Is it a Bad Idea to Use A Retail Investment App?

If 2021 were to have any financial theme so far, it would be The Year of the Retail Investor. While Robo-advisor apps like Robinhood, Webull, and Betterment have existed for some time, recent headlines around so-called “meme stocks” like Gamestop and AMC have propelled them into the mainstream conversation. This has led to record-breaking levels of what the financial world refers to as “retail investing” or individuals who buy and sell securities on their own through brokerages.

Many individuals who have long-term investments through their job or a wealth management service, such as Awaken Wealth Partners, have asked, “should I put a little money into a retail portfolio?” 

It’s a valid question, and like most things in the financial world, it largely depends on the individual and their goals. Rather than giving our clients a blanket answer, here’s a few good reasons why you should or shouldn’t start making retail trades.

Why You Might Want A Retail Investment App

It’s a great way to learn how security investment works.

Even with incredibly simplified trading apps in the Robo-advisor space, it’s beneficial to learn the nuts and bolts of how security investments work. If you have the time and interest, there are lots of great (often free) resources to teach you how to research a company, as well as more advanced techniques like stop losses, shorting, and buying on margin. Even if your retail portfolio is a fraction of your overall investments, it could help you ask your financial advisor more detailed questions. It is extremely important however to know what you are doing when trading any security. No matter the ticker and no matter the trading technique.

It could motivate you to stay more informed. 

In today’s market, the latest business headlines could significantly impact the prices of a single company or an entire industry. Having some money under your direct control on Wall Street could be a great incentive to keep up with the latest news, market developments, and trends. Having more information is almost always a benefit when it comes to investing.

You can invest directly in companies you believe in.

Let’s say you just heard about a medical company that’s working on an exciting breakthrough. If you think it has the potential to be a world-changing medicine, you might want to buy and hold a few shares. If you have investments in an index fund or other retirement savings plan, be aware of the possibility that some of your other investment money might already be staked in that company. But if not, or you’d like to double down, retail investment gives you that option directly.

Investing can be kind of fun. 

There are a lot of dramatic moments in today’s trading world. A company that was quietly plugging away for the last several years might strike a deal that rockets their share price into the stratosphere. Other more common events, like dividends or splits, can also be exciting moments for investors. So long as you maintain the mindset that these are investments and not a casino, it can be educational to keep up with the highs and lows of the market.

Why You Might Want to Leave it to the Experts

The probability of losing some money.

There’s a steep learning curve when it comes to investing, and odds are your first few buys and sells could leave you in the red. Even if you do your best due diligence, trading securities is much like any other profession; it takes time, study, and a lot of hands-on experience to get consistent, positive results. 

You’re the underdog now.

Stocks like Gamestop and AMC are quite literally historic exceptions when it comes to the power of retail buyers. The vast majority of securities bought and sold are held by massive financial institutions and hedge funds. Not only does this mean their purchasing power is much greater, but they’re also deploying vast amounts of analytics and technology to make incredibly sophisticated trades. In other words, if the big firms decide to take their portfolio in a different direction than yours, you might feel the burn.

Good investing requires upkeep.

The history of Wall St. is full of fortunes being made and wiped off the table seemingly overnight. Even if you aren’t planning to sell your stocks for multiple years, you’ll need to regularly check in with your investments to make sure you’re not missing a golden opportunity or making mistakes. Investing with a managed fund or financial advisor means it’s someone’s job to keep an eye out for your portfolio. When making retail investments, it’s all up to you.

Investing can be stressful.

It’s a great feeling when all of your stocks are heading towards an all-time high, but there can be a lot of panic and anxiety after multiple days going in the wrong direction. Although these are common patterns, even for professionally managed funds, you might get a little more heartburn seeing these updates every single day. If you’d rather put your faith in someone else’s ability and put it out of your mind for weeks at a time, retail probably isn’t for you.

Risk is Risk, no matter the type.

Market risk, interest risk, political risk, fire, natural disaster, passivity, fear, ignorance, no matter the risk, if it exposes the possibility for loss, it is still a risk. If fear of losing your investment tends to steer your thoughts, retail investing is probably not your thing. Or if the other end of the bookshelf is more your speed and everything sounds like a good buy, consider asking for advice from a professional first. 

Should You Jump Into Retail Investing?

Unfortunately, there is no one-size-fits-all to this question. We know this sounds like a platitude, but it really does depend on why you want to start your own portfolio, your risk tolerance and future use of earnings. Should you decide to sign up with one of the many robo-advisors, here’s our advice: 

Only buy with the money you’re okay with losing. Pretend you’re spending your first trade on an online course (or some entertainment) and that you’re never getting it back. Start small, take your time, and always perform due diligence. Before locking in a trade, make a plan for that investment and stick to it. One of the very worst mistakes any investor can make is “panic trading” or following the trends of others. Know when you are going to buy and at what price. Also know when you are going to sell and at what price. When it reaches the goal, follow your plan. With a bit of luck and a lot of patience, you just might make some money. Oh, and don’t forget about taxes!