Retail Investors Are Rightly Riding on Trends, but How Smart Are They?
Cartoon character Yogi Bear was not one for underestimating his intelligence, cunning or ability to outsmart park rangers to steal picnic baskets. In the past, regulators have been guilty of similarly underestimating the abilities of retail investors, an approach that is undermined by recent research suggesting they were more astute than might have been expected during the major market events of 2025.
A report published by liquidity provider Winterflood Securities has analysed the trading activity of UK retail investors, examining more than 97% of trade flow from the retail market for equities and ETFs. This amounted to £228 billion worth of trade flow across almost 26 million trades last year, based on data from 150 retail-facing counterparties.
Heightened levels of retail investor activity were identified in the vicinity of Donald Trump’s Liberation Day proclamation, when traders were rewarded for ‘buying the dip’ after the inevitable U-turn on tariffs arrived.
There was also plenty of selling done in advance of the November budget announcement, when markets were in a state of flux over concerns about tax hikes.
‘In short, retail investors behaved as rational economic actors in an unsettled environment, reinforcing the case for broader access to a range of investment products, in line with government and FCA policy,’ said the report.
According to Winterflood, the data shows that retail investors have a strong sense of trends and events and how to deal with them, and that engaging with this segment of the market requires recognising retail investors for their expertise and considered approach to investing.
The report was published on the same day the UK government, Financial Conduct Authority and London Stock Exchange launched the ‘Bond with Britain’ campaign, designed to encourage retail investors to invest in corporate bonds. This coincides with broader reforms aimed at increasing retail participation in capital markets, including easier access to investment products.
Key changes include a reduction in the time a prospectus must be publicly available before an IPO, new ‘targeted support’ for investments, and permitting long-term asset funds in stocks and shares ISAs.
Don’t Succumb to Acronym Confusion
The mere mention of collateralised debt obligations, or CDOs, is enough to make the average investor break out in a cold sweat. The role these instruments played in the 2008 financial crisis, by mixing high-risk subprime mortgages with seemingly safe, triple-A-rated securities, has been well documented.
The CLO (collateralised loan obligation) could be said to have suffered collateral damage from the fact that every CLO is effectively a CDO. But this is to ignore a key difference between the two, namely that CLOs hold pools of senior secured corporate loans, whereas CDOs also include riskier assets.
Investors should avoid falling into the trap of guilt by association, according to Edwin Wilches, co-head of securitised products at PGIM, who reckons there has rarely been a better time to familiarise investors with the facts about an asset class that aligns with current investor demand to increase yield, reduce risk and enhance diversification.
Senior secured corporate loans represent the primary collateral in CLOs. The loans are pooled into a special purpose vehicle, which issues securities in tranches offering various levels of risk and return potential. This ability to build CLOs with bespoke mixes of assets and grades could be described as a uniquely appealing feature of an asset class that offers the prospect of attractive income, credit resilience and diversification.
Wider product availability has made CLOs more accessible to retail investors, and these instruments have compared favourably to other fixed income offerings over the last 12 months, with the lowest potential, non-default annual return a bondholder can receive comparing well against global aggregate bonds and US Treasuries.
Wilches favours CLOs because they do not have the idiosyncratic risk associated with traditional fixed income instruments. “This creates a very robust cash flow for times where credit stress might pick up, and AAA and AA CLOs, in particular, can shield investors from some of those idiosyncratic risks that we are not sure about yet, but we know will eventually come,” he says.
Look Beyond the US for Value
In previous columns, I have explored some of the issues around US equity valuations, for example, the likelihood that valuations have been driven artificially higher in part by investors borrowing record sums from brokers to buy stocks.
I have also explored the argument that European equities are underpriced and offer better value than their US counterparts.
It was therefore interesting to read an analysis of equity valuations that suggested US equities were priced at a point where investors could not afford to ignore the benefits of diversification.
*EUROPEAN MARKETS FINAL 2025 PERFORMANCE:🇪🇸SPAIN’S IBEX 35 +48.2%🇮🇹ITALY’S FTSE MIB +30.7%🇩🇪GERMANY’S DAX +22.3%🇬🇧BRITAIN’S FTSE 100 +20.2%🇪🇺EURO STOXX 50 +17.8%🇫🇷FRANCE’S CAC 40 +10.3%🇳🇱NETHERLANDS AEX +7.2% pic.twitter.com/qMMOQzgPpD
— Investing.com (@Investingcom) January 1, 2026
A chart comparing 12-month forward price-to-earnings ratios across MSCI regions relative to their own 20-year histories shows that US equities are close to their highest ever level at approximately 22.6 times forward earnings, while European equities are trading at a multiple of 15.1. Japanese equities are trading closer to US levels, but still only at 17.3 times forward earnings.
One of the themes that emerged from the analysis was recency bias, another topic that has been covered here previously, with investors willing to keep paying a premium for equities that have generated good returns recently and underestimating the capacity of markets to turn.
This is important in the context of valuations that are not only higher than anywhere else in the world, but considerably higher. In fact, the premium investors are paying to hold US equities is sitting significantly above the long-term average, which raises the risk that other markets are being ignored despite potentially offering better value.
This is not to say that investors should dump these assets, as the US premium could hold up for longer than expected. But historically high relative valuations reduce the margin for error when it comes to making decisions on risk and leave investors more exposed to bad news.
This article was written by Paul Golden at www.financemagnates.com.
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