If you are a do-it-yourselfer and a millennial then odds are you have stumbled across the mobile app, Robinhood. Even if you do not fit into that category there is a good chance that you have heard of Robinhood as it has been surging in popularity as of late. In case you do not already know, Robinhood is a mobile app that allows you to trade stocks, bonds, mutual funds, ETFs and even options contracts. Millions of people use Robinhood, or other apps like it, to begin trading and more often than not it seems that they are buying individual stocks. The app is fun to use and even gamifies the experience in a way that is especially appealing to young people.
However, this presents a problem as most financial professionals and conventional wisdom would agree that it is likely not prudent for young people to be day trading on an iPhone app. In fact, there is absolutely no reason whatsoever why the average person with no prior investment experience should be investing in individual stocks. Warren Buffett, one of the most iconic investors of all time, recommends that the average individual should invest in index funds[i]. Index funds are about as passive as you can get while still being in the market and requires no trading of your own. Why would the great “Oracle of Omaha” suggest such a thing? Buffett is quoted as saying, “By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals".
And he is right! The S&P 500 index has averaged an annualized around 10% since its inception in the 1920s[ii]. And while, there are mutual fund managers who have managed to average even higher returns (albeit for a shorter period of time) the research and analysis required to vet potential investments is not feasible for the average individual. Many financial advisors, myself included, rely on the research and expertise of fund managers and analysts as opposed to picking individual stocks and bonds for client’s portfolios.
This does not mean that we invest all our clients in passive index funds. Far from it! But if you think that you are going to outperform the market long term by trading individual stocks on your phone. Think again. If funds sound boring, consider this: These funds are often invested in some of the largest most exciting companies in the country. U.S. large cap funds often includes names like Apple, Amazon, Netflix and as of late even Zoom[iii].
Beyond investment returns, Robinhood has also been under a microscope for reliability issues. The year 2020 has been a volatile one for the markets and Robinhood has cracked under pressure. The app and website have gone offline 47 times[iv] since March and for almost two days just as pandemic concerns ended an 11 year bull market run[v].
Robinhood has also taken heat for the way in which they acquire new users, usually younger investors, to the platform. The promise of free trading and easy access coupled with emojis and virtual scratch off tickets has proven to be a successful model for the young tech company. Unfortunately, this also means that many young people are joining the app and making trades for investment vehicles they don’t understand. One such young trader took his own life[vi] after seeing a negative balance on his account of over $730,000. The truly devasting fact is that the young man likely misinterpreted the information presented to him on the app and probably wasn’t in the financial hole that he thought he was in.
The bottom line is that the real key to success for the beginning investor right now is not picking stocks on your phone. Its consistency and developing a plan, preferably with a financial advisor, and sticking to it. That is what is going to help you build long term wealth, not playing games with your money. There are options for you as a young or beginning investor that don’t require you to go it alone. Do your research and ask for help from a professional when you have questions. Feel free to give me a call if you are looking for guidance. I don’t mind giving out free advice!
On a lighter note, it’s time for the song of the week! I recently spoke with a reader who maligned the fact that he didn’t recognize many of the bands that I reference in my song of the week. He recommended something from the 70s, a request that I feel obliged to fulfill. However, I couldn’t pick just one so here are two of my favorites:
[ii] The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of its predecessor index, the S&P 90. The S&P 500 is unmanaged and cannot be invested into directly. The index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
[iii] All company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services