Retail Investors: The New Smart Money

• There's an emerging power shift from Wall Street institutions to Main Street investors

• Retail buying activity has marked stock market bottoms in this new era of democratized finance

• We call out the key risks investors must recognize so that they can thrive in the next macro cycle

Individual investors control the ball. They are the offense on the field, powering markets to new heights and offering support when stocks drop. It’s a 180 from just a few cycles ago. Small investors, often dubbed the “retail crowd,” were viewed as the “dumb money,” chasing rallies, panic-selling during bear markets, and in desperate need of handholding when volatility spiked. Large asset managers, or “institutional investors,” were seen as monitoring markets from on high. They were the gatekeepers, allowed to charge massive fees to the selected few granted access to their strategies.

The times have changed. The March 2020 COVID crash and rally suggested that retail investors made the right moves, including buying aggressively after stocks had dropped hard. Then the April 2025 tariff-induced V-shaped recovery confirmed that everyday investors no longer required the aid of so-called experts to guide them through macro turbulence. 

This decade has also brought about the spectacle that is meme-stock trading. Reddit’s r/wallstreetbets seems to matter far more than dry research reports put out by the big banks. Retail traders come together to promote individual stocks and themes, and that money quickly finds its way into markets. Of course, there are inherent risks with taking signal from all of the noise produced on Reddit, and it can lead investors astray from reaching their goals, but the trend appears to be here to stay.

Retail Trading on the Rise

Source: Citadel Securities

But why do retail investors now dominate markets? We’ll explore that today. It boils down to greater access to information, technological advancements (including AI), and a broader cultural shift toward financial empowerment. There’s an enduring bid to markets, with investors, young and old, periodically adding to stocks, resulting in short-lived downturns and steep inflections that are more challenging than ever to time. 

We’ll explore recent events and analyze current data to prove that all people have the power to make wise decisions, build resilient portfolios, and shape their future.

Why Retail Investors Don’t Panic—and Often Win

The democratization of investing has been a game-changer. Allio is at the forefront of bringing sophisticated strategies to individual investors at a low cost. We recognize, however, that we are not the only game in town. Others have worked to reduce barriers to entry so that people across wealth levels and knowledge of markets can participate in all that capitalism has to offer. 

The rise of the retail investor is built on access to information. You don’t need to be a pro to think like one, and Wall Street doesn’t own a monopoly on intelligent decision-making. Gone are the days of households being blissfully ignorant of profitable investing maxims. Financial literacy continues to make inroads, with social media, podcasts, and even online forums disseminating what used to be secrets of the wealthy. 

But those secrets are actually not all that sophisticated. Buying dips, investing for the long run, allocating across asset classes, and keeping fees in check are the winning concepts. Not giving into fear, while dismissing the media’s narratives, is another key to success. This ethos is spreading, too.

April 2025’s Buy the Dip: Investors Piled into Stocks

Source: BofA Global Research

In recent cycles, we’ve seen small investors come out ahead for three reasons:

1. Behaving Right and Buying Reflexively

Here’s a Wall Street secret that has gone up in smoke: Market bottoms occur when retail investors succumb to fear and sell en masse. It’s the opposite today. Rather than capitulating as prices fall, many everyday investors enter with a mindset shaped by prior crises: if the market collapses, they expect a rebound. 

The pattern of “buy the dip” won’t work every time, but today it’s like a Pavlovian response to equity drops. Stepping into stocks amid volatility is done both without thought, such as through 401(k)s, and opportunistically with cash in trading accounts.

Here’s the cadence:

1. Markets decline →

2. Retail expects a bounce →

3. Retail buys aggressively →

4. Price rebounds faster than institutional conviction →

5. Institutional managers slow selling or begin buying earlier →

6. Correction ends quicker.

In effect, retail investor behavior shapes the market environment, turning downward shocks into buying opportunities, and institutional investors must either adapt or risk losing out.

Recent Case Study: Investors Scooped Up Stocks in August 2024 (the Yen Carry Trade Unwind Event)

Source: Vanguard Group

2. Allocating with Speed and on Logic

Markets move faster these days thanks in large part to technology, but there’s another force at play: Retail investors are nimble. When headlines flash, apps like Allio empower investors to act decisively and buy when big hedge funds are liquidating. Armed with the knowledge of what asset classes may outperform during specific regimes, they can allocate appropriately, but not merely impulsively.

Institutional investors, by contrast, must wade through committees, research teams, and risk constraints. They are beholden to not only their clients but also to their inherent behavioral biases. For instance, a Wall Street portfolio manager may fear losing their job if they were to aggressively load up on stocks amid high volatility (the career-risk bias). It could be seen as a reckless decision, so they may play it safe, then miss a V-shaped rally that has become so commonplace. Retail investors don’t face these barriers and outside pressures.

Investors Rewarded for Buying Corrections

Source: Goldman Sachs

3. They Act on their New-Found Power to Shape Market Direction 

Retail buying at market dips can itself alter the dynamic. Scott Rubner of Citadel Securities notes that retail trading activity is a structural shift, not a short-lived phenomenon, underpinned by consumer health. He believes that the next wave of retail empowerment may be seen in savvier portfolio construction. Passive index products could combine with alpha-generation techniques, opening the door to creative asset allocation methods. 

In short, buying the dip may just become the norm until some seismic event upends the macro environment. There’s a reinforcing quality to it: If everyone expects retail buyers to emerge at the bottom, then institutional managers may be slow to sell or even begin covering early, accelerating the rebound. Thus, retail traders determine the inflection, while institutional investors react. 

The Self-Fulfilling Prophecy of "Buy the Dip"

Individual investors are now the lynchpin to financial-market stability. Buying the dip has become an American virtue, but it only works if people have jobs and are earning decent wages. Our concern is that if we see a macro shock, similar to the 2008 Great Financial Crisis (GFC), then the tailwind retail investors currently provide could flip to a headwind. 

You see, the US labor market has been generally healthy for the past decade. Despite the 2022-2023 inflation spike, the unemployment rate has remained low, affording investors the liquidity to pounce on stock market drops. We believe that macroeconomic conditions must be monitored, as today’s regime may not be tomorrow’s regime. The solution for investors is to hold a truly diversified portfolio that can weather the spectrum of possible outcomes. 

Buying the dip is a self-fulfilling prophecy, but it’s not guaranteed to work in the years ahead. Investors must follow the forces (inflation, interest rates, policy moves), position ahead of shifts (not react to the crowd), and stay adaptable (own a portfolio that adjusts as global trends evolve).

For now, buying the dip is in vogue. March 2020 and April 2025 are cases in point.

March 2020 Crash: Retail Bought While Institutions Sold

The COVID‑19 crash of March 2020 offers a textbook example. As markets collapsed by over 30% in a few weeks, institutional investors began selling risky assets, treasuries, even gold; yet retail investors largely held steady or even bought into the decline. The Vanguard Group’s How America Saves report profiled the steadiness that everyday investors exhibited during one of the fastest stock market plunges in history.

The 34% S&P 500 freefall over 23 trading days was the first test of individual investors’ mettle since the GFC. To be clear, there were other gut-wrenching 10-20% corrections, such as those in 2011 and late 2018. This one felt different, though. Fear cascaded across markets faster than COVID-19 spread around the world. The Cboe Volatility Index (VIX) spiked to 80, the same zenith from late 2008. 

Institutional investors, bound by risk models and mandates, moved to de-risk their portfolios, increasing allocations to cash or safe-haven assets like US Treasuries. Retail investors, however, saw opportunity amidst the chaos. They pounced on cheap prices by piling into shares of beaten-down, high-quality companies. The collective buy-the-dip mentality worked to stabilize markets (the Fed promising to backstop the economy didn’t hurt either). 

A trend emerged that was poised to mark a new era of macro investing. The “watch what I do, not what I say” economy began then. Survey data revealed fear among small investors in March 2020, but they just kept buying. The retail crowd recognized that it’s natural to be scared amid heightened uncertainty, but they also knew that adding to stocks when there’s proverbial blood on the streets is required to reach long-term financial goals. 

That tack was vindicated over the ensuing months, as the S&P 500 hit new all-time highs just months after the March 23, 2020, generational low.

When the dust settled, it was apparent that institutional selling created the dip; retail buying helped form the trough. 

April 2025’s Post-Liberation Day Plummet: Retail Saves the Day

The Fed was not on standby when the VIX hit 60 in early Q2 2025. Looking back, it was a garden-variety near-20% drop, but it felt like a whole lot more in the moment. TV talking heads warned of a Black Monday event after President Trump outlined steep reciprocal tariff rates to be enforced in his second term. 

Podcasters and newsletter writers described the reshaping of the global trading system, noting that what worked before may not work in the future. “The president is trying to destroy the stock market” was a common refrain. Retail investors scoffed and saw value, not chaos.

History repeated itself, though on a smaller scale. Mom and pop investors stepped in aggressively when stocks dropped: $50 billion net retail inflows drove the recovery off the April 8 market bottom, and the portfolios of retail‑direct investors rose 15% in line with the broader market rally. The Pavlovian dog was barking once more, and as fast as the S&P 500 fell after the Liberation Day announcement from the White House Rose Garden, equities climbed back to new highs in short order.

Just like in 2020, the vibes were terrible coming off of the early-April bottom, but steadfast buying among small investors supported a recovery that stunned the experts. There was no extra stimulus, no help from Chair Powell at the Fed, and individual investors had to push through the media’s doom and gloom. The S&P 500 rose to 6400 for the first time less than four months after April 2, having fallen below 5000 for a brief time at the start of Q2 2025.

Retail Investors Came to the Rescue in April 2020 and April 2025

Source: Goldman Sachs

Flipping the Script

There’s a tired chart the Wall Street machine likes to tout. It purports to demonstrate that small investors are the dumb money; they consistently underperform market indexes due to their “bad behavior.” 

The DALBAR Quantitative Analysis of Investor Behavior (QAIB) report, released each March, notes the “Average Equity Investor’s” return compared to the S&P 500’s performance. Like clockwork, the former underperforms the latter. 

Pictured below, the typical investor somehow always comes out on the losing end. The solution, according to the traditional wealth management industry, is that people need an advisor to handhold them at all times.

DALBAR QAIB Study Assertion: A Major Behavior Gap Exists, Underscoring Retail Being the “Dumb Money”

Source: Evaluator Funds

The study counters much of what we have laid out, but there’s a reason, one that Wall Street doesn’t want you to know (or think you can understand). It has to do with how the calculations are performed. The DALBAR study assumes investors buy periodically, not all at once at the beginning of a period, which makes sense in the real world. The problem is that since markets trend higher, investing at the start of the period usually beats investing in chunks along the way. 

It’s the concept of “time-weighted” versus “money-weighted” performance. So, it’s not that retail investors are bad market-timers; it’s just that they rarely invest a lump sum. In reality, the so-called “behavior gap” is much smaller than what DALBAR reports.

Recent data, as we noted earlier, even suggests that individual investors are beating the pants off institutional allocators.

Is Old-School Wall Street Losing Its Grip?

The truth is that Wall Street doesn’t have a monopoly on innovative thinking. You don’t need to wear a suit or hold a CFA to think like a professional investor. You just need the right mindset and the right tools. Allio’s Dynamic Macro Portfolios and ALTITUDE AI™ Technology blend data-driven thinking, macro intelligence, and AI signal detection into a strategy built for real people.

There’s a clear shift in market psychology: retail investors are no longer merely reactive; they’re anticipatory. Operating with a mindset tuned to volatility (namely buying the dip and believing in fundamentals long term), they often catch turning points faster than risk‑averse institutions.

Wall Street trading firms employ the very smartest people in finance; they didn’t get to where they are by making poor decisions. The problem is that natural barriers are emerging that prevent them from holding the commanding presence they once controlled. We can harness their expertise while not being bound by their constraints.

Broader Implications Looking Ahead

The rise of the retail investor means market trends of tomorrow will be different from those of decades ago. Here's what to expect:

• Faster Drops: The self-fulfilling prophecy of retail buying during dips suggests that corrections could come about more quickly but then end more abruptly compared to previous cycles. Asset bubbles may come about, then dramatically burst. Don’t let that shake your psyche.

• Volatility in Volatility: We expect the VIX to go through protracted periods of extremes—low (under 15) for months on end, but then spike (above 40) with little warning. Whipsaws can wreak havoc on your wealth if you’re not prepared for the roller coaster ride.

• New Wall Street Gimmicks: Institutions will feel pressure to devise new, high-cost strategies to sell to the public. Don’t fall for them. 

• Regulatory Shifts: The Trump Administration caters to Main Street investors, and new policies, such as those related to crypto, reflect that. Fair and transparent markets must prevail.

Market historians will look back at 2020–2025 as the era when retail investors crossed from “dumb” to dominant stabilizer. Where institutions are structured for risk control, retail often thrives on reflexive contrarianism.

The Bottom Line

Retail investors, long viewed as the irrational fringe, have increasingly proven themselves to be the persistent backstop at market bottoms. The combination of technological advancements, financial education, and a cultural shift toward empowerment has created a new breed of investor, one that is confident, agile, and unafraid to challenge the status quo.

But risks remain. Individuals must guard against overconfidence and the temptation to chase speculative trends. Diversification, discipline, and a focus on long-term goals, all of which Allio champions, will be critical to sustaining your success.