The stock market’s volatility this week is old hat for seasoned investors — but for novices using low-cost micro-investment apps it prompted concern. And some say that these apps could unintentionally promote investing behaviors that could put those users at risk, especially in recent weeks when the Dow Jones Industrial Index
As the market went up and down over the course of this week, scores of consumers who use apps such as Stash and Acorns took to social media to lament their losses. And that’s not surprising since a majority of the users of these platforms are first-time investors who are only familiar with favorable market conditions.
The companies said that the market’s volatility didn’t prompt a mass exodus by any means — both Stash and Acorns said that there wasn’t any noticeable difference in terms of their buy-versus-sell flows. But financial advisers expressed concern that these apps inherently could promote an active investing mentality that could be costly as the market turns bearish.
“I’ve seen it firsthand,” said Kent Schmidgall, a wealth adviser and advisory team leader with Buckingham Strategic Wealth in Burlington, Iowa. “Undisciplined investors are far more likely to attempt to time the markets during times of volatility when using an investment app, then if they used a traditional service.”
@acorns and @Stash keep sending me messages when I log in to check the account. RELAX folks. I know better than to sell when the market is down. I do need the economy to find my returns though. pic.twitter.com/YO2FHIRudz
— MP Cowley (@_cwly) February 9, 2018
My Acorns account is freaking out over this market shift and warns me every time I open the app that the market will recover.
Like, cool, the $300 in pennies I’ve saved really isn’t going to cause the second Great Depression if I pull out.
— Lindsey (@heyluvcrusader) February 9, 2018
How these apps may inadvertently encourage active investing
Two of the most popular investment apps — Acorns and Stash — operate with similar models. For as little as $1 per month, users can set up accounts that will automatically invest small sums of money.
With Acorns, users’ money is invested in a highly diversified, broad portfolio comprised of exchange-traded funds across six asset classes: Real estate, large companies, small companies, government bonds, corporate bonds and emerging markets.
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Stash allows for more customization: For instance, users can choose from three mixes of investments — conservative, moderate and aggressive. Investors can also tailor their investments to specific interest, such as blue-chip stocks, tech companies or companies that support the LGBT community.
‘It makes it too easy to check your investments or read about the latest shiny object. This allows the user to make rash decisions based on how they feel or the latest sound bite they hear on TV.’
Robinhood, another popular investment app, offers even more freedom and lets investors funnel their money however they choose, including individual stocks, commodities, options and even cryptocurrencies. (Robinhood did not respond to a request for comment.)
Inherent to all of these platforms is their ease of use. Getting set up is easy — as is cashing out your money. And that means users can easily make emotional decisions that will cost them. “It makes it too easy to check your investments or read about the latest shiny object,” said Joe Sallee, managing partner at Bay Capital Advisors, a wealth planning firm in Virginia Beach, Va. “This allows the user to make rash decisions based on how they feel or the latest sound bite they hear on TV.”
More assured investors might also feel emboldened to make more speculative decisions that an adviser might dissuade them from, Schmidgall said. “For first-time or undisciplined investors, using these kinds of apps during times of market crisis adds an additional layer of risk, since speculative trades can so easily be made,” he said. “Now, in a moment of passion or panic, terrible financial decisions can be executed, all while driving down the road or eating lunch at Arby’s.”
Apps focus on education — even when the market isn’t volatile
Acorns and Stash have worked this past week to maintain calm among their user base. Both apps used in-app messages to reiterate the importance of staying in the markets despite the fluctuations.
Beyond that, they have worked to educate their users about the stock market’s history, why the markets are volatile and how to approach investing in times like these. “We launched after the bull market started and a lot of our users only know the bull market, so we had to provide that broader context,” Jennifer Barrett, chief education officer at Acorns, said.
In its messages to users, Acorn linked to content from its personal-finance website Grow to educate them. The service had also recently launched a personal finance course through Udemy and sent reassuring, informative messages to those users as well, Barrett said. The course, led by Barrett, is included in Acorn subscriptions and costs $75 for other consumers.
‘We launched after the bull market started and a lot of our users only know the bull market, so we had to provide that broader context.’
Meanwhile, Stash hosted a question-and-answer session via Facebook Live FB to give users another outlet to get more information, said Ed Robinson, co-founder and president of Stash. “All the questions were about what they should be doing,” he said.
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But this focus on education isn’t unique to times when the market is volatile, both companies said. Both Stash and Acorns make users go through an initial onboarding process to get them more familiar with how investing works. Overall, both apps hammer home messages involving similar views on investing, including the value in maintaining a diverse portfolio and the importance of buy and holding.
Dude, my Stash account has DIPPED. I’m a sad boy
— The Debt Collector (@TheHeroDrowns) February 8, 2018
Acorns users get periodic Grow newsletters and access to the aforementioned Udemy course. Customer support staff are also well-equipped to answer questions relating to market, Barrett said. “Education is core to what we do,” Barrett said.
Beyond frequent in-app messages, Stash has a feature called Stash Coach that provides ongoing guidance about investing and awards user points for following tried and tested investing rules, Robinson said.
And when a Stash user wants to sell, the app asks why. Depending on their answer, Stash will give recommendations of other investments.
How consumers should approach investment apps
Bottom line: Consumers should fully understand the product, said Robert Barba, senior banking and fintech analyst at personal-finance website Bankrate. The apps can help them automate savings, making them appear similar to savings apps such as Digit that put funds into traditional deposit accounts. “You’re investing in the market, and the market swings,” Barba said. “If you don’t want to withstand some losses here, maybe you need to be in a deposit product.”
Also see: 5 great questions Americans are asking about the market’s crazy ride
“The important thing is that a person differentiates between their long-term retirement funds and some money they play around with for fun in a stock-picking app.”
For the most part, investors in these apps aren’t funneling much money into them — the average Stash user only adds between $23 and $25 per week, Robinson said. For that reason, some advisers say it can be a great learning tool.
“These apps are a great way for first time investors to dip their toes into the investment world in a way that feels more comfortable to them,” said Grant Meyer, a wealth adviser with Fure Financial, a financial planning firm in Bloomington, Minn. “The important thing is that a person differentiates between their long-term retirement funds and some money they play around with for fun in a stock-picking app.”
Therefore, the standard advice an adviser would give a client invested in a more traditional Roth IRA applies equally well here: Users should let the dust settle before making any changes to their investments. At that point, they can choose to reassess their risk exposure — keeping in mind that the market will inevitably go up again.