The stories behind the Robinhood generation of investors is getting worse:
Rookie trader kills himself after seeing a negative balance of more than $700,000 in his Robinhood account
It seems that startups bringing free trades and app-based investing to the uninformed masses might need to be reined in a bit. The narrative in recent years has been that investing can be a low-cost, do-it-yourself kind of thing, where paying professionals a fee is a complete waste of money and only eats into your returns. Of course, that is only true if the small investors have as much knowledge and experience as the professionals and therefore would get zero value from the professional advice (that caveat is rarely mentioned in the same conversation).
Now yes, I am an RIA so I have a dog in this fight and you might say I am just talking my book here. But assets managed by RIAs are growing, not shrinking, and it’s not because the professionals are taking advantage of anyone. There are simply millions of people out there who know they won’t be very successful on their own because they lack the knowledge, time, and/or ability to take emotions out of the equation enough, and therefore they would rather outsource the bulk of the investing work to a pro (and gladly pay for that service). That is not to say that everyone will, or should, fall into that bucket. But many will and if you do not, then great, by all means manage your own portfolio.
Apps like Robinhood that have turned investing into more of a game like Candy Crush are making it easier for novices to venture into waters that are too deep given their background and skill set. As we saw in the story linked to above, such services probably need to have more risk controls in place and higher thresholds for advanced trading strategies (like dabbling in options and penny stocks). Instead, the opposite seems to be happening and they don’t seem to want to take responsibility (at least not yet – maybe that will change).
It reminds me of the social media companies who have created sites where anyone can sign up for an account (without verifying their identify), and then can post anything they want to the world (even anonymously). If bad things happen, the companies claim they are only serving as a platform for free speech and can’t control what people do or say. It seems pretty obvious that such a business model could pose real societal problems, but there was no plan to deal with that side of the equation.
While I can’t control what apps like Robinhood do, I can give advice. And on that front I say that only educated and experienced investors should manage their money entirely on their own without any help. That help can take many forms and does not have to mean you hire an RIA to manage your account for you while you close your eyes and pray for good results. I know myself and many pros that would gladly serve as sounding boards for investing ideas and/or in the role of a second opinion for those who want to make the final calls and actual trades themselves. If you have others to bounce ideas off of and to give you the opposing side of an investing thesis (or explain the downside risks in more speculative waters like options or penny stocks), I suspect your returns over the long term will be higher than they would otherwise. And that is even after you account for any advisory fees you might pay for such advice.
Just some food for thought… please be careful out there everyone.
SOURCE: Peridot Capitalist Blog Post Archive – Peridot Capital Management LLC – Read entire story here.