Every Reason Not To Get Sucked Into Online Investment Services

Every Reason Not To Get Sucked Into Online Investment Services

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 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.

Image via Shutterstock

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