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Tag: Investing

Questions You Were Afraid to Ask #10

The only bad question is the one left unasked. That’s the premise behind many of our recent posts. Each covers a different investment-related question that many people have but are afraid to ask.  So far, we’ve discussed the essentials of how the markets work, the differences between various types of investment funds, and the ins and outs of stocks and bonds. 

A few months ago, however, an acquaintance of ours asked us a question not about investments but investing.  Specifically, she wanted to know our thoughts on the modern trend of using mobile investing platforms — aka “investing apps.” 

It’s a terrific question, because the use of such apps — and the number of apps available — has exploded in the past few years.  So, in this message, we’d like to continue our series by answering:

Questions You Were Afraid to Ask #10:
What are the pros and cons of investing apps? 

Mobile investing apps enable people to buy and sell certain types of securities right from their phone.  They have provided investors with a quick and easy way to access the markets.  For new investors who are just getting started, these apps have made the act of investing more accessible than ever before. 

That’s a good thing!  Even today, many people only invest through an employer-sponsored retirement account, like a 401(k).  That’s because they may lack the resources, confidence, or ability to invest in any other way.  But not everyone has access to a 401(k).  And while 401(k)s are a great way to save for retirement, many people have other financial goals they want to invest for, too.  Mobile apps provide a handy, ready-made way to do just that. 

Continuing with the accessibility theme, many apps enable you to invest right from your phone, anytime, anywhere.  In addition, many apps don’t require a minimum deposit, so you can start investing with just a few dollars.  Finally, the most popular apps often charge extremely low fees – or even no fees at all – to buy or sell stocks and ETFs. 

Many apps also come with features beyond just trading.  Some apps will help you invest any spare change or extra money, rather than let it simply lie around in a bank account.  Others enable you to invest automatically – daily, weekly, bi-weekly, monthly, etc.  That’s neat because investing regularly is a key part of building a nest egg. 

It’s no surprise, then, that these apps have skyrocketed in popularity.  In fact, app usage increased from 28.9 million in 2016 to more than 137 million in 2021.1  Part of this surge was undoubtedly due to the pandemic.  With social distancing, many used the time to try new activities and learn new skills from the safety of their own home…investing included. 

But before you whip out your phone and start trading, there are some important things to know, first.  Investment apps come with definite advantages…but also some unquestionable downsides.  When you think about it, an app is essentially a tool.  Like any tool, there are things it does well…and things it can’t do at all.  And, like any tool, it can even be dangerous if misused. 

The first issue: the very accessibility that makes these apps so popular is also what makes them so risky.  When you have a tool that provides easy, no-cost trading, it can be extremely tempting to overuse it.  Researchers have found that this temptation can lead to overly risky and emotional decision-making, as investors try to chase the latest hot stock or constantly guess what tomorrow will bring.2  The result: Pennies saved on fees; fortunes potentially lost on speculation. 

The second and biggest issue is that while these apps make it easy to invest, they provide no help with reaching your financial goals.  No app, no matter how sophisticated, can answer your questions.  Especially when you don’t even know the questions to ask.  No app can hold your hand and help you judge between emotion-driving headlines and events that necessitate changes to a portfolio.  No app can help you determine which investments are right for your situation.  Just as you can’t hammer nails with a saw, or tighten a bolt with a screwdriver, no app can help you plan for where you want to go and what you need to get there. 

Take a moment to think about the goals you have in your life.  They could be anything.  For instance, here are a few our clients have expressed to me over the years: Start a new business.  Visit the country of their ancestors.  Support local charities and causes.  Design and build their own house.  Play as much golf as possible.  Volunteer.  Visit every MLB stadium.  Send their kids to college.  Read more books on the beach.  Tour national parks in a motorhome.  Spend time with family.

Achieving these goals often requires investing.  But there is more to investing than just buying and selling stocks.  More to investing than simply trading.  Investing, when you get down to it, is the process of determining what you want, what kind of return you need to get it, and where to place your money for the long term to maximize your chance of earning that return.  It’s a process.  A process that should start now, and last for the rest of your life.  A process that an app alone cannot handle – just as you can’t build a house with only a saw. 

So, our thoughts on mobile investing apps?  They are a tool, and for some people, a very useful one.  But they should never be the only one in your toolbox. 

In our next post, we’ll look at two other modern investing trends. 

1 “Investing App Usage Statistics,” Business of Apps, January 9, 2023.  https://www.businessofapps.com/data/stock-trading-app-market/

2 “Gamified apps push traders to make riskier investments,” The Star, January 18, 2022.  https://www.thestar.com/business/2022/01/18/gamified-apps-push-diy-traders-to-make-riskier-investments-study.html

You Must Not Do That

As financial advisors, do you believe that’s the phrase we get paid for the most?  That’s because we earn our keep by keeping clients from making some very big mistakes with their money. 

Now, as we experience a market correction and spate of scary headlines, we think it’s time to go over what the biggest mistakes are:

1. Speculating when you think you are investing

This happens during good markets and bad ones. Invest during dips if you have the money, but never if you don’t. (See Mistake #2.)  Never invest because you heard a hot tip. Hot things burn.  We never speculate.  We follow rules to know when to buy, sell, or hold.

2. Borrowing to invest

No, you should never take a home equity loan to invest when the market goes down.  (Or up, for that matter.)

3. Investing dollars you will spend in less than five years

These dollars should go into your emergency opportunity fund.  Therefore, we have income in a preservation portfolio, and we replenish often. 

4. Investing for an interest rate instead of total return

Interest will never be high enough to beat the cost of living.  Owning at least a portion of your overall portfolio is an investment that gives you both growth and dividends that will keep you ahead of inflation. 

5. Letting taxes be the tail that wags the dog

You may or may not pay a capital gains tax, but that doesn’t mean taxes should rule the decision-making process. It is an important piece we don’t overlook, but it is just a piece. We will help you look at all the reasons to sell an investment or not. 

6. Waiting to sell something bad until the price gets back to what you paid for it.

You may recoup your losses sooner by moving to something better.

7. Under-diversify

This can be having five different mutual funds in five different places, but they all own the same stock.  Often, we suggest rolling over retirement plans when you retire to control your diversification.  If you own, for example, the “ABC Growth Fund” and “XYZ Growth Fund” and they both own large portions of Apple stock, for example, you have less diversification than you think.  

8. Feelings of euphoria…or panic!

Emotions are natural.  We get excited when things are going well.  We get fearful when they are going poorly.  But emotions have no place in making investment decisions.  Your investment decisions are directed by your plan and only your plan. 

Maybe we should have started with that last sentence as the headline!  Plans, your plans, dictate every recommendation our team makes.  And it’s often why the second most worthwhile phrase we say is, “Have your plans changed?” 

So, as we go through the ups and downs of the current market volatility, always remember to follow the plan.  Remember, too, that if you decide to do something else, well…

You must not do that!

Always remember that we are here to help.