market’s wild ride this week – and the scare could spell an end to rampant day-trading by the little guy.
“It won’t happen immediately,” said Christopher Davis, the executive director of the Money Management Institute, which helps investors get professional financial advice.
“It will happen next week, as more of these do-it-yourselfers admit over the weekend to their spouses or significant others that they’ve lost money in the market. That’s exactly what happened in 1987.”
After the ’87 crash, discount brokerages lost customers while full-service brokers gained them – and experts anticipate many day-traders will also turn to professionals this time around.
When the market takes a roller-coaster ride, it’s the individual investor who’s most likely to experience motion sickness.
In fact, one New Jersey woman said she vomited – after her husband told her their online brokerage account shrank in the past month from $80,000 to $30,000.
“I kind of let him handle everything, so I didn’t really know that we were in so many biotech and Internet stocks,” said the 34-year-old mother of two.
“Just the other day, he asked me how much money we needed to pay our taxes and also the landscaper who’s been working on the yard. And then he told me he was worried that we didn’t have the money.”
That’s because the market turned with deadly vengeance against the “momentum” stocks in their portfolio – stocks like Celera, down 53 percent in the past month; Microsoft, down 19 percent just this week; and I2 Technologies, down 39 percent in the past month.
At least she and her husband didn’t buy any stocks on margin – a risky technique involving the purchase of securities with borrowed money, using the shares themselves as collateral.
That aggressive investing technique really creamed individual investors in recent days.
It turns out the couple can pay their immediate bills, but they believed the account would also build a college fund for their two sons, ages 4 and 1.
“I’ve been sick to my stomach for two days now. And I haven’t slept a wink,” said the housewife, who told her husband to stop trading until they make a long-term plan for more sensible investing.
Experts say their experience is quite typical for individual investors who manage their own portfolios without expert help.
“The investors who fared the best never had exposure to the volatile stocks to begin with,” Davis said.
“But there’s an enormous sector of America that’s been taking a do-it-yourself approach and they’re the ones who got bitten. These are the people who put their arm in the lion’s den and are now wondering why it’s all chewed up and mangled.”