With all the technology and apps we have at our fingertips now, it has become easier than ever to be able to invest money in financial markets. While this can be great and empowering for consumers if used correctly, it can add a lot of complexity, confusion and risk to an already difficult topic. One of these new technology-driven platforms is Robinhood, which has really caught on with Millennials and other individual investors. The appeal of Robinhood and other similar apps is the free trading, and the slick, modern interfaces that make everything more understandable and easier to find. However, this can be a double-edged sword because it gives easy access to leveraged trading and complex derivative strategies, like options, that are risky and can lead to large losses. Many people have gotten themselves into trouble by jumping into investment strategies they don’t fully understand or not having any sort of plan at all. So, what things do you need to think about before beginning or modifying your investment plan?
Is it Gambling or Investing?
The first thing any investor needs to do is have a solid plan in place, which I’ve covered here before (Investing In Volatile Markets). Having a plan ensures that you’ve thought through everything and are prepared to follow the investment strategy for the long term. Skipping this step increases the risk of investors drifting into a scenario that looks more like gambling than investing. The investing apps are now one click away on your phone and are designed in a way that delivers a dopamine hit when interacting with them and making trades. The experience that gets delivered resembles a game more than a long-term strategy that can be followed and built upon over time. This has all enabled a modern version of day trading where a new generation of young investors have easy access to financial tools they may not completely understand. Robinhood has seen record numbers of account openings and trading activity in the past few months that directly coincides with the pandemic related market turmoil. New users appear to be trying to take advantage of the current situation, and some people have speculated the lack of sports and other gambling outlets have led people to treat stock trading like a big slot machine. Whatever the underlying reasons might be, it’s important for everyone to take a step back and think through what they’re doing. Having a small account of “play” money is one thing if you’re doing it with the understanding that losing it all is a distinct possibility, but taking big gambles with large portions of your assets is something that needs to be avoided at all costs.
I have talked about emotions related to investing before, but it’s worth repeating that we need to take whatever steps we can to make investing an objective process. If there’s a well-defined plan outlined, then it will be easier to just keep everything on autopilot and not worry about whatever news is affecting the markets this week. Sometimes the smallest things can create an emotional trigger for us that we don’t even understand. The investment platform where I manage accounts stopped using colors like green and red in the performance numbers and charts due to the emotional reaction they can create in people. Logging in and seeing red everywhere creates fear and panic for people, and they were more likely to makes changes or withdraw money because of it. Something that simple has subconscious effects on us that we don’t even realize but can lead to worse outcomes over time. There are many other little biases like this, which is why the best is to automate as much as possible and follow a plan. Taking little steps like these can be greatly beneficial over time. Lots of money topics can be very emotional for people, but a successful investment plan is one area where this needs to be limited as much as possible.
Creating a Successful Investment Strategy
The best investment plans are often extremely boring. Having a good savings rate, and automating that process is the single most important thing for most investors to do. This reduces temptation to intervene and monitor things on a daily basis. Investing in a well-diversified portfolio and being mindful of fees are the other big factors to keep in mind. Most people that just implement these couple ideas will be set up for successful investing over the long-term. This sounds pretty simple, but sometimes things are easier said than done when we’re constantly flooded with news and advice from many different sources. The temptation to modify and update accounts can be extremely tempting for almost anyone, especially when markets are volatile and you want some sense of control. This is another area where a good advisor managing investments can help keep you accountable and focused on your goals, and not caught up in any market gambling or speculation. If you would like to find out more about how I manage investments for financial planning clients, schedule a complimentary meeting where we can learn about your objectives.