Individual Investors Don’t Move Markets
October 23, 2008 – 5:21 amThe recent volatility in the financial markets has led to a variety of messages to individual investors. The primary message is essentially this: “Don’t freak out, and don’t sell your securities and stock up on cash.” Although this advise is reasonable and solid, it seems like these messages are designed to help calm and stabilize the financial markets. The point that has not been discussed by the media is that individual investors do NOT drive most of the volume in the financial markets.
All of this volatility, share price drops, and other financial abnormalities are primarily driven by large institutional trades. I suppose if a large number of people decide to sell out of their 401k investments the market may notice. But individual investors would not cause a 5-10% swing in the major market indexes in a single day.
I wish I could find current statistics on this to see if my assumption is true, but I can’t seem to remember the book I’m thinking of. I once read that institutional trades make up a huge majority of the exchange volumes, and that the top few firms (say, 20-25 I think) make the majority of all trades. If anyone has seen a recent statistic on institutional versus individual trade volumes please let me know by leaving a comment.
I agree that people should avoid freaking out. If you have a solid financial plan in place and your asset allocation is where it should be, then by all means stay put. The fear that has taken over the market, however, is driven as much by “smart money” or “institutional” fear as it is by small-investor fear though. Pehaps even the smart-money investors are just as weak and fearful of losing money as the rest of us small-time investors.
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3 Responses to “Individual Investors Don’t Move Markets”
thanks for your information sir.
By budi on Oct 24, 2008
Individuals don’t drive the market unless their name is Warren Buffett ha…
Great post!
By Financial Viewpoints on Nov 2, 2008