Asset ProtectionInvestmentSavingsYoung Families

Robinhood, E*Trade, Acorn, Stash : 
Things to know when using an app for your finances

By July 8, 2020 January 23rd, 2021 No Comments

In today’s world, a lot of things are becoming easier. Investing with apps has become more and more popular — especially for millennials. Being a millennial myself, I’m used to using apps/my phone for groceries, social networking, entertainment, business etc…

On a weekly basis, I come across clients and prospects that use an investing app. I’m always curious to see how they are managing their portfolios, how they seek opportunities, how they analyze the alpha & the beta of their stock positions and mostly… how much TIME they are putting into their research. 

Through this line of questioning, I’ve come to realize that most individual investors using these apps to invest don’t understand their risk exposure. They generally don’t take the time to research each individual stock because they don’t know where to start. From the hourly market updates to long-term strategies, app investors are missing out on a lot of opportunities, and — more importantly — putting themselves at a disproportionate risk to the potential reward.

What are the risks of investing through an app?

I find it a bit surprising that so many people put thousands of dollars into random stocks and portfolios without having the basic knowledge to protect themselves and their assets. In the US, the general population has not been educated on the basics of financial management and therefore, lacks the knowledge to DIY invest. 

Investing without the knowledge to do so successfully is like playing the lottery or gambling. Sure you may win occasionally, but long-term, you’ll likely be taking a hit.

I think we have all fallen victim to the temptations of simplicity and convenience. I know I have. But choosing convenience over security may not be the right move when your financial stability is on the line.

Also, you need to realize that most of the investors using apps are new to investing and may let their emotions in the way. They contribute to volatility.

According to MarketWatch : « During that volatile period earlier this year, scores of consumers who use apps such as Stash and Acorns took to social media to lament their losses. And that’s not surprising, given that a majority of the users of these platforms are first-time investors who are only familiar with favorable market conditions. »

https://www.marketwatch.com/story/in-a-volatile-market-do-investment-apps-put-users-at-risk-2018-02-09

Maybe you are still wanting to give it a try. No problem, I’m here to help. I want to offer you my best advice and help you succeed. Here’s a tip: invest time before you invest a single dollar.

Should I invest with an app?

Here is a quick test to see if you’re ready to DIY invest. If any of the below terms are unfamiliar to you, you should probably delete that app and go to an old-fashioned financial planner, or you should at least take the time to expand your knowledge.

If you’re a little fuzzy on some of the below terms, do some research. Would you buy a house without having an inspection? Without knowing if it was in a flood zone? No, you would hire an inspector and/or educate yourself on this huge investment that will affect your financial future.

Remember that the below terms have been simplified, and they need to be considered as a whole when you make your investment decisions. There are many additional indicators to consider that are not included here. This is just a sample. Don’t pick one of these concepts to learn about, and then feel you’re equipped to manage your finances yourself.

  • Alpha
    Alpha is a return compared to a benchmark, usually the S&P500. So for example, if the stock you picked returned 15% this year and that the S&P500 returned 10%, then your alpha is 5%. It basically determines how much better the stock you picked returned compared to other S&P 500 stocks.
  • Beta
    Beta indicates the level of volatility of your stock, usually compared to the S&P 500. A Stock beta of 1.0 indicates that the volatility of your stock is similar to the volatility of the average of the S&P500 stocks. If this number goes above 1.0, then you stock is more volatile than the benchmark you are using and vice versa.
  • Standard Deviation
    Talking about volatility, the Standard Deviation measures the volatility of potential future fluctuations. Often times, the more volatile a stock is, the riskier the stock. This is why Growth stocks have a higher standard deviation than Value stocks, because they are considered riskier.
  • Total Return
    Total return may sound simple but remember that it includes ALL of the returns of you stock : including interest, capital gains, dividends and distributions.
  • P/E ratio
    The Price-to-Earnings ratio is a measure that indicates what the market is willing to pay for the stock. If your stock has a relatively high Price-to-Earning ratio, then it could mean that the stock you are buying is over-priced. In the contrary, this could be an indicator of an undervalued stock.

If any of these terms are foreign to you, then investing your money yourself is equivalent to taking a trip to the casino, but without the fun drinks and live entertainment.

If you CANNOT afford to lose all of your « invested » money, do not gamble with it. As a general rule, if you’re prepared for the consequences, stick to a limit of risking a maximum of 5% of your investable assets. 

If you’ve decided you’d like some guidance on the best ways to optimize your finances and achieving your goals, please send me an email at theo.desmulier@raymondjames.com or reach out to my office at (407) 478-0374. I’d be happy to help you work towards financial freedom and security.

Any opinions are those of Theo Desmulier and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Inclusion of these indexes is for illustrative purposes only.