The Rise of the Working-Class Investor — and the Rush to Sell Them Private Assets

This week in our newsletter:

• A Brutal Jobs Report Forecasts Weak Labor Market Ahead
• As AI Advances, More People are Turning to Entrepreneurship
• Say Hello to the AI-Generated Influencer

Picture the average stock market investor. What would you assume they look like?

Most people would probably imagine someone relatively affluent– well-educated, financially savvy, and with enough disposable income to regularly invest in stocks. Perhaps they’re a professional who tracks earnings reports, watches market trends, and allocates a portion of their savings to a diversified portfolio.

You’d be forgiven for thinking these stereotypes still hold water. After all, stock trading has historically been reserved for the wealthy, and the top 1% of wealthy Americans currently own half of all stock.

But in recent years, the image of the retail investor has begun to change, from white-collar professional to blue-collar worker. Nowadays, your average investor is a restaurant worker, a gig-economy driver, or a service employee who’s checking stock prices on their phone between shifts.

According to a recent survey conducted by the BlackRock Foundation and Commonwealth Research, 54% of Americans earning between $30,000 and $80,000 annually now have taxable investment accounts.

Even more striking is that more than half of those investors entered the market within just the past five years.

A sizeable chunk of this is younger Americans entering the investing game. According to JPMorganChase’s report on shifting investing behaviors, 37% of 25-year-olds contributed to investment accounts in 2024, compared to just 6% in 2015.

These trends all point to a fundamental shift in how Americans build wealth. As JPMorganChase explains, home ownership has historically been the primary pathway for middle-class wealth accumulation. But with rising housing prices and higher mortgage rates making that goal increasingly difficult to achieve, financial markets are filling the gap instead.

What’s Driving the Growth?

Several developments are at play here. As Hannah Erin Lang and Anne Tergesen at the Wall Street Journal explain:

• Technology has dramatically lowered barriers to entry, with commission-free trading platforms, mobile apps, and fractional shares making it possible to invest with just a few taps and relatively little capital.
• Financial information (though not all of it trustworthy!) is now widely accessible through social media, online forums, and financial content creators. Investment ideas once reserved for professionals are now within reach of everyday investors.
• A strong bull market also encouraged participation, with many new investors rewarded after the pandemic, reinforcing the perception that investing can accelerate wealth accumulation.

The shift has seen even those with modest incomes even lower income build six-figure brokerage accounts and fund future home purchases through equity gains. Retail investors also now collectively exert measurable influence on market activity.

So, what’s the cause for concern here?

For one, the risk exposure across America is greater than ever before.

Many newer investors have entered the market during a period of unusually strong returns. The S&P 500 has risen dramatically since 2020, meaning a large portion of this cohort has never experienced a prolonged bear market. If markets decline sharply, millions of households now have greater financial exposure to stock market volatility than in previous decades.

But the concerns don’t end there.

Some newer investors are also experimenting with higher-risk strategies such as options trading and speculative assets, which can amplify both gains and losses.

The issue here is that retail investors often respond strongly to market momentum, such as entering markets during rallies and buying on dips during downturns, behavior intensifies volatility during periods of market stress.

It’s a phenomenon that we’ve previously explored in The Psychology of Bubbles: Why Investors Keep Falling for the Same Old Cons. Investors are often drawn to markets during periods of rising prices, especially when they see others profiting. FOMO has led many to take on greater risks than they otherwise would.

For newer investors who have only experienced a prolonged bull market, the psychological pressures to invest in risky assets may be even more pronounced. And if market conditions were to reverse, inexperienced investors would be exposed to a level of volatility they’ve never encountered before.

Private markets now have their eye on working-class investors.

Wall Street has taken notice of the millions of new retail investors entering the market. Now, there is also a growing push to get alternative assets into the hands of ordinary Americans.

Historically, these asset classes have been restricted primarily to institutional investors and wealthy individuals who qualify as accredited investors. And for good reason– alternative investments often involve complex structures with higher fees, longer lock-up periods, and more complex risk profiles than traditional stocks and bonds.

Last year, we examined how regulatory barriers have come down, making alternative assets available to 401(k) plans. See our thoughts on this in The 401(k) Floodgates Have Opened — Please Don’t Drown.

The door has since been opened even wider for private equity firms to sell to the masses.

According to Loukia Gyftopoulou at Bloomberg, private equity is moving deeper into the retirement industry itself by “winning over” the industry gatekeepers that influence which investment options ultimately appear in retirement plans. They’ve been quietly buying out wealth advisers, plan consultants, and insurance brokerages.

