Over the last few years there has been a drastic increase in mobile investing and trading apps that provide users with easy access to stocks, commodities and cryptocurrencies. Whilst there is clearly some advantage to being able to execute trades on the go and to have access to your investments in the palm of your hand, there may also be a number of risks that are overlooked.
Conventional financial wisdom is to maintain a diversified portfolio over a longer period of time. This means not buying and selling assets on a regular basis, especially in a reactionary manner. Investment wisdom goes something like: Time in the market is key, not timing the market.
For the majority of people, having a barrier between themselves and their portfolio is beneficial as it reduces the risk of making emotional decisions when volatility occurs.
Increased risk of mobile investing
Another potential issue with these apps is the nature of the investments that they offer. Most of the well known mobile platforms only offer stocks and fractional shares, commodities and cryptocurrencies. These are all high risk investments that experience high volatility.
Many portfolios are constructed from a selection of low cost ETF funds, that may hold a large number of shares, maybe even across a wide range of sectors or geographies. Buying individual stocks increases the risk these investors are taking.
Your risk profile is one of the most important factors to consider when building your portfolio. The traditional process of going through an advisor starts with a clear understanding of your risk profile obtained by completing a risk profile questionnaire.
Often this step is not included in mobile trading apps and many investors are accessing investments that may not be suitable for them. The apps provide access without education, which can be a particularly dangerous combination for new or inexperienced investors.
Gamification and meme stocks
These are two terms that you may be familiar with as they have become increasingly popular over the last few years. Gamification refers to the process of producing an application that incorporates elements of gaming. This may be adding features that set challenges and targets or even displaying other users performance figures to encourage competition.
The applications make money on trade volume, so it is in their interest to encourage users to buy and sell assets more frequently. This subtle encouragement to increase activity is clearly in stark contrast to how a traditional portfolio would be managed
Meme stocks refer to assets that are driven in price by popular internet communities such as r/wallstreetbets on Reddit or well known individuals on Twitter. Many of these stocks experience extreme and often unwarranted price increases, followed by a swift correction. The most famous of these was GameStop (GME), which went from $1 a share to $80 in a couple of months and then crashed to around $15 a share in a couple of weeks.
In the crypto world it was DOGE that was driven up 1000s of percent before crashing again. These ‘pump and dumps’ cost a lot of people a lot of money and gained such a large amount of traction due to the amount of people who had easy access to jump on board, combined with very little experience investing.
Benefits to traditional investing over mobile
We are all subjected to market noise and part of the challenge of successful long term investing is to stay focused on the long term without reacting to it. Having an app on your phone that constantly sends you notifications on price movements and encourages action when volatility occurs, can be detrimental to your long term plans.
Having an individual such as an advisor between you and your portfolio will reduce your reactionary impulses to switch assets or solidify losses too soon. Brite can provide world class investment advice and expertise for anyone looking to build an intelligent, diversified portfolio. Contact us here to find out more.
