Robinhood is dangerous

robinhood-for-webFirst of all, I don’t mean Robinhood the vigilante, the hero. Sure, was a criminal, but at least he was fighting against the bad guys. In an unjust agrarian society, his actions could be seen as defensible, but I digress.
I mean Robinhood the investment app. A few notes on its danger:

  • The Robinhood app is gorgeous. It’s so pretty it’s hard not to look at it. The graphs and charts are perfect, the animations and gestures are seamless, the design is minimal, it’s about as well designed as apps come. The old mantra ‘beauty is only skin deep’ applies here. The beauty draws you in but also masks some sordid parts.
    The beauty of Robinhood masks the fact that it’s essentially a place to gamble. Sure, you could call it sophisticated gambling, at least you’re not sitting in the smoky haze with eyes glazed over at a shiny slot machine, but it’s still gambling. The little news tidbits aren’t going to help you beat the market, nor will the pretty charts. The truth is that even professionals don’t beat the market. The beauty and ease just make it more tempting.
    Robinhood will you trade options, which is an even riskier way to invest, and even more likely to lose you more money. An option is just a leveraged bet on the market, like putting your money on 13 at the roulette table. It’s a terrible idea.
  • Robinhood offers free trades, perhaps its most alluring selling point. Purchasing stocks always involves fees, brokerage fees, trade commissions, transaction fees, etc. Brokers who conduct trades charge fees, usually per transaction. Robinhood is one of the few places where consumers can purchase shares without transaction fees. So it’s beautiful and free? Who says no to that?
    It’s not entirely free. There are regulatory fees on every trade which Robinhood does pass on to customers. These fees are typically fractions of pennies, and Robinhood rounds them up to the nearest penny, pocketing the round-up of course.
    Robinhood also generates substantial income from a practice called ‘payment for order flow,’ a controversial industry practice interestingly invented by Bernie Madoff. It basically means Robinhood sells the right to execute customer trades to third-party market makers who pay a small fee. Those small fees add up, and Robinhood relies on their high-frequency traders to make it work. Regulators don’t love it, in fact, other brokers and market makers have faced lawsuits over the issue. Robinhood’s dependence on this income could spell its downfall in the coming years.
  • Robinhood only allows you to buy entire shares, which are often pricey. At the time of this writeup Apple is trading at around $200/share, SPY (a very popular ETF that tracks with the S&P 500 index) is trading at about $300/share, Tesla is at $220, you get the idea. Not all shares are that expensive, but it’s tough to deposit a small amount and get trading, you need more money to buy full shares.
    It’s not like Robinhood couldn’t offer partial shares, other platforms do it. Robinhood doesn’t because this is another one of the ways they make money. Offering full shares exclusively means that you will usually have some leftover change in your account, and Robinhood earns interest on those leftover funds. It also encourages you to invest larger chunks of money, which means you’re likely to lose more money.

I’m not saying you’ll die young or retire destitute if you invest some money in Robinhood. But just be aware of what you’re doing. You’re gambling. For the most part, it’s best to stay away.

How does your retirement plan look?

Many of us, especially those who are younger, probably haven’t thought much about our retirement plans. I wouldn’t have put any thought into it either if I wasn’t an investment advisor. But I’ve run into some troubling stats about the relationship between Americans and retirement, so I think it’s worth talking about.

First, by retirement, I mostly mean age, like somewhere in your 60s. I don’t mean quitting all obligations and sitting around by a lake somewhere. Retirement definitely could include that (I’m counting on it!), but most of us probably won’t be content to only sit around. We’ll probably be doing some kind of work when we’re retired. What you definitely don’t want when you’re in your 60s is to be working full time out of necessity at a job you’d rather not be working at (which is unfortunately normal among retirement age Americans). I think about retirement as a time when people have options. I’ll personally want to keep working or doing something productive, but it could be work that doesn’t pay, or pays very little; I’ll be doing it because I want to, not because I have to. And let’s be honest, at some point we just won’t have the strength to keep working full time, so we need a plan to pay the bills.

Here’s a problem, 1 in 3 Americans has nothing saved for retirement. 4 out of 5 Americans have less than one year’s worth of income saved in retirement accounts. That obviously isn’t great. Consumer debt is on the rise. Student loans put young people in a large hole right out of college, the most fruitful investing years. Credit card debt is up. Car loans are accepted as the normal way to buy a car. The average American starts behind finically and borrows their way further down. Partly because of this debt crisis and partly because of our consumer culture, Americans only save about 3% of their income today, barely enough to keep up with inflation let alone fund their futures.

Compounding all of this is our increasing dependence on savings for retirement. Generation Y (Millennials) and Generation Z will to need to lean on investment accounts more than any generation before for a few reasons:

1) Pensions are all but gone. They’re a conduit for too much risk to employers who have shifted to 401(k) offerings. This trend isn’t actually bad, the market will do a better job growing money, and many employees offer generous 401k matching programs. But in order for it to work employees need to be intentional about utilizing 401(k)s, and to understand how the money is invested within the 401(k)s. That’s where we tend to fall short. Employees miss out on $1,336 in employer matches each year. We also let the money we do have in 401(k)s languish in actively trading mutual funds, surrendering large sums to fees and sub-market performance.

