Gamified investing apps could seriously damage millennials’ wealth
A recent investigation by the Financial Times has found that the latest crop of stock-trading apps may skip over the risks for less experienced investors, leaving them vulnerable when they try their luck in the markets for real.
These investing apps have become increasingly popular, allowing those new to investing to set up accounts and trade with ‘virtual’ cash; brokers and platforms on both sides of the Pond have reported record number of accounts being opened as lockdown left many people with money in their pocket, time on their hands and a hankering to be in control of their financial futures.
However there is increasing concern that younger investors in particular are engaging in risky behaviours that could put them in jeopardy.
The report says that when US oil prices crashed into negative territory, the financial pages were filled with warnings to retail investors looking to bet on a rebound.
However, such stories did not halt the ‘millennial rush’ as amateur investors tried to call the bottom for crude prices.
The United States Oil Fund, the world’s largest oil ETF reflected worrying behaviour; Robinhood, a trading app targeted at the young and tech-savvy, with an average age of 30, reported the number of users holding USO more than tripled to 200,000 over the three days that followed crude’s sub-zero plunge.
The flood of entrants came as the price of USO dropped about 40% and ETFs in Europe and Asia experienced similarly large inflows as prices crashed; however, over the next week, as hopes rose for a market rebound, Robinhood users began selling out
these are millennial investors buying low and selling lower
When USO started to show signs of recovery, the number of Robinhood’s holders had dropped by a third; these are millennial investors buying low and selling lower.
Despite repeated warnings from regulators, younger investors were drawn into risky and volatile commodity tracker funds, unsuitable for retail investors.
Whereas buying funds that track an index or a benchmark may be suitable for relatively inexperienced investors; complex commodity products patently are not.
According to a 2018 survey by investment body, the CFA Institute less than half of millennials with taxable investment accounts are ‘extremely or very confident’ in their ability to make investment decisions; this falls to 21% per cent among millennials who do not invest.
In 2017 French investment bank Natixis, found that 65% of millennials believed that index funds were inherently less risky, despite offering ‘no built-in risk management’; viewed in the context of commodity-linked ETFs such as USO, that is a recipe for disaster.
Trading is now so simple that it can be easy to make impulsive decisions
Products such as USO behave differently to stock market ETFs; investors hoping to benefit from a rebound in oil prices may have been attracted by the simplicity of products that appear to track the price of oil, oblivious to the risks inherent in the investment structure. These products can catch even experienced investors off-guard
In this context the main ‘nasty’ is called ‘rollover risk’, when the ETF has to sell expiring oil contracts and buy the next month’s.
When spot prices are trading below prices for future delivery – or in ‘contango’ – funds can be exposed to potentially unlimited losses as they roll; such risks can be exacerbated when investors bet on leveraged products that multiply gains and losses, and often come with steep management fees.
These products can catch even experienced investors off-guard
New investors have been attracted by slick user interfaces, low fees and near-instant account opening of investing apps such as Robinhood, E*Trade, and SoFi Invest, in record numbers; fee-free Robinhood, has added 3m users in 2020, half of whom are first-time investors, while E*Trade added 363,000 mostly retail investors in Q1 2020.
A millennial investor in Harvard’s economics PhD programme told the FT he regrets the progressively riskier bets he made, running into thousands of dollars: ‘Robinhood has gamified investing. Trading is now so simple that it can be easy to make impulsive decisions. The lockdown has also meant I’ve just had more time to spend on the app.’
The investing apps do not offer financial advice, and in trying to offer simplified explanations of major market events may be exacerbating the problem; on April 21st Robinhood’s Snacks newsletter said: ‘there is so ridiculously little demand for oil right now that we could theoretically be getting paid to fill up our own tanks,’ with little information on the dangers of ETFs that bargain-hunting millennials were diving into.
As the Covid-19 threat recedes, it remains far from certain that demand for oil will ever recover to pre-crisis levels as climate challenge continues to rise up the agenda; for a generation that supposedly factors in social and environmental impact into financial decision-making, long-term bets on renewable energy might make more sense than punting on fossil fuels.
Trading apps are using technology to engage the next generation of savers and investors, which can only be seen as a positive as financial self-reliance replaces dependence on the state; however, there has to be more than a nod to the inherent risks involved and a determination to ensure that their clients are suitably educated and informed to make sound investment decisions.