Do-it-yourself investing has boomed over the past year, but the rise of ‘meme stocks’ and the impact of social media influencers on young savers could have a detrimental impact on the market, experts have warned.
The total amount held by the main online investment brokers has hit £355bn, according to online investment education site Boring Money, up 34% on the same figure in August 2020 and 6.5% in the past quarter alone.
Chief executive Holly Mackay said: “The overall increase we have seen across the board means that the DIY channel will have to be taken more seriously by those who have formerly only paid attention to investors with a financial adviser or high net worth individuals.”
The boom in DIY investing brought about by higher-than-usual savings during the pandemic has coincided with a long bull market, suggesting that some investors have been enticed by the strong returns. However, past performance does not equal future gains.
“The challenge will be to preach sensible diversification, to manage expectations and then to retain and help these investors the next time things head south,” she said.
Hundreds of thousands of new investors opened accounts to buy funds and shares over the past year, but the demographic has also changed. Investors are younger on average and have been more drawn towards digital investing, making the days of calling up stockbrokers a thing of the past.
Jim Adams, head of research at Boring Money, said it would make fund groups and asset managers “take notice”, as in the past some financial firms have ignored retail investors in favour of big institutions or wealthier customers using a financial adviser.
“We’d expect to see firms investing in service, calls centres, websites and mobile apps as they focus on the growing DIY market. That means it is going to be a good time to shop around. If you’re on a dated share-trading platform, chances are there is a much slicker and easier to use alternative available,” he said.
Investors could also use their new voices for good by voting out fat-cat bosses at underperforming firms, or rallying against businesses that aren’t acting ethically.
“This mobilisation is a distant possibility at the moment and will require significant improvements to make it easier and quicker for retail shareholder to vote,” Adams said.
While these are positives for ordinary investors, they also comes with drawbacks. As the DIY investor market has grown, retail investors have wielded more influence over the companies they invest in.
By mobilising en masse, DIY investors have caused huge swings in share prices. Earlier this year, GameStop and AMC – two American businesses – were bid up by an army of traders using the online forum Reddit.
They collaborated in an effort to force hedge funds that were shorting the stock – betting the price would drop – to sell their positions and take big losses.
However, this did not last long and many that bought in too late would have suffered significantly. At its peak in January GameStop hit $347.51 (£250.69) but today has more than halved to $158.50.
GameStop share price has been volatile in 2021
Source: Google Finance
Independent market commentator Adrian Lowcock said: “The biggest challenge is that you could be right in your assessment of a stock, but the momentum of these meme and speculative investments can be huge. Investors have to stick to their conviction but this is so hard to do. Some will look at how much money they could have made from the likes of GameStop, Tesla or Robinhood, where valuations have been pushed so high that it is hard to not to be swept up into something that they should not be invested in.”
Danny Cox of Hargreaves Lansdown said the key to minimising volatility was diversification, especially to large caps, which had much more liquidity than smaller companies and were less likely to be caught up in the ‘meme stock’ trend.
The firm revealed its results this morning, which showed assets under administration were up 30% on the previous year, while its overall market share was 38%. It brought in a record 233,000 net new clients and £8.7bn of net new business.