Four ways retail investors can take control of their financial future

Investing is a long-term game — especially during periods of market turbulence, which the world is now experiencing.

Investing enables individuals to grow their money over a period of years or decades, more so than if they left it in a savings account. Investing in markets, whether it be stocks, bonds or newer products, is riskier than a savings account, but over the long term it can pay off.

As markets go through periods of tumult, it is critical that individual investors, many of them spooked by falling stock prices and doom-and-gloom news, hold steady. The old adage goes: time in the market beats timing in the market. Recent evidence has shown that individual investors are heeding this advice. Almost two-thirds of individual investors, or "retail investors" as they are referred to, held their investments in response to stock market selloffs.

Despite the lucrative potential of investing for the long-term, not enough people are doing it.

While retail brokerages and platforms have become ubiquitous in recent years, too many people globally have yet to start investing. For example, in France, only 6% of the population is considered a retail investor, and in Mexico, that figure is just 1%. In the US, more than a third of adults are missing out on the opportunity to build wealth through investing.

The World Economic Forum, in collaboration with BNY Mellon and Accenture, has been examining how to improve participation in capital markets so individuals can take ownership of their financial future. Over the past six months, the Forum has surveyed over 9,000 retail investors globally and spoken with over 35 organizations that provide services to retail investors.

The study examined what it takes for retail investors to be successful in the capital markets ecosystem, and where there are gaps in today’s retail investing environment.

An empowered investor is able to access, learn about and trust financial services.

More can be done to improve investor protection, broaden access to information, improve personalization of products and services and enhance financial literacy.

Out of the Forum’s study of retail investing, four key lessons for individual investors emerged.

A 2021 survey found that just one in three Americans has a written financial plan. Of those without one, half said they thought they didn’t have enough money for a plan to be worthwhile, while others said it was too complicated or they didn’t know where to start.

Basic financial planning is key to ensuring retail investors are in control of their finances. Individuals must understand their own finances. In addition to knowing their income and expenses, this means understanding their liabilities — student debt and mortgage balances, for example — and their assets — like current savings, retirement accounts and real estate value.

Then individuals should examine their goals: what are the things I want to save and invest for?

This includes both short-term and long-term financial goals, such as saving for a holiday, a house or building a retirement fund.

Financial literacy means understanding and making use of a variety of financial skills: banking, budgeting, handling debt and learning about investing.

Being financially literate can mean paying off high-interest debt first, understanding different investment assets and strategies, or recognizing the importance of savings and emergency funds.

The Forum’s study found that people are inclined to invest more when they have better opportunities to learn about investing. Early exposure to learning opportunities is critical. However, over half of the investors surveyed learned about investing only after entering the workforce.

Policy-makers and the financial sector must do more to improve financial literacy education. In the meantime, individuals can leverage trusted online blogs, podcasts and books, many of which focus on teaching investing fundamentals accessibly.

This element of financial literacy warrants its own callout. Although retail investors can choose from a multitude of investment products, major gaps in product awareness could lead to the adoption of the wrong products. There is a danger that individuals are selecting products with a risk level that does not match their investing goals.

Retail investors must understand that no asset is free from risk, but that there are concrete steps to protect against significant loss, for example, dollar cost averaging and portfolio rebalancing.

Retail investors have proven that they can collectively exert significant influence over the market.

In January 2021, retail investors following a popular online message board wielded the power of social sentiment and caused the stock of several companies — so-called “meme stocks” — to soar more than 400%.

Through asset selection, retail investors also have influencing power by demanding certain products, such as ESG (Environmental, Social, Governance) or other purpose-driven products. For example, a recent study found that half of the retail investors are planning to switch some of their investments, including pensions, into ESG investments.

As this cohort grows in size and strength, financial institutions must recognize its importance and reassess how they serve its needs. Individuals should continue to demand more from their financial providers and brokerage platforms. They should vote with their feet when their needs are not being met.

Starting to invest may seem intimidating, but there are many resources available to support individuals in their journey. People should start by seeking out opportunities to learn more about investing, plan short- and long-term goals, think about risk tolerance, and find a trading platform that makes investing accessible.

As more and more retail investors participate in the capital markets, companies, policy-makers and the ecosystem at large will continue to adapt to the evolving demands of today’s retail investors — and that's a good thing, for people and the planet.