Retail investors are back – and they're a lot savvier than they were in their YOLO days

Net purchases of equities by retail investors hit a year-to-date peak in February, but trading volumes are below trend compared to other recent rallies.

• Retail investors have made a comeback, and they're a lot savvier than they were in the meme-stock era. 
• Net purchases of equities by retail investors hit a year-to-date peak in early February.
• "They are looking for growth, but they're looking for growth at a reasonable price."

After riding the meme stock rollercoaster of 2021, getting burned in the bear market of 2022, and getting whipsawed by volatility in 2023, retail investors are back in the saddle. 

Unlike the days of the YOLO trade though, they're more discerning, smarter, and savvier, stock market experts say. 

"I think the difference is that investors are saying, 'Yep, we want to participate in the full run, but we don't need to bet the house on it,'" Joe Mazzola, director of trading and education at Charles Schwab, told Business Insider.

Hopping on to the turbocharged rally that began in October, retail investors have been steadily snapping up more stocks. Daily net purchases hit a year-to-date peak in early February at $1.5 billion across equities, and total trading volume has tripled since pre-COVID.

But even though the S&P 500 is breaking new records and the sugar-rush rally is a marked reversal from anemic 2022 and wobbly 2023, the cohort of investors are more measured in their enthusiasm lately. The total volume traded is below trends of the previous bull market rallies in the past few years.

"It is like they want to participate — they don't want to miss out on the rally too much — but they're doing it mainly by the bigger names," said Marco Lachini, senior vice president at Vanda Research, which tracks retail trader activity across stocks and ETFs.

"Instead, they're using SPY or QQQ instead of the triple QQQ or a lot of the heavy usage of leveraged ETFs in 2021 that has diminished significantly after they got burned," he added, referring to the popular S&P 500 and Nasdaq 100 ETFs. 

At the peak of the meme-stock era, retail investors were lapping up shares of things like leveraged ETFs, which amplify the returns and the losses of the underlying assets they track. They loved small companies that didn't need to have rock-solid balance sheets, like GameStop and AMC. They were also big on squeezing stocks in what seemed like a David-and-Goliath fight against short sellers on Wall Street.

Then the market tanked in 2022. Faithful to the "diamond hands" never-sell mantra, retail traders stuck it out and saw the value of their portfolios shrivel by around 30% towards the end of the year.

Today, the unhinged speculative frenzy has tapered. For one, hedge funds have become smarter at anticipating attempts to squeeze stocks, but retail investors have also matured. 

A key reason why trading activity hasn't touched the 2021 levels is because the memory of being burned in 2022 is too fresh, Lachini explained. As retail investor portfolios have finally caught up with the all-time highs, they're not big on making big YOLO bets. 

And having jumped into the latest bull market rally right on time, there's no FOMO mentality fueling their investments. Instead of aggressively buying the dip, gobbling up meme trades, and heavily piling into single names, investors today are more balanced between stocks and ETFs.

"They are looking for growth, but they're looking for growth at a reasonable price," Mazzola from Charles Schwab said. "Whereas in 2021, it was, 'Where is the opportunity? How can I get in and get out before this trade ends?'"

AI over meme stocks 

While the occasional meme stock still goes parabolic now and then, retail investors are riding the hype train in other parts of the market, like AI.

"Investors are really buying into the AI story, and I think that they're using opportunities when they do get pullbacks," Mazzola said.

According to VandaTrack data, Nvidia, Advanced Micro Devices, and the QQQ were in the top five shares that saw the largest net inflows in the past month.

"What I see month to month is that what goes down, our customers buy a little more of, and what goes up a lot, they trim a little bit," Steph Guild, head of investment strategy at Robinhood, said in an interview. 

Those patterns mimic that of a "long-term investor" she said — something that wasn't exactly a part of their brand before. They are also exploring different themes beyond the proverbial Magnificent 7 trade. They've been dipping into healthcare, financial tech, and even cruise lines.

"We are seeing more diversification in what's owned in portfolios, generally speaking, than let's say two years ago or three years ago," Guild said. "And it doesn't seem to be as socially fueled. While there is discourse on social media obviously about this, it's not like necessarily everybody's piling into one name or two names."

And they are feeling pretty good about their choices. According to a recent Charles Schwab poll, traders' confidence in their own decision-making hit the highest level in survey history at 68%.