Investors who got into the stock market for the first time during the early months of the COVID-19 pandemic are more likely to turn to financial planners for advice than to do their own research. Coinciding with that pivot: The number of first-time investors with cryptocurrencies increased.
Those are two takeaways from a
The 12-page report by the FINRA Investor Education Foundation and NORC looked at
Benjamin Ramsey, a certified financial planner at Crestwood Advisors in Boston, said he worked with many inexperienced investors during the early months of the pandemic at his previous firm, Balanced Rock Investment Advisors. Many clients who approached him and his colleagues already had money in nontaxable retirement accounts like 401(k)s and IRAs. But few had opened taxable brokerage accounts to invest in stocks and bonds.
"One thing that didn't happen is that people didn't back off and decide not to invest and hold onto cash," Ramsey said. "People kept investing. When the pandemic started, there was a lot of fear, a lot of uncertainty. But fewer clients panicked or wanted to get all their money than I thought were going to. They were mostly able to look to the long term."
U.S. stock markets took a pummeling in the early days of COVID-19 but quickly rebounded as investors, flush with cash from stimulus checks, sought returns on their savings. JP Morgan Chase
Some of the flows were driven by the "meme stock" trend in which investors turned to online forums like Reddit to encourage others to buy cheap shares in companies like GameStop. Many of these trades had the ostensible goal of punishing hedge fund managers who had bet the stocks' valuations would fall, but many investors lost money. Regulators expressed concerns that unsophisticated investors were being lured into buying shares that would have little value after a mass selloff fueled by internet hype.
The FINRA Foundation and NORC report should dampen some of those anxieties. For one, it suggested that new investors are more likely to turn to financial professionals for investing information than to do research on their own. In the 2020 survey, 31% of the respondents said they rely on "personal research" to learn more about investing. Only 24% said they consult financial professionals. In the second survey two years later, the share seeking out financial professionals rose to 33%, and those doing personal research fell to 22%.
The number of new investors who turned specifically to brokerage firms for information also fell, from 31% to 29%. Meanwhile, the two most consulted sources of information — annual reports and company websites, and friends and family — held their places in the ranking.
Brad Wright, the managing partner of Andover, Massachusetts-based Launch Financial Planning, said he and his colleagues have found that most people first turn to financial planners following a life-changing event. Wright said many of his clients initially came to his firm — which opened in May 2020 — several years after getting "real" jobs and amassing substantial cash savings.
"Their careers are chugging along and they have families or something else is going on," Wright said. "And now they have to be serious with this stuff."
Wright said most of his newer clients already had brokerage accounts at companies like Robinhood or Morgan Stanley's E-Trade Financial. Many clients used those accounts to trade tech stocks or cryptocurrencies. But despite a bent toward chasing trends, those clients usually don't need much convincing that they should be investing for the long term, Wright said.
"And if they want us to just trade stocks for them, then we're not really a match," he added. "That's not our thing."
The report's findings are based on two surveys of a 480-person cohort between Oct. 26-Nov. 13, 2020 and Sept. 9-29, 2022.
The 2020 survey shed light on the demographics of pandemic-era investing newbies. They tended to be younger, have lower incomes and be more diverse than experienced investors. Almost two-thirds of new investors in that survey were younger than age 45. And only 37% of them earned more than $100,000 a year, while 24% earned less than $35,000.
Among experienced investors, meanwhile, 45% reported an annual income of more than $100,000. Black investors made up 17% of new investors in the 2020 survey but only 7% of the experienced investors. White investors, by contrast, accounted for 58% of the new investors and 68% of the experienced investors.
The report also suggested that investors who opened taxable accounts for the first time in 2020 are in it for the long haul. Some 75.2% were still in the market two years later. For experienced investors, the figure was 88.6%.
To be sure, 15.6% of the new investors surveyed confessed to being unaware of whether their accounts were still open (compared with 4.7% of experienced investors.) New investors also showed a greater propensity to withdraw money from their accounts — a sign they were not adhering to the classic buy-and-hold strategy. Among new investors, 39% withdrew money from their taxable accounts in the two years of the survey. Only 16% of experienced investors did likewise.
Experienced investors also tended to put more money into their accounts. Of those surveyed, 46% of experienced investors added money in the two years following the pandemic's outbreak. Only 39% of new investors could say the same.
In the 2020 survey, respondents were asked if they hold money in alternative investments including cryptocurrency, gold and hedge funds. About 14% of new investors and 19% of experienced investors said they did. In the 2022 survey, the two groups were asked specifically about cryptocurrencies. About 28% of new investors and 22% of experienced investors said they had money in crypto — both significant spikes from two years earlier. Holders of crypto in the latter survey tended to be younger (nearly 38 years old on average) than non-holders (46 years old on average.)
The report also shed light on what investors like and don't like about online investing. Seven out of 10 respondents said they look favorably on app features that let them learn about investing, and 57% said they like both features that can be modified to suit their preferences and companies that offer free stocks or cryptocurrency in return for opening accounts. Only one in three, or 32%, said they liked apps that connect to social media, and only 29% said they like features allowing them to select avatars to represent them online.
