I’m writing this review because this is something I recently got into and I think my perspective could be helpful to other people. If you use my referral link we both get free stocks.
A few months ago I stumbled across an article about Robinhood, a stock market app that charges no commissions. I’d never had any interest in the stock market before — actually, I’ve always been a hardcore cynic. But since Robinhood is totally free I figured there was no harm in checking it out.
In retrospect it’s a no-brainer. Before, I was saving money in a savings account, earning close to no interest on it while inflation slowly ate away at its value. The stock market on the other hand returns on average something like 10% a year. With compounding that means that on average every 6 years you would double your money. I think a lot of people come from that same place of ambivalence that I was at before I tried Robinhood, so I’m going to walk through what I learned since then.
I haven’t worked at a proper job in eight years. As you can imagine, I don’t make a lot of money from my music or video related endeavors. But at the same time, I also lead a very humble lifestyle. So what I’ve been able to do with Robinhood is take the money I’ve been able to save and stretch my income even further by putting it into stocks.
Despite not watching TV or connecting with pop culture, I nonetheless feel like I’m a pretty “with it” guy. I know about technology. I use a lot of technology in what I do. So I can guess where things are going. I’ve leveraged those insights to invest in stocks poised to profit from the rise in things like artificial intelligence, cloud computing, and internet of things. So far it’s working ridiculously well. This is something everybody can do, because everybody knows a lot about something.
There are a number of things that held me back from diving in, but I think I had outsized fears.
The biggest was an ideological aversion. I had a fear of being complicit. I was taking all the worst things ever done in the name of capitalism, corporate personhood, and fiduciary duty and projecting it onto the whole. Now I think it’s more important to have a balanced view of things. When you buy stock, you are not giving the company money. You are just buying it from somebody else. Then you own part of the company, which (typically) gives you a vote. In that sense it’s democratic.
Also, there are plenty of companies you can invest in to express your values. You can invest in green energy. You can invest in companies run by women. You can short the oil industry. (Shorting allows you to profit from their share price going down.)
I also saw the stock market as a crooked tool for rich the to get richer. I still think it’s true. But with zero commission trading, it also becomes accessible to the rest of us.
I had a fear of making costly mistakes–bad stock picks–and flushing my hard earned cash down the toilet. What I’ve learned is that yes, you will inevitably make make some losing bets, but the goal isn’t to always be right. The goal is simply to be more right than you are wrong. What I recommend is starting out slowly with a small amount of money until you get a sense for things. Be prepared to lose money, and don’t let your emotions get the best of you. Panicked decisions are what will cost you the most.
Even professional traders make mistakes. Actually, most do not reliably outperform a low-cost, diversified, passive index-based ETF (electronically traded fund) such as VOO. So if you simply buy-and-hold something like that, that could be your wisest, safest move. There are other ETFs that give you global (VT) or emerging markets (IEMG) exposure, in case you want to bet that the rest of the world will outperform the U.S. Bonds usually go up when equity stocks go down, so allocating part of your portfolio to something like TLT will likely give you more protection during a crash.
If you do want to actively trade, one way to avoid costly mistakes is to pay attention to support levels. A support level is a level where the price doesn’t seem to want to go below. This happens because somebody or many people with deep pockets have decided that if it goes below that level it’s too good of a value, so whenever it hits that level they just buy it up. You can use that to your advantage. If you buy while a stock is recovering after hitting support, you reduce the risk that the stock will fall far from where you bought it. (Be aware though that often when the deep-pocketed ones anticipate that a stock will blast upwards they’ll let it dip below support levels to freak everybody else out into selling, so they can buy up even more at a even greater discount.) Support levels aren’t a guarantee, but they can be used to improve your risk-reward odds.
I also had a fear of bad timing. I have memories of two catastrophic stock market crashes. When the late 90s dot-com bubble burst, investors in technology stocks lost 80%. Then in the crash following the 2008 sub-price mortgage crisis, investors in financial stocks lost more than 80%. What’s important to realize that this is the worst case scenario — if you bought exactly at the top in exactly the wrong kinds of stocks and then gave up and sold at the very bottom. The reality is it’s nearly impossible to have that kind of terrible luck. Some years the market will be down, and some years it may be flat. But the general long-term trend is upwards. With that in mind, staying invested through a crash is not such a terrible idea, because the market has always recovered. Investing a fixed amount at a regular interval (a strategy called “dollar cost averaging”) has been shown to be highly successful.
