It has never been easier to set up a retail trading account. In the age of high volumes, electronic trading and ETFs, the number of retail trading accounts has grown to staggering levels. The number retail investors now probably exceeds the number of professional investors by many orders of magnitude. And yet, are retail investors really capable of managing their own money?
Let’s review some cold hard facts about the performance of retail investors in the markets.
- Less than 10% of retail traders and investors are profitable
- Of those profitable traders, only a handful are spectacularly profitable
- When surveyed, only 1% of retail traders understood the meaning of the financial terms option, delta, gamma, theta or modern portfolio theory
Volatility = opportunity = risk
Today’s markets are more volatile than ever before. For savvy professional investors, this translates into opportunity. But for those who don’t know how to manage risk, trading in the markets is a challenge and in many cases a gamble. For the risk averse, there is no need to trust professional traders. Low risk equity funds use the science of modern portfolio theory to eliminate risk in volatile markets, and sturdy money market funds put together mathematically optimized bond portfolios organized into diversified risk-return tranches.
Should we introduce stricter regulations for retail traders?
It’s a tragedy that so many retail investors are losing money when professional investors are producing strong and reliable returns with tested investment strategies. One solution is to introduce stricter regulations on retail trading accounts that limit the amount of risk that the trader can take. In addition, a windfall tax on large profits would discourage traders from taking excessive risks and would funnel more capital into safer investment funds.
Investors have the right to do whatever they want with their own money, but only within the bounds of their societal responsibility. It is absolutely irresponsible to risk your capital in the markets without a solid economic education and at least 10 years of experience in the investment industry. As more and more average Americans become retail traders, it is now up to the government to regulate this activity and ensure that people invest their money responsibly.