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Are Retail Investors Looking for Entertainment?

Image via William Iven on Unsplash

Plenty has been written about retail investors' newly-found interest in the stock market.

With Robinhood adding 3 million new funded accounts in the first quarter, along with the likes of "Davey Day Trader" picking stocks using Scrabble tiles and investors getting financial advice on TikTok, the stock market has certainly attracted a new group of investors as of late.

As we said last week, boredom, stimulus checks, commission-free trading, lack of sports to bet on, or hopes of making a quick profit are all valid theories for the rise in retail traders' participation in the market.

According to Dan Egan, managing director of behavioral finance and investing at Betterment, it appears boredom is a valid theory as he says we are seeing retail investors enter the market for "entertainment investing."

Egan cites a lack of professional sports, film and television productions, indoor activities and other entertainment options for leading retail investors to seek a new sense of community.

"The stock market is in the news. People talk about it. It’s more accessible than it’s ever been," Egan said. "We are definitely seeing people treating it a little bit like a form of entertainment, where they want to come in and be able to talk about what they have and haven’t invested in and how it’s been doing."

The downside of the surge in retail investors' participation is they're getting into the market when valuations are at extreme levels.

"Everything is expensive," said Chris Watling, chief market strategist at Longview Economics. "80% of the markets we track have a valuation in the upper quartile relative to the market’s history -- the greatest percentage on record using data since the mid-1990s."

Furthermore, the concentration of a select handful of stocks propelling the markets higher is also getting worrisome. Amazon, Microsoft and Apple now have a combined market capitalization of more than $4.25 trillion, equal to 20% of U.S. GDP. Adding in Facebook and Google to get the top five stocks in the S&P 500, they now account for more of the index's weight than the top five did during the height of the dot-com bubble.

While these new retail investors have been rewarded by the Federal Reserve for purchasing everything under the sunincluding bankrupt Hertz, it remains to be seen if it's different this time.

If it isn't, hopefully for their sake they can get out of the market and back to their pre-coronavirus lives before they get caught holding the bag.

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