On the other hand, if you do want to limit how much you are willing to lose you can place a “stop loss” sell order at something like 15% below what you bought at. So, even if there is a stock market crash, in all likelihood you’ll have raked in a bunch of gains before things turn south, and even if that’s not the case you can always pull out once your losses are more than you can stomach.
Probably my most unfounded fear of not being able to get my money in case I urgently need it. I think I invented this issue in my head. Transferring money out of Robinhood only takes a few days. While, yes, if you need to suddenly sell your stocks the timing might not be perfect, ultimately it’s better to have your money in the game than sitting on the sidelines.
Finally, I had a fear doing something I was clueless about. The stock market was French to me. I’d never had any exposure to it. It was totally inaccessible. What I’ve found is that it isn’t that hard to get the basics. Robinhood makes it easy to learn hands-on. Just start small. Read.
Prior performance is not indicative of future returns. You’ll see that disclaimer a lot. Just because a stock has been going up for six months doesn’t mean it won’t tomorrow drop 10%. You’re better off investing in something you believe in long-term that the market is undervaluing at the moment.
There are plenty of articles all over the net with stock advice. Ninety percent of them reek of bullshit. So hone your senses. Read the comments sections for some perspective. Don’t trust something just because it was on CNBC either. Ultimately, nobody knows for certain anything. Some advice is deliberate manipulation; some is just misguided.
Even though there are no commission fees on Robinhood, there are still frictional costs to be aware of. Avoid super low-volume stocks (anything below 50,000 shares traded a day is trouble). Low volume stocks have wide spreads, which is the difference between the bid and ask, which is money you lose when buying or selling. Another danger in low volume stocks is that if you need to sell fast, there might not be any buyers at the current price, and so you’ll end up having to sell at a much lower price.
On a related note, always use limit orders so you don’t accidentally pay way more than you intended or sell for less than you intended. The price you see in Robinhood is the last sold price. It might be that nobody is currently selling at that price, so if you don’t use a limit order you may buy from somebody selling at a much higher price, and visa versa. If the spread is wide, you might place your limit order at the mid-point between the best current bid and ask.
Remove emotions from the equation, especially stress. When you panic sell something while it’s down you may be just locking in losses. Your goal is not to buy high and sell low, but emotions might drive you to do that.
Diversify. Because all stocks go down a bit on their way up and because any stock can turn out to be a dud, if you are diversified enough none of that will have too harsh an effect on your balance. Sometimes an entire sector will go down together. This happened to tech stocks this summer. So even though it’s good to focus on what you know, it’s safer to diversify across sectors.
Buy the dip. Often when prices are going down for no reason, people respond by selling in a panic or their “stop losses” are getting triggered, which exasperates the price movement. After that the smart buyers swoop in and buy the newly discounted stocks. At least that’s been the case in the current market environment.
Once you’re up 15%, the prospect of losing 10% isn’t as scary, because you’ll still ahead of where you would have been had you not invested.
Robinhood is not without its drawbacks. I wish there were a way to keep notes within the app so I could keep track of what I was thinking about various stocks. I wish there were a way to sort or more elaborately organize the portfolio and watch lists. It becomes just this really long list that’s hard to traverse. All the graphs are relative, so it’s hard to compare performance just by looking at them. It would be useful if you could overlay two graphs, even if one were just a benchmark, such as S&P500, for comparison. It’s a good idea to use a 3rd-party website for charts, such as tradingview. Robinhood offers a premium “Gold” membership, where they charge a flat fee no matter how much of it you use, which makes it really expensive unless you use all the “Gold” margin the whole time, so it’s not really worth it for normal use. I’m constantly discovering bugs. Support can be terrible. But ultimately, the platform is totally free, which is a game-changer and totally worth checking out.
Note: Robinhood has a referral program, so if you use my link we both get free stocks.