Wall Street Journal: Amateur investors are gradually withdrawing from the investment market

Omar Ghias, an amateur trader, said he amassed about $1.5 million when stocks surged early in the pandemic. As gains grew, so did his spending on everything from sports betting to bars to luxury cars. He also borrowed heavily to expand his positions.

His fortune has dwindled due to bad investments and overspending. To support himself, he now works at a Las Vegas deli, where he earns about $14 an hour plus tips. "I'm going to start from scratch and I'm not going to invest anything," Mr. Ghias said.

Many Americans got addicted to trading stocks, options and cryptocurrencies during the coronavirus pandemic in 2020 and 2021, driving up the share prices of many companies. Now, some of these retail investors are pulling out of the market after the worst year for stocks since 2008. Others are cutting their positions or moving money into more conservative assets such as bonds or cash.

Last month, retail investor activity, measured by dollar volume, hit its lowest level since January 2020, according to an analysis by research firm Vanda Research. Earnings reports show that these investors have also reduced their trading with brokerages that sparked their enthusiasm for investing in the early days of the pandemic. According to Goldman Sachs Group, American households are expected to withdraw about $100 billion from the market by 2023, which would be the first net outflow since 2018.

Amateur investors are still the largest holders of U.S. stocks, according to Goldman Sachs, so their next investment decisions will have a significant impact on the direction of the market, and any stock market pullback could lose a stable source of support at a turbulent time. Central bank officials have repeatedly said their work to "cool" the economy is not yet done. Many large companies are preparing for possible economic turmoil.

Last month, gains in certain stocks, such as online car seller Carvana Co. and retailer Bed Bath & Beyond Inc., sparked speculation among some professional investors that individual investors were driving the gains. Markets overall were higher last week after the Federal Reserve raised interest rates by a quarter point. So far in 2023, the S&P 500 is up 7.7% and the Nasdaq is up 15%.

The investing frenzy of early 2023 is still a far cry from what happened two years ago. Stuck at home during the Covid-19 pandemic, many novice traders gathered on online forums such as Reddit, Discord and Twitter to buy stocks. The frenzy led to stunning surges in the shares of troubled companies such as GameStop Corp. and AMC Entertainment Holdings Inc.

Some of these rookie traders made a small fortune in 2021. But many suffered losses the following year as stocks fell along with bonds and cryptocurrencies.

Vanda Research estimates that individual investor portfolios have fallen 27% on average since the peak of investment in December 2021, while the S&P 500 has fallen about 13% over the same period. Monthly active users of online brokerage app Robinhood Markets Inc. also recently fell to the lowest level since the company went public. Average daily retail trading volumes at more traditional brokerage firms such as Morgan Stanley and Charles Schwab Corp. also fell to the lowest level since 2020.

Some still-active retail investors are also turning more conservative in their bets. Sumit Gupta, a 49-year-old ophthalmologist in Charlotte, North Carolina, is among those who bought stocks on the dip in early 2022.

As markets continued to fall, with the S&P 500 on track for its worst year since the 2008 financial crisis, the Federal Reserve was forced to sharply raise interest rates to reduce inflation.

“He’s starting to realize how determined Jerome Powell, the Fed chairman, is to raise interest rates,” Mr. Gupta said. “So he’s putting his extra cash into Treasuries.” The yield on 10-year government bonds hovers around 3.5%, up from less than 1% in 2020.

Jonathan Javier, 28, also increased his investments during the pandemic, attracted by the rapid rise in prices of various commodities, including cryptocurrencies and the S&P 500. He bought technology stocks such as Meta Platforms Inc. and Apple Inc. His portfolio roughly doubled by November 2021. Therefore, he believes that these portfolios will continue to grow as they have for most of the past decade.

In mid-2022, as the portfolio showed a "U-shaped" trend, falling by about 8%, he cut his regular investments by about half and decided to exit the market. Mr. Javier said he did not make any investments last year.

Navroop Sandhu, a 32-year-old web developer living in London, is new to investing. At the beginning of the pandemic, the value of her new account with online brokerage eToro soared. As a result, she would enter and exit positions within hours or hold them for weeks, and actively participate in discussions in online Discord trading groups. "Investing was like a snowball effect, and I got addicted," Ms. Sandhu said.

Now, she makes two to five trades a week, significantly lower than the nearly 10 trades she made in some weeks of 2020. Ms. Sandhu said she is also working on being patient in choosing the right trade times, which helps her to continue investing.

Meanwhile, some investors, including Mr. Ghias, have opted out of the market. Mr. Ghias said he first got into investing as a teenager growing up in suburban Chicago, where his guitar teacher would monitor stocks on the phone. He and the guitar teacher would discuss everything from penny stocks to marijuana stocks to big company stocks. When he got to high school, he began trading with some of his own money between jobs. He even sometimes skipped classes to trade.

After the pandemic began, he began looking at stocks and funds related to metals and options, which allow investors to buy or sell stocks at specific prices. He used these to generate income or profits from stock fluctuations. He also borrowed money from his brokerage firm to expand his positions, a strategy known as leverage.

In 2021, he began increasing his leverage, his brokerage statements show. He often turned to trades tied to the Invesco QQQ Trust, a popular fund that tracks the tech-heavy Nasdaq 100, while continuing to bet heavily on metals. Sometimes he tried options tied to hot stocks like Tesla Inc and Apple Inc.

At one point, Mr. Ghias’s leverage exceeded $1 million, according to brokerage statements reviewed by The Wall Street Journal. As of around June 2021, his portfolio was worth about $1.5 million, according to those statements.

As his stock market gains grew, so did his spending and partying. He began betting big on professional football games. In late 2021, Mr. Powell of the Federal Reserve warned that he was about to withdraw the central bank’s easy money policy, opening the door to scaling back its monthly asset purchases. Those plans had the potential to unsettle markets that have been setting records for much of this year.

Mr. Ghias said he thought the Fed was bluffing and made a speculative investment, thinking he would benefit from the central bank’s loose monetary policy and expecting silver and gold prices to rise. He said he also added a bearish position tied to the Nasdaq. But his trade didn’t work out, and he lost more than $300,000, according to his account, while the S&P rose 27%.

In 2022, he began taking bigger risks trading options and betting on sports. Brokerage reports show that Mr. Ghias trades S&P 500 options around the clock, sometimes making some trades worth hundreds of thousands of dollars around midnight. For example, if he had a hunch that the S&P 500 would continue to fall the next day, extending the losses from the overnight trading session, he might sell option contracts that would profit from a sharp drop.

By the end of 2022, bills on his American Express Platinum card had accumulated more than $300,000, and his $1.5 million nest egg had disappeared, according to snapshots of his accounts viewed by The Wall Street Journal. He decided to move to Las Vegas and began working at an Italian deli and restaurant on the outskirts of town. He was also interviewing for other jobs while documenting his new life on TikTok under the alias “OGTraderTV.” When one of his TikTok followers learned he was short on cash, Mr. Ghias was offered a free stay at the Bellagio Hotel & Casino. He said he was now in the market for money and shared screenshots of his accounts showing he had about $15,000 in credit card debt.