These moves have been years in the making. Gyftopoulou, citing PitchBook data, states that over the past decade, PE firms and PE-backed financial firms have acquired more than 900 independent businesses that provide wealth management and retirement services.

The issue here is that this will likely lead financial advisors to invest your money in alternative assets without you even knowing.

Michael Esselman, CIO of OneDigital, an insurance brokerage and consultant firm with majority PE ownership, was quoted in the Bloomberg article saying, “I don’t think the choice should sit with the participant… They don’t even know the difference between equities and bonds.” That’s not paternalistic at all (read aloud in a sarcastic tone).

But don’t be fooled into thinking that the private equity industry is simply “democratizing access” to ordinary investors here. (We’ve been warning against this for more than a decade; More Venting About the ‘Democratizing’ of Investing lays our case out if you want the short version.)

This push to ordinary investors has come about, at least in part, because fundraising from traditional institutional investors has slowed (down for a fourth consecutive year), and firms are seeking out new sources of capital. We broke down these trends for you in a previous newsletter, covering how private equity is currently facing its most prolonged downturn since the 2008 financial crisis.

So why, then, should millions of ordinary retirement savers be forced to fill up the gap left by institutional investors, in an industry that doesn’t even beat the stock market in returns?

Brace yourselves: This is just the beginning.

Plans are in the works to expand access to alternative assets even further.

The Senate recently passed the Incentivizing New Ventures and Economic Strength Through Capital Formation (INVEST) Act. It’s intended to help startups raise money more easily, give investors greater access to private markets and alternative assets, and reduce regulatory barriers for companies seeking public capital, while retaining some investor protections. This sounds good on its face. However…

It’s now our turn for some paternalism: private and early-stage investments were historically restricted largely to wealthy or institutional investors for good reasons. Those reasons have not gone away.

What are some of those reasons? We’re glad you asked. Let’s break them down:

• Venture capital investors operate on the assumption that most portfolio companies will fail and that a small number of outliers will generate the overall return. If you cannot afford to diversify across dozens of startups, you will face a materially higher chance of losing most or all your invested capital.
• Public companies must file extensive disclosures with the SEC, including periodic reports, audited financial statements, and detailed risk factors. Private companies operate with less regulatory oversight and fewer standardized disclosure requirements than public ones. Financial statements may be unaudited or prepared using nonstandard assumptions. As a result, you may make decisions based on incomplete or incorrect information.
• This also creates opportunities for bad actors to exploit inexperienced investors. Startups often rely heavily on projections, assumptions, and narratives about future growth that may be difficult to verify. Unsophisticated investors may have difficulty separating credible opportunities from overly promotional claims.
• Private investments are typically illiquid, meaning there may be no practical way to sell the investment once it’s made. You may therefore need to wait years (or forever) for a liquidity event, such as an acquisition or an initial public offering. Even assuming the company you invest in doesn’t fail, you may have no practical way of extracting value from it. For investors relying on liquidity for retirement planning, financial stability, or emergencies, this long-term lock-up can create significant financial strain.
• The valuation of private companies is often determined during funding rounds negotiated between founders and investors rather than through an open market. Those valuations may reflect optimistic projections rather than demonstrated financial performance; without market pricing to validate the valuation, you may purchase shares at prices that later prove unrealistic; and when the company ultimately raises additional capital or goes public, the true market value may be significantly lower.
• Private investments frequently involve securities structures that are more complicated than simple common stock. These may include preferred stock, liquidation preferences, convertible notes, anti-dilution protections, and other contractual features. Professional investors negotiate these terms carefully to protect their downside risk. Retail investors may not fully appreciate how these provisions affect their economic position, particularly in downside scenarios.
• Startups typically raise multiple rounds of financing, and each new round can dilute earlier investors. Institutional investors may negotiate protections that preserve their economic interests, but you, as a retail investor, likely cannot. Over time, your ownership percentage (and thus economic participation) can shrink significantly.
• Retail investors may be attracted to startup investing by highly visible success stories involving early investments in companies like Amazon, Google, or Uber. These cases create the impression that early-stage investing routinely produces extraordinary returns. But in reality, most startups either fail outright or produce modest returns. Without institutional diversification strategies, individual investors may overestimate their ability to identify the rare winners.

We’re not suggesting all retail investors below some arbitrary level of wealth should stay away from private markets and alternative assets. We are saying that doing so is not a decision to be made lightly, and that educating yourself about investing is critical. You can start to do so by reading Alternative Assets and the ‘Average’ Accredited Investor Installment #1.