ETF Edge

Retail investors are playing the stock market for 'entertainment,' says behavioral finance pro

The psychology behind the retail investor comeback

"Entertainment investing" is having its heyday.

That's according to Dan Egan, managing director of behavioral finance and investing at Betterment, who used the term on CNBC's "ETF Edge" on Monday while explaining retail investors' recent rush to the stock market and trading platforms like his.

"In March and April, we were definitely seeing people getting a little bit more conservative, especially around having cash positions or emergency funds and wanting those to be available on shorter notice," Egan said.

A survey of 5,005 U.S. investors conducted by Betterment found that 78% did not take money out of the markets from March to mid-April. Of the 20% who did, nearly half said they would only reinvest when the market was either fully corrected or had begun to correct.

As lockdowns continue into the summer, "people are either voluntarily or involuntarily saving a lot of that money, and they need something to do with it," Egan said. "We're starting to see what I would call 'entertainment investing.'"

With professional sports, film and television productions, indoor activities and other entertainment options largely on hold due to the pandemic, people have been looking for a sense of community, he said.

"The stock market is in the news. People talk about it. It's more accessible than it's ever been," Egan said. "We are definitely seeing people treating it a little bit like a form of entertainment, where they want to come in and be able to talk about what they have and haven't invested in and how it's been doing."

"From a budget point of view, but also from a 'What else are you going to do with your time?' point of view, it's been a good time to be somebody who helps clients manage their money," he said.

John Davi, founder and chief investment officer of Astoria Portfolio Advisors, warned that the retail investor comeback could just be a fad.

"A lot of retail investors that come into the market not really for a long-term strategic allocation tend to buy very low-priced stocks, penny stocks. It is concerning," Davi said in the same "ETF Edge" interview.

"I think in investing you should have a very long time horizon, ... so I am worried about it," he said. "I do think that as the economy opens up, sports open up, a lot of these investors that would typically trade for a quick day trade ... will go and find other ways to kind of utilize their efforts and their time and their money."