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If you put it in an app, youths will use it. This seems to be the conventional wisdom coming out of Silicon Valley these days, and in many ways they’re right. Everyone gets excited about the next big app and what they can do on their phone. The advances we’ve had in technology have been nothing short of amazing. Soon we will have “smart homes” with remote control door locks so the Amazon delivery drone can fly into our bedroom and deliver a hot, fresh pepperoni pizza right in front of us so we don’t ever need to interact with a human being when we’re deathly hungover. A true technological utopia. However, just because a cool app is available for your phone doesn’t mean you should use it.
This brings me to investing. According to Forbes, only about 26% of Millennials invest in stocks, compared to over 50% of Baby Boomers. To capitalize on this, certain companies have created investment service apps to cater to tech-savvy millennials who want to invest but don’t want to put in the legwork. I won’t use any names, but if you Internet even a little bit you’ve seen their ads all over social media.
Seems practical, right? “Experts” create an app that you can link to your bank account in five seconds and then they invest your money for your future. It’s very, very convenient compared to traditional fund managers, but managing your investments shouldn’t be about convenience. It should be about well-informed decisions, managing risk, and growing your money.
Speaking of traditional fund managers, there are plenty of experts outside the app world that manage funds as well, and their success rate is spotty to say the least. That’s one of my biggest problems with investment services in general, let alone on apps—the “expert” perception. Let me tell you something about the “experts” — most of them don’t know much more than anyone else about in which direction a stock will move. Matthew McConaughey’s fugazi speech in “Wolf of Wall Street” was actually not far off. This isn’t just in apps. It’s also in real life. Typically, only about half of actively managed funds beat index funds, which are funds directly tied to the major stock indexes. A few examples of index funds are SPY (S&P 500), DIA (Dow Jones), and QQQ (Nasdaq). Many of these funds also pay dividends and are generally the benchmark for fund performance.
Personally, I avoid actively managed funds altogether, and for me, it’s really a red flag if it’s app-based and very brand oriented. I don’t want someone profiting off my investments just because I enjoy the convenience and don’t want to put in a little extra work, especially if I’ve never met them and I’m just another number on the balance sheet. I’m not suggesting at all that these companies are malevolent in any way. I’m sure that they are financially responsible, take fiduciary responsibility very seriously, and pride themselves on beating the market when they can and making money for their clients. However, when you decide to invest, you have to make a choice whether to pay someone else to manage your money, knowing that half of actively managed funds don’t beat the indexes, or to simply invest for yourself. And this is America – it’s your choice. My bottom line here is don’t fall into the trap of using actively managed funds just because it’s a cool looking, convenient app heavily advertised on Twitter and Facebook. ESPECIALLY if you have to pay a fee for the service.
So what should you do if you’re not comfortable giving your money to actively managed funds? First, find a trading platform that suits your needs and make sure to read the fee schedule. I use Robinhood, invested in by Google Ventures. For the most part, Robinhood will trade domestic shares without a fee, but as I said about all brokerages, make sure to check their fee schedule. For me, they’ve done an excellent job tracking capital gains/losses, cash balances, dividends, and tax documents. They’re as good as any brokerage or bank. But do your own research and see which ones are rated the best and suit your needs the best.
Second, determine your risk threshold. All stocks have risk, obviously some more than others. Do you want something heavily diversified that moves with the market and pays a dividend, such as an index fund, or do you want to roll the dice on a fast-growing small to mid-cap stock? Just be careful how much risk you are willing to take because you can really get burned. Just ask Pershing Square Holdings manager Bill Ackman how Valeant’s stock is doing.
Finally, and I can’t emphasize this enough, do research. Research, research, and more research. Before you even buy one share of anything, study everything you can get your hands on from successful investors like Warren Buffett, William J O’Neil, and Jimmy Rogers. I read Warren Buffett’s Berkshire Hathaway shareholder report every year. It’s like poetry. It’s also the first place I look for ideas of which holdings I should buy. But I digress. Make sure you understand the basics. There are many resources out there. My personal favorites are investors.com and anything written by Buffett. Learning about things like dollar cost averaging and other investing strategies will give you options as well. These are your choices to make, and it’s your responsibility to be well-informed. Learn from the best and make your own decisions. It’s a ton of work, but it allows you to control your own destiny without paying someone else a fee and hoping that they’re one of the small percentage of funds that will significantly beat the market. Especially a fund that doesn’t have a long track record to research and is heavily targeting the tech-savvy, investment not-so-savvy 20-somethings because of the convenience of the app. Fiduciary responsibility aside, would you trust someone you’ve never met to quarterback your relationship, your personal budget, and your healthcare options? If so, download my app RelationshipBudgetHealthcarefront. Only $10 a month, guys, and I promise to try my best. .
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@5OClockShadow_
Also “not having enough money to invest” but I agree with your points. Apps still fall into the categories of entertaining, communication, and small tool for me, I can’t see myself putting a lot of stock (heh) into one.
If you can set aside even $100 a month you can choose to use a fee-free service. Hell, it’s not like that cash is getting a return in your savings account at ZIRP.
Is there much lag time or a big spread on Robinhood trades compared to other platforms? Saving $7 a trade is yuge.
I’d say the lack of tools is the major issue, most online services (scottrade, etrade, etc…) have powerful tools you can use to manage your risk while also looking at a company’s financial statements, on top of the tax reporting services. If you’re blindly buying stocks because you think it’s a good idea, that’s essentially gambling. Also, do you really trust all your private information (Social Security and Account Numbers) to an app that doesn’t charge anything?
I’d agree if it was not regulated and not part owned by Google Ventures, but it is, and Robinhood has been adding features to compete with the existing trading platforms as well. I’d say your average young investor is not trading options and futures and can look up whatever information they need anywhere on the Internet.
Yeah I already use scottrade so I can use all their tools. Might look into robinhood. Chalk it up to being a millennial but I don’t really care about giving my info to apps.
Trading stocks is legal gambling. You can try and spin it anyway you want but when you get down to it you are betting on the chances that a stock will gain or lose value. You can have all of the information in the world to improve your odds but saying that it is not gambling is a fallacy.
Not true. The stock market is supply and demand on steroids. What you don’t know is what events will trigger heavy buying or selling, which would be a concern if you are a day trader. However, historical data shows that, long term, the indexes go up over time because well run companies grow and more companies go public. Taking on risk doesn’t necessarily mean gambling. Hell, when you buy a home you are risking whether or not the real estate value will increase based on factors you can’t control. How is that any different?
It’s true that it is not the same as gambling, but picking individual stocks is akin to a gamble. You are exposed to much more risk than a diversified mutual fund (definitely the way to go btw.) Nobody knows if a specific stock is going up or down, but I think most of us agree that capitalism creates growth over the long term.
You skipped all those gen ed business classes in college, didn’t you?
On par with USAA, Fidelity, etc.
Tony Robbins claims in his new book that 96% of actively managed funds fail to beat the market over time, especially when you factor in all of the fees associated with an active fund.
100% of passive index funds fail to beat the market when you factor in fees
^Don’t know if it is 96%, but this is absolutely true. Active funds do not win over the long run. Some do, but some monkeys throwing poop at a wall of stocks would occasionally do it as well.
Do you even finance, bro?
I didn’t understand most of this, but something tells me it’s fairly accurate.
It is and it isn’t, depends on how you look at it. If you’re doing a one to one comparison of an actively managed index fund vs a passive, then the passive will perform better over time. But the idea behind the upstart “robo-advisors” is to allocate your money in a way that suits your risk tolerance. So by that standard, if you’re comparing an allocated portfolio of stocks, bonds, and cash then of course an S&P index fund is going to beat it over time. But the allocated portfolio also won’t fall as much in a bad year which behavioral finance has shown is more important to an average investor.
Dorothy Mantooth was a Saint!
Just pick a robo advisor that uses passive funds and you’ll be chill. But you don’t really need them. The only reason I get paid is because on the surface this shit is too complicated to the average person, but realistically a globally diversified portfolio through low cost, passive mutual funds is perfect for any investor and it takes almost no time for me to do that.
I tried to find your app since I figured you couldn’t be any worse at managing those things for me than I am, plus an app! But it seems it’s only available on Windows phone, at which point I gave up on the whole idea.
Well if there was ever an article I should weigh in on…
Here’s how to succeed as an investor: Diversify broadly through passively managed, low expense ratio mutual funds. You should NOT be trading, trying to time the market, or any of that.
Go buy Vanguard’s Global Equity Fund (VHGEX) and call it a day. If you want to get real fancy put 10% in a REIT (preferably global) because they have similar return characteristics and stocks, but a low correlation, reducing some volatility. Assuming you’re saving for retirement you can worry about bonds once you’re over 40, if it’s for something else then it is a different story.
Boom. Investors pay advisors thousands to do basically this for them.
Google Modern Portfolio Theory and Efficient Market Hypothesis if you’re super interested, but the gist of both is that you want a really diversified portfolio and trying to beat the market is asinine, especially if you are a casual investor. If less than 50% of fund managers who do this for a living can do it, you can’t. You can get lucky, but realistically the only way to know if a stock will move up or down is to have insider information.
VHGEX? No way. I wouldn’t even put my money in this and this ain’t my first rodeo. https://www.google.com/finance?q=MUTF%3AVHGEX&hl=en&ei=PE4zV7nyNdLHmAHns6WoAQ
Go to the chart and compare it to Coca Cola, Philip Morris, QQQ…hell even DIA.
And REITs haven’t been a good idea since 2012.
These are cyclical investments. VHGEX has a 4 start rating from Morningstar as a 3 or 5 year investment but 3 stars for 10 years because when the market gets hit VHGEX really gets hit.
Better to just dollar cost average the indexes or the blue chips. Especially for people who have never invested on their own before.
The people I went to school with who went into advising were usually…uh, not the top half in my finance classes. I think I’m with you on skipping the experts.
Not to be a jerk, but isn’t youth already plural? As in multiple youth is still youth, not youths?
Nothing is showing up. This round: draw?
One of the biggest perks of working for an RIA is access to the Institutional shares of actively-managed funds, on a platform for which you don’t have to pay a fee.