2) We don’t know exactly what Social Security will look like in the future, on its current trajectory it will have to be cut by about 23% by 2033. There will likely still be some sort of social security benefits down the road but it’s not something reliable enough to stake retirement on.

So right now, regardless of your age, do you have any idea what your retirement is going to look like? One meeting with an advisor to take a quick look at your situation could save you worlds of financial hurt down the road. Maybe you’re actually in great shape, or maybe there are just a few small things you can change which would have a dramatic impact on your financial future, or maybe you need someone to tell you your lifestyle needs trimming. It’s something you can, and probably should know.

How To Fix Your Finances

If you’re super stressed about your money situation, which, according to CNBC is pretty common, you’ve got two options:

Option 1: tighten your budget and stick to it at all costs. This option is not a lot of fun, but it’s still very important. The basic principle of personal finances is to live within your means. This means that if you don’t have money for something, you don’t purchase it, instead, you save some money over time until you can afford it. It’s common sense, but it’s not commonly practiced. SNL is an authority on the topic: Don’t Buy Stuff You Cannot Afford. Though this definitely isn’t the fun option, it might be the more important option. Sticking to a good budget and living within your means teaches you to think differently about money. If you’re a subscriber to the ‘I want it and my credit card isn’t maxed out yet’ line of thinking, this budget thing won’t be easy, but it will change your life.

Option 2: make more money. This is much more fun. Instead of holding back, you’re increasing. You can be creative, start a side-hustle, work towards a promotion. The options aren’t exactly endless, but they’re pretty broad. Do something that is exciting, something that you love, or something with a loved one! The only rule is that your idea has to make some money (and also stay within the bounds of federal law).

Here’s the twist, you don’t have to pick just one option. Ideally, you’ll work on both simultaneously. If you only tightened the budget, you would confine yourself to a workable, but boring financial existence. If you only earned more money, you would spend it as soon as you earn it since you would never have learned the discipline and benefits of saving. Neither option, by itself, is likely to get you where you’re hoping to go. But together, these two strategies can create a real and lasting fix to your finances.

Be Wary of Investing Apps

Investing today is easier than it’s ever been. One hundred years ago investing options were limited, there were no mutual funds, no ETFs, it was basically banks and single stocks. And even those few options were expensive and difficult to obtain. For most people, investing wasn’t a viable option. Today we’re drowning in all the investment options. It’s become so easy, so normal, you can download an app and own thousands of equities within minutes. The ease is good, and it’s good that more people are able to own equities (equities are the best passive wealth building tool in history) but there are also good and bad ways to own equities, and the ease seems to more often promote the bad ways.

Active investing is essentially gambling, even for professionals. We know the stock market moves relative to news and emotion, neither of which is consistently predictable. We also know that the current price of a stock is the best indication of its current value, stocks aren’t ever ‘on sale’ or ‘overpriced.’ So when an active investor buys or sells a stock share it’s just a bet, a bet that a specific company will either increase in value (in which case you’d buy) or decrease in value (in which case you’d sell). Successfully buying and selling stocks is tough, and no one can consistently do it well enough to beat the market over time, not even professionals. Research shows that the outcome of this active investing style is overwhelmingly negative. That’s part of the reason why we’ve seen a seismic shift toward more passive investment strategies over the last 20 years.

However, we’ve also seen the growth of in-app investing. I’m all for cool apps, and investing apps are among the coolest, but there’s an inherent problem in using an app as an envoy for your retirement. The fact that they are so easy to use is a temptation to actively use them. The fact that they look so nice gives the illusion that we’re doing something responsible with our money. Some offer worthless, even contradictory, commentary on market predictions. Some even promote super risky options (puts and calls) accompanied by incomplete (at best) information concerning the risk involved, and even how they work. Essentially, these apps promote a sort of sophisticated gambling, which is really fun, and really bad for your return probabilities. Apps that have claimed to stand for passive investing seem to be slowly moving toward an active style as well or at least offering it.

It’s probably best to treat investing apps like gambling apps since that’s effectively what they are. Don’t be duped by the bells and whistles, they offer an adrenaline rush and a lot of downsides. Most of us wouldn’t take our retirement fund over to the roulette table and put it all on red (talk about a rush!), so don’t dump your life savings into an app.

Finances by age

We’ve all heard of general financial guidelines which wisdom would suggest we follow. Dave Ramsey talks about them, financial planners use them, we all interact with them on some level. As you move through life the guidelines also move a little bit, some things you didn’t have to deal with in your 20’s become pressing in your 40’s, and vice versa. This is a breakdown of these financial guidelines by age, things that you should be thinking about based on your stage of life. This does not mean that you’ve failed if you’re working on some 20’s things in your 30’s or 40’s, or even 50’s. But these guidelines are a helpful measuring stick to see how you’re doing currently, and they provide a good pathway for lifetime financial success. Let’s dig in.

Teen years:

  • The number one thing you can do in your teens is to start developing good financial habits.
  • Stay away from consumer debt. These debts are often subject to high interest rates (credit cards), tied to depreciating assets (cars), and often end up funding things that are unnecessary. They encourage bad spending habits and can cost years to catch up from.
  • Learn to save money. Instead of unnecessary spending, practice going the other way, save up money for things you want. 
  • Learn to work hard. Financial guidelines will certainly help you succeed, but you won’t get far if you can’t earn money. 
  • Get through college with minimal student loans.


20’s:

  • Now you’re out of college and real life is set in. The number one thing you can do is create a zero-sum budget and stick to it as if your life depends on it. Give yourself some spending money, make sure to budget your savings, and again, avoid consumer debt. The budget is not a forecast of your future spending, and it’s not just for tracking your spending either, it’s for planning your spending. You intentionally decide what you’re going to spend money on and how much, and you don’t spend beyond that. 
  • Start a financial plan. Meet with an advisor, learn about how the market works, and start putting together a loose plan for retirement. Things will obviously change, but the plan will ensure that you’re pointed in the right direction.
  • Create an emergency fund. Dave Ramsey says save $1,000, that’s a good place to start. Eventually, you might work up to a month or two worth of expenses. This is how you will pay for life’s curveballs instead of using your credit card.
  • If your company offers a 401k plan, start putting some money away. The money you invest in your 20’s will work the hardest for you over the long haul. If your company’s 401k plan offers some sort of match, try to contribute whatever is required to take full advantage of the match. The free money is hard to pass up.
  • Be aggressive about paying off student loans (and any other consumer debts).
  • Start saving for a house.


30’s & 40’s:

  • Now that you’ve set the stage in your 20’s, you’re ready to start executing in your 30’s and 40’s. Keep meeting with your advisor and updating the plan, keep learning, and keep on the straight and narrow.
  • Become debt free (aside from a potential mortgage loan). If you have any consumer debt or student loans, be aggressive about paying them off.
  • Think about buying a house. Your financial plan will show you that buying a house is the most cost-effective way to provide housing, a home is a good asset. Save up a large down payment and ensure the payment fits nicely in the budget, there are few things more financially stressful than being ‘house-poor.’
  • Make a plan to pay off the house, ideally in 15 years or less. Owning a home free and clear is one of the most impactful things you can do for your retirement. It’s also a great way to help kids through college if that’s a goal of yours.
  • Increase retirement savings. You’ve been contributing enough to take advantage of the match, but there’s no need to stop there. Bump up your 401k percentage or put some extra money away in an IRA. 15% of your income is a good goal.
  • Buy some term life insurance, especially if you have children. A 20-year policy is often sufficient, the goal is to ensure that your family will be well-off in the event of a tragedy.
  • Put together a will, again, especially if you have children. It’s another way to ensure the family will be well-off in the event of a tragedy.
  • Increase the emergency fund to cover 3-6 months (or whatever number feels most comfortable) worth of expenses. Think about this money as insurance. It’s not going to earn much if anything, but that’s not what it’s for. The investments will earn money for retirement, the insurance is to shield you from unforeseen events.

50’s:

  • Talk to your advisor about your investment allocations. As you move closer to retirement, you’ll want to ensure the retirement funds will be available for you, which means you’ll probably scale back the risk factor in your portfolio, or at least have a plan in place to do so. This means owning a higher percentage of bonds and fixed income type assets and fewer equities (stocks). A good advisor will engage with you on this subject pro-actively.
  • Adjust investment contributions. It could be a good time to increase savings again to maximize what will be available in retirement. It’s the home stretch!
  • Pay off your home. I mentioned this earlier, but paying off your home is one of the most significant things you can do for your retirement. From a cash-flow perspective, it makes a ton of sense. If you owe $100,000 on your mortgage, and your payment is $750 per month, you’ll gain $9,000 in spendable cash-flow per year for spending by paying the $100,000. If you instead saved that $100,000, you would be able to pull about 5-6% per year ($5,000-$6,000) and you’d still be making the mortgage payment. A mortgage-free budget will also be much more flexible. Many people end up working in retirement mainly because they still have to cover the mortgage.
  • Look at your social security estimate. This is available online (https://www.ssa.gov/benefits/retirement/estimator.html) and will be helpful as you get more detailed in your retirement plan.


60’s+:

  • Finalize your retirement plan. Determine when you’ll retire, what your new income sources will look like, how your advisor will manage the retirement funds, when to take social security, all the exciting stuff. These are important details to nail down as you move into retirement.
  • Revisit your budget. Income, expenses, taxes, and cash-flow all change significantly in retirement. A good comparative cash-flow analysis from your advisor could prove very helpful. Usually, retirees can achieve a similar or better cash-flow with significantly less income because of how the taxes and expenses shape up (especially if that mortgage is gone!).
  • Decide what you’d like to accomplish in retirement, maybe even set some goals. The great benefit of retirement is not the ability to stop doing anything, it’s the opportunity to focus on the things you want to do. A part-time job or some sort of enjoyable work, more family time, travel with loved ones, important hobbies, these all can be part of a richly fulfilling retirement; but don’t let them simply happen to you, do them on purpose.