Is Extreme Volatility Driving Retail Investors out of the Stock Market?


While regulators have tried to assure investors that another flash crash is impossible, recent bursts of volatility in the markets have not been very reassuring. On Wednesday, August 1, approximately 150 stocks traded up to 20 times their normal volume, and a number of them fell 10% or more in a matter of seconds.

The mini-flash crash reportedly involved well-known stocks like American Express, Harley Davidson, Nordstrom and Berkshire Hathaway. According to the Wall Street Journal’s columnist Jason Zweig, the volatility is likely to hasten the exit of individual investors who remain in the stock market “When Will Retail Investors Call It Quits”).

Retail investors have been net sellers of U.S. equity mutual funds since 2008. In the 12 months ending in June 2012, the outflow was more than $129 billion, according to the article, citing Morningstar.

Computerized, high-speed trading is probably responsible for a significant part of the increased volatility that has scared investors away from the stock market.

It has long been conventional wisdom that the stock market is no place to put assets that may be needed in the next 3 to 5 years. Many wonder whether there is a developing consensus that the stock market is no place to put assets period.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.