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Investing App Dangers!

Investing App Dangers!

February 07, 2021

Investing App Dangers!

Hi everyone, and welcome back to Melissa Making Cents!


As a CERTIFIED FINANCIAL PLANNER™ and a financial coach, many people I deal with are competent and extremely interested in investing. You may have heard recently in the news (and on social media) about various user-facing investment apps, like Robinhood, Acorns, and Round. Applications like these have become increasingly popular among the "every day" investor, or someone who isn't really trained in finance or investing but wants to dabble in the market. While apps like this can be fun to use, they can also have some dire consequences for those using them. It's easy to view apps like this as fun and almost like a lighthearted game, but users are using real money, which comes with real-world implications. 

***I'd like to make it clear that today's blog post is for informational purposes only, and any companies mentioned today are not recommendations. Before investing in a company I advise you to do your own research to make sure that  your investments align with your financial goals.  To paraphrase the famous words of Peter Lynch, the long time manager of Fidelity's Contra Fund, "Once you get a tip on a hot topic, it's already too late"

Why GameStop and Robinhood Suddenly Became a Hot Topic

Melissa Cox CFP explains the recent GameStop buzz

I've been planning to writing this blog, but I wasn't going to write it for a few more weeks. However, with GameStop and Robinhood's news, I felt there was no better time like the present! So… what exactly has been going on with GameStop and Robinhood? 

For anyone unaware, GameStop is a company that largely participates in the buying and selling of video games for various gaming systems.  In the In recent years, GameStop and its stock prices have been on a downward slope. GameStop has been in a continuous battle and struggles to adapt to gaming's new digital marketplace, which puts a large part of its business model in a bind. Without getting too much into the weeds, essentially, what has happened is that hedge funds have borrowed to buy GameStop stock and sold it to "retail investors" (also known as short selling, which can be a very risky move with large financial consequences) in hopes that the prices would go down and they'd be able to repurchase it cheaper at a profit. 

Melissa Cox CFP explains short selling

Unfortunately for them, the internet (specifically WallStreetBets, a forum on Reddit) had different plans. After catching wind of the short sell, Reddit users bought and urged others to buy as much stock in the company as possible, which caused the stock's price to surge. This means that the larger businesses who initially borrowed money to sell, purchase and sell the stock are forced to take a