In the last five years, we’ve seen the explosion of alternative investment avenues, especially through apps. While technological advances (computers, algorithms, the internet, you get it) certainly make investing a better and easier experience than it’s ever been, they’ve also promoted some troubling trends in popular consumer investing apps.
Here are a few ways your investing app is ruining your retirement:
Investing apps are built for active trading which loses money compared to the market. In order for investing apps to be interesting, they promote active trading. No one wants or needs an app to help them buy and hold and never make trades. Unfortunately, active trading is a recipe for disaster. Even professionals lose to the market when they actively trade stocks, not because of any inherent flaws in themselves, but because it’s literally impossible to consistently beat the market.
No great offerings. Because they’re designed to encourage active investing, investing apps don’t offer many great investing options. Even if you could ignore all the crap, the best funds aren’t in there. Sure, you can find some cheap ETF and index funds, which aren’t the worst options in the world, but they’re definitely not the best. And investing apps know you might try them out, but ultimately you’re going to be moving money around.
Your earliest years are the most important years and you’re wasting them. Investing apps appeal unilaterally to younger people. The great thing about investing when you’re young is that money invested early will compound far more significantly over time than money invested later. Unfortunately, many young people fall prey to these investment apps which do the opposite of maximizing investment dollars.
Mis-education, worthless news. In order to make active investing seem legitimate, investing apps often share news and information regarding the market. Unfortunately, the news is not helpful for investing. Instead of learning about how the market works and how to prudently invest money over time, these excerpts simply validate terrible investing strategies.
Encourage bad behavior. This is the biggest problem. Instead of educating investors, investing apps take advantage of them. Active investing feels right, it seems legitimate, and investing apps only encourage that feeling. Unfortunately, the feelings of investors have no correlation with successful investing, if anything they’re negatively correlated.
So dump the investment app. Learn about important investing concepts like Efficient Market Hypothesis, Modern Portfolio Theory, the Three-Factor Model. Get a good advisor who will get you into the best funds and help you remain disciplined through scary markets. Take your purpose seriously, it’s probably something worth more than speculating and gambling with your investments.
First 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.
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.