Three Factor Model

5 ways your investing app is ruining your retirement

Link Joshua VanDykeLeave a comment

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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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

On REITs

Link Joshua VanDykeLeave a comment

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REITs (Real Estate Investment Trust) are a hot topic in 2019. Real estate is popular, it’s tangible, it’s easy to understand the profits and costs involved, and many of us already own some ourselves. REITs offer the allure of owning income-producing real estate without ever having to take a call from a grumpy tenant or running over to fix a leaky toilet in the middle of the night. It’s real estate investing without all the hassle! Well, that’s not exactly true, here a few reasons to look elsewhere for investing returns:

  1. A REIT is not like investing in real estate the way most of us think about real estate investing (owning rental properties). Traditional real estate investing is a great way to make money, but it’s not passive. Ask anyone who owns rental properties and they’ll tell you it’s a job, maybe a part-time job, maybe a worthwhile job, but a job none-the-less. It takes work and time and good business sense. A REIT is like a mutual fund that only owns income-producing real estate (at least 75% of the income within a REIT must come from rental income or something similar), which sounds similar to traditional investing, but a REIT is completely passive. The expected earnings on the two types of investments are very different because they’re very different types of investments.
  2. Investing in REITs is redundant. If you’re invested in the stock market you already own real estate. In fact, you already own the same exact companies and properties that are also in the REIT you’re thinking about purchasing. You could theoretically double down on real estate, own it both in your investment account and in a REIT, but why would you do that? There are three essential market factors that drive returns: stocks (which outperform bonds over time), small companies (which outperform large companies over time), and value companies (which outperform growth companies over time); real estate doesn’t make the cut. There’s no additional benefit to increasing your exposure to real estate, no additional returns, no additional diversification benefits, nothing. You could buy into a REIT if you have a hunch that real estate as a market sector is going to do well in the next few years but that would be market timing, a proven great way to lose money.

REITs sometimes sound exciting, especially when they’re doing well, but keep the big-picture perspective. No one knows when REITs will do well or for how long, we just know that over time they won’t beat a well-diversified portfolio, which already owns a lot of real estate anyways.