By Gaurav Kapoor, President – MetricStream Solutions and Services
The last several years have seen the rise of a new generation of investors: digitally-native, connected and younger retail investors that have learned to capitalize on massive behavioral changes in the market.
These market changes, driven by super-digitalization of consumer finance tools, have been great for the expansion of retail investing, but have also elevated the opportunity of risky bets. Now, average people – particularly young millennial and Gen Z investors – can trade anytime from anywhere. The advent of meme stocks, like 2021’s GameStop short squeeze, has led to the gamification of investing.
However, trading is not a game. Just as there are real returns for those who invest strategically, there are real and serious risks that come with new territory. What’s more concerning: regulators may be falling behind the innovation in retail investing. But soon, regulators will catch up to the boundary-pushing efforts of this new generation of retail investors to help navigate the new paradigm of risk emerging. Here’s what smart investors need to know.
Exploring new territory: cryptocurrencies, NFTs and the metaverse
Keep an eye on a few spaces. These have already changed rapidly as they’ve risen to prominence in recent years but will continue to change as regulators catch up.
The advancement of digital banking and the rise of neobanks is creating a new paradigm of how younger millennials and Gen Z want to interact with their finances and investments. The U.S. has some of the highest adoption rates for neobanking due to the availability of these services, and the number of users has grown in recent years. A study from Insider Intelligence estimates that there will be 47.8 million digital-only bank account holders in the U.S. by 2024, making up an estimated 17.9% of the national population.
This has aided the expansion of cryptocurrencies, digital assets, digital wallets and digital real estate. With digital-only finances and tools, the realm of possibilities for investing extends beyond the physical. Now, anybody can launch a currency or create a non-fungible token (NFT). Even mainstream consumer brands are shifting brand equity into the digital world; Walmart is planning its own cryptocurrency and NFT launches, while Nike is bringing shoe NFTs to the metaverse. Other brands have rushed to claim space in the metaverse, even while the future of the metaverse remains unclear.
The new paradigm of investment risk and governance
The growing interest in digital banking, digital assets, and the metaverse is ultimately good for markets - it creates disruption. But we don’t yet know what this activity creates for the world of risk. Unlike more traditional or institutional investors, many young retail investors operate solo and don’t have the counsel or experience to assess their risk landscape and make changes to their strategy based on risk. In many cases, risk guidelines don’t even exist yet. Smart investors will take advantage and make massive gains out of this disruption, but many will lose big without risk awareness and protections.
Investors need to know that they play an important part in these critical next few years while regulators catch up. Governance in times of disruption follows a typical pattern: self-governance, community governance, and finally, regulator-governance. Users of the early internet saw this same paradigm play out as the internet community grew and the dotcom bubble swelled. Today, regulators and government entities are still trying to frame tech companies into regulations that allow for democratization and innovation with adequate protection of users.
Retail investors have a responsibility to be a part of the governance process by staying aware of the risks that come with new territory and rallying around industry leaders. Until governing bodies can get enough experts on the ground to understand the risks of investment territories like the metaverse, it is up to individuals to keep their personal data, their investments, and their community secure.
How to practice self-governance as a retail investor
In the meantime, investors can follow a few key steps to assess and act on risks. The good news is, amid this wave of disruption, the basic principles of risk management don’t change. Everything just happens faster.
Meme stocks, for example, can grow exponentially in a matter of hours. They can spiral just as quickly. The same can happen with NFTs or metaverse real estate, especially when the market cools – and soon enough, that will happen as regulators catch up.
Remember these steps: identify, monitor, act.
First, identify opportunities that are fundamental to your beliefs, are well researched and not based on ‘herd’ mentality; in parallel, identify risks in your investment portfolio and rank investments from riskiest to least risky. Then, continuously monitor those risks with diligence – stay on top of quick changes in the market, follow outside interest in specific investment areas, and stay apprised of the latest news. This information and risk awareness can ultimately help investors make better investment decisions and act.
Within the next two to three years, we will start to see equilibrium come to the volatile retail investing market. It will cool down as fundamentals become more dominant, assurance takes pace and regulators learn more and put governing principles around these new ways to invest, balancing out the growth of innovators and mavericks. What is happening now is very exciting from a consumer standpoint – investing is more accessible than ever before. But these investors need to realize the risks involved and understand how to manage that risk constantly. It is also a huge responsibility of the neobanks and trading platforms to ensure that they balance profit with the purpose of aggressively educating investors on both downside and upside. Digital banks and trading platforms have to implement a foundational, strong risk management strategy to ensure digital banks continue to grow responsibly.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
