Over the last few years, Silicon Valley’s darling and popular “fin-tech” trading platform, Robinhood, has attracted millions of millennials (my generation) to trade stocks, Exchange Traded Funds (ETFs), and even options on its commission-free platform that makes trading seem as simple as ordering a gluten-free pizza from an iPhone. On Monday and Tuesday of this week, though, the tech-savvy trading alternative went dark freezing nearly 6 million customers out of their accounts during two of the most volatile trading days in history. Robinhood’s investors could only watch as their risky bets went up in smoke while extreme volatility ripped through the markets.
Now, if you have been a reader of our messages over the years, you might know that our stance on short-term trading and making wagers by trying to time the market in your portfolio is a futile strategy. It is well known and has been well documented that attempting to chase “hot stocks” without real awareness of the potential danger and without knowing whether or not an investment is appropriate, is risky business. Renowned studies have shown that even the “pros” managing billions on Wall Street can’t seem to get it right - According to a Standard and Poors’ case study, in the past 15 years nearly 92% of actively managed funds have trailed the market index in performance.
Volatility can inflict havoc on markets and, at times, things can freeze up when trading volume balloons, but the length of time that Robinhood was blacked-out is unprecedented. A Tweet from a 30-year old engineer that was featured on CNBC stated; “It’s frustrating. You’re just sitting there, stuck on the sidelines…I had to watch those Short ETF prices go down, and just eat the losses.” Buying funds that are “short” means that this young investor was betting against stocks, trying to profit if the markets decline. Aside from the questionable appropriateness of this type of investment, not being able to sell out of it during times of record volatility was extremely dangerous because this “Robinhooder” was sitting on potentially unlimited losses by being “short”. I wonder if he really knew the level of risk he was taking?
We live in an era where computer based, algorithmic trading allows for the purchase or sale of millions of shares of a single stock, an entire sector, or even whole indexes in fractions of seconds. The main input used in computer trading is momentum and the robots profit easily while us humans, frankly speaking, will never be able to keep up.
All investors, millennials included, should adhere to a due diligence philosophy when selecting investment service providers that will hold custody of their money and that philosophy should consider the following:
- Regulatory Oversight: Investment options should be managed by regulated entities with strong organizational structures beneath them, such as a Registered Investment Advisor or RIA.
- Track Record: The investment service provider that is chosen, should have a proven track record that demonstrates stability during times of economic turmoil and through volatile markets.
- Stability: Common sense should prevail – organizational instability, as with any business, will result in underperformance.
- Fees and Expenses: Investment fees and expenses should always be reasonable and in line with advice and services.
When considering the amount of money that was lost during the Robinhood power outage on Monday and Tuesday of this week (which, by the way, the company, according to the fine print in their 44-page customer agreement, is not accountable for), does it make sense to pay a professional investment advisor a reasonable fee for quality advice on a durable platform that can easily withstand shocks to the market system? Or is it better to make risky bets during crazy times that you cannot control?
What’s the REAL cost of doing business with your “fin-tech” service provider?
It’s important to trust the service provider that you invest through, ensure that you have liquidity at all times, and that you are working with a strong partner when investing your money. In the confusing and sometimes misleading world of investing, opening and holding investment accounts that are vulnerable to technological “bugs” is dicey, to say the least. At Capstone, we believe that success is based not only on the integrity of advice we provide, but also, on the reliability and consistency of the investment management platform where we manage and hold client assets…Access is key.
If you’re wondering whether or not the service provider holding your money is safe, contact us for a fresh look, no-obligation investment review. We can be reached at (570) 587-7800 (office - direct) or 888-587-7526 (toll fee).
(The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.)