‘Dumb Money’ Traders Are Actually Investing Smart

“Dumb money” may not be so dumb after all.

Wealth managers tend to thumb their noses at stock market amateurs, dubbing them “dumb money,” meaning individual investors who are more emotional in their trading decisions and follow trends and unsound advice. But retail traders now trying their hand at stock picking are actually investing smart, according to data from investment research firm Vanda Research.

The average individual investor's stock portfolio has grown roughly 150% since the start of 2014, when Vanda Research began tracking the data, surpassing the 140% rise in the S&P 500 during the same period. Vanda analyzed individual trading activity in U.S.-listed stocks, excluding exchange-traded and mutual funds and transactions through retirement accounts or investment advisors.

Mom-and-pop traders are looking at the stocks of major technology firms for their investments, with Apple, Tesla and chipmaker Nvidia accounting for 40% of the average stock portfolio, Vanda found according to data provided to The Messenger. The household name stocks have soared since 2014: Nvidia has surged more than 10,000%, Tesla is up 2,000% and Apple grew 800%.

Retail investments in U.S.-listed stocks and exchange-traded funds are also above pre-pandemic levels, Vanda found.

Just over 60% of Americans reported owning stock, according to a Gallup survey released in May. 

In the era of “meme stocks,” where individual investors trade tips on Reddit and other online investment forums to push up the prices of stocks, cashing out before they fall, retail investors have revolted against hedge funds and other big investors. Tupperware, GameStop and AMC all saw their shares soar, then plunge, after receiving the “meme stock” treatment, handing traders big payoffs.

Retail traders are also playing riskier gambles: Options. These contracts are linked to stocks or securities that give buyers a right — but not the obligation — to buy and sell them at a specific time and price. Day traders accounted for anywhere from 30% to 40% of zero-day stock options — those with contracts tied to the S&P 500 that expire within 24 hours, Jonathan Zaionz, senior derivatives analyst at exchange-operator Cboe Global Markets, told Bloomberg in August.