Almost every piece of data on major market volume shows that the number of shares traded on an average day continues to drop. There are a great number of guesses about why. The Wall Street Journal speculates that there may not be enough volume for institutions to make money. TD Ameritrade (NASDAQ: AMTD) said that its daily average trades fell to 309,000 in August, down from 484,000 in May. Most of its customers are individual investors.
The DJIA fell throughout much of May. Investors may have been in a rush to hit the exit doors. The market moved up sharply in September and that may have helped volume pick up from the summer. Whether the market is volatile or not this year, the conventional wisdom backed by a fair amount of data is that the individual investor does not want to own equities. They left the market and may not come back.
But, it is premature to say the people have taken their money and put it into cash, bonds, mutual funds, or gold. The individual investor left the market after the 1987 crash. They also walked out on the market when it dropped in 2002 and in early 2009. They believed, probably correctly, the markets were too dangerous for people who wanted to make money as traders. That does not mean that investors stepped away from their long-term holdings. They simply refused to trade.
And, that is the myth about the individual investor. They stayed in the market on the supposition that stocks will have a better return than most other assets over a period of a decade or more. Based on past statistics, that is true. The economy has begun to recover, perhaps. The DJIA was up over 6% in September. It is near 11,000. The 12,000 mark is within reach by early next year if the market only grows modestly.
The individual investor does not mark his proxy as often as large institutions do. They figure that it does not matter much who runs McDonald’s (NYSE: MCD) or GE (NYSE: GE). Their boards will eventually find the right CEOs, if they do not have them now. Hedge funds, however, need quick results to keep their investors happy. The person who will retire in ten or fifteen years and use his portfolio for retirement does not have that problem.
Douglas A. McIntyre