Chasing The Robinhood Generation: Are Young Retail Investors Still Betting On The Market?

Flashback to November 2021: Bitcoin is soaring at over $64,000 (more than three times its current price in 2023). The S&P 500, as well as popular tech stocks like Amazon.com, Inc. AMZN , Apple Inc AAPL and Tesla Inc TSLA , are all at historic highs. Meme stocks like GameStop Corp. GME and AMC Entertainment Holdings Inc AMC continue to enjoy much higher valuations than their fundamentals can justify.

The crypto crash and the bear market of 2022 are just around the corner, yet the sustained rally lasting over one-and-a-half years continues to attract a particular type of investor: one with little investment experience, easy access to technology and dollar signs in their eyes. Enter the "Robinhood Generation."

Millennial and Gen Z investors started pouring into the market during the peaks of the COVID-19 pandemic, propelled by disposable income from stimulus checks and time on their hands thanks to months-long lockdowns.

The rise of commission-free trading, a model popularized by gamified trading app Robinhood Markets Inc HOOD , also helped new investors enter the equity market.

According to a recent survey by The Motley Fool, Robinhood dominated the millennial and Gen Z market in 2021. By August of that year, 37% of investors between the ages of 18 and 40 used the app. Other beginner trading apps had significant shares of users, with 23% of investors saying they used Acorns at least once per month, 20% saying they use Stash and 16% using Webull.

Robinhood became the broker with the highest number of accounts opened in 2021, according to a report by BrokerChooser.A New Generation Of Investors, With New Methods, Asset Classes

This cohort of investors didn't just become disruptive from their tools of choice, but also from the way they accessed information and made investment choices. The same survey puts 91% of Gen Z investors and 75% of millennials using social media as their main source of investment information.

"This new generation of investors is very enthusiastic about sharing investment information and actively discussing it in online forums," says Dr. Mikhail Melnik, professor of economics at the Coles College of Business in Kennesaw State University in Georgia.

In his eyes, while the investment community has always been keen on sharing information, the level to which it has been taken by this new generation is unprecedented.

During the boom of commission-free trading, crypto trading also became widespread among this cohort.

In 2021, Binance, the world's largest crypto exchange by trading volume, saw a 263% year-on-year increase in revenue and a 794% yearly hike in trading volume, reaching $9 trillion.

Competitor Coinbase Global Inc COIN saw its trading volume jump from $165 billion in 2020 to $1.6 trillion in 2021.

Related Link: A Short Seller Joins Benzingas Power Hour To Talk GameStop. The Rest Is History.Millennial Money Stopped Short

In 2022, the unthinkable happened: cryptocurrencies crashed and burned and the bullequity market that had been ongoing since early 2020 hit its roof.

Except it was not unthinkable at all.

"Im worried about the newest generation of investors," says Asher Rogovy, chief investment officer at Magnifina, a personal investment advisory firm. The last two years were not a good introduction to the markets, he said.

Experienced investors are accustomed to the fluctuating cycles of the equity market, keenly aware that every bull market is succeeded by a bear market and that, by the time of the latest crypto boom, cryptocurrencies and other associated assets had seen their prices bloated by speculation. The real world application of crypto and blockchain technology are still not as ubiquitous as crypto enthusiasts tend to portray.

"This is not the first time novice investors chose bubble assets instead of proven investment strategies," says Rogovy. "There always seems to be some hot market getting more press attention than traditional securities."

By the time Gen Z and millennial investors were flooding the market by the flocks, Gen X investors had already witnessed the dot-com meltdown, the 2001 recession and the 2008 crash, says Kennesaw State's Melnik. Investors who entered the market in times of tailwinds had no previous exposure to sustained periods of loss.As The Market Crashed, Where Did Millennial Investors Go?

Rough times for the markets developed into a diaspora from millennial and Gen Z investors who had never experienced a bear market or bubble burst.

Robinhood lost 35% of its daily active users between September 2021 and September 2022: an objective loss of 6.7 million users, taking the platform's user count to levels seen before the rally around meme stocks of early 2021.

That also meant huge losses in assets under custody. Between the first and second quarters of 2022, Robinhood's AUC went from $93 billion to $64 billion, a quarterly decline of about 31%. In its latest quarterly report from last week, the company continued to showcase weakening assets under custody, at $62 billion.

The company's communications put the blame on lower valuation for growth stocks and crypto assets.

Trading around crypto, a hallmark of the millennial and Gen Z investor, has substantially decreased since its heyday. In the 14 months from September 2020 to November 2021, every month but July 2021 surpassed $1 trillion in monthly trading volume for Bitcoin, with January and February 2021 surpassing $2-trillion, according to data from Yahoo Finance.

Yet in the 14 months since December 2021, only three months had volumes above $1 trillion: May, September and November 2022, showing a sustained decrease in trading of cryptocurrencies during 2022.How Hard Were Young Investors Hit?

With the exception of well-covered events like the meme stock rally of early 2021, assets under custody data from multiple brokers shows that for all the buzz, users of trading apps like Robinhood don't have such a heavy impact on the markets overall.

We're able to get a glimpse of the effect these investors can have by comparing the $62 billion in assets under custody of Robinhood with a legacy bank like Charles Schwab Corporation SCHW .

By March 2022, Schwabs total client assets amounted to $7.86 trillion, according to its own reports. While these assets include the firm's banking arm, the latter wins by over two orders of magnitude.

"If you compare the AUC held at Robinhood vs. Schwab, you can see that its not a lot of money the Robinhood Generation was investing with," says Magnifina's Rogovy.

That conclusion makes sense when considering that younger investors typically have a smaller net worth to invest with.

Other popular millennial and Gen-Z trading apps display smaller numbers than Robinhood, further showing the smaller impact of these apps on the overall market. Acorns' assets under custody are just above $6 billion, according to the firm's ADV form. For Stash, it's $3 billion. Webull has around $42 billion.

On the contrary, brokers like TD Ameritrade boast over $1 trillion, according to its site. For Fidelity, it's $9.6 trillion.

These investors "could certainly have an effect on a few small or illiquid assets, like during the meme-stock frenzy in Jan 2021, but not enough to move the whole market significantly," says Rogovy.Searching For The Robinhood Investor: Where Are They Now?

It's hard to gauge how many of these investors left the market after 2022's market contractions, and how many merely changed brokers.

Broker Chooser's report shows that the first quarter of 2021 was by far the period with the most brokerage accounts opened in recent years: 14 million, a majority of which went to Robinhood.

By the first quarter of 2022, Fidelity and the combination of Charles Schwab with TD Ameritrade had both surpassed Robinhood as the new brokers of choice.

Investors who entered the market during the crypto bubble, the rise of gamified trading and the meme-stock craze could have only gone in two direcions: they either left the market or they continued to invest.

Of the 6.7 million users who stopped using Robinhood, a large chunk is likely to have left investing altogether after the bitter taste left by 2022's losses.

But those who stuck around got to learn a lesson that only experience can teach. They graduated from the market's school into a new generation. No longer a generation of trend followers, but one of more mature retail investors who learned the risk of pursuing fashionable assets with weak fundamentals.

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