Is technology-facilitated investing worth it?
Are investment apps like Robinhood that are designed to facilitate individual, small-scale investments and services that use robo-advisors worth it? Can they really help investors build a better portfolio?
At the end of the day, there are a lot of different ways to win. My own approach doesn’t have a monopoly on making money, so I’m not going to say, “Hey, this is the right way and oh, everything else is wrong.”
Certainly, technology can do a lot of good things to help investors, and machine-managed, app-facilitated investing technologies have their place. They lower barriers to entry, allow people to get started with less money, and ease the sometimes overly complicated process of actually just making an investment. According to one report, most investment app users deal in small trades: 70% have bought stocks for under $5.
On the other hand, the ease of use may be facilitating some bad, high-risk decisions. Over half (56%) have bought and sold stocks on the same day, and almost one out of every three users say that cryptocurrency is a low risk investment! (That is not true.)
Some of these apps and services also incorporate robotic, AI-based advisors who make portfolio recommendations. Performance-wise, they’re highly variable, ranging from below-par to quite successful. Altogether, I urge caution. A Forbes report on small-dollar investment app Robinhood writes, “The perfect stock trading app for the videogame generation was supposed to ‘democratize finance’ with zero-commission trades. But the primary plan was to get rich by selling customer trades to the market’s most notorious operators.”
Remember, a lot of these products come directly from Wall Street and get put out there because they're marketable, not because they're necessarily in their client's best interest.
I don’t say this to knock anyone’s experience with Robinhood or similar apps. As I said above, these kinds of technology legitimately lower barriers to entry, and that’s a good thing. But there’s almost always more than meets the eye to them, and users need to understand that.
So, it doesn't hurt to be a little bit suspicious and really just try to understand exactly what they're doing and why they're doing it. And robo-advisors and similar services definitely lag in making judgments about the business and looking at companies that don't necessarily screen well today but have the underlying strength to generate strong returns over time. The ability to think long term, especially in today's world, is probably greater than it's ever been. Plus, I’d argue the ability to bring together both the quantitative and the qualitative is key to gaining an edge.
But these apps and AI programs aren’t set up for any of that. They’re designed for constant reactivity, making frequent adjustments to account for market changes, so they also tend to adhere to theories of investing that I don’t buy into or favor.
The truth is, if we step back and just look at the Internet as a whole, I don’t know if it’s been a net asset or a net liability to investors. It facilitates the spread of information and learning, but it maybe also makes it too easy to take action. When the Internet wasn’t as developed, and it sort of slowed investors from making poor, overly reactive decisions, that was probably a good thing. Instead, the Internet has facilitated a sort of Wild West in the investing work where people can do all kinds of different things on the spur of the moment. Investment apps and robo-advisors have definitely contributed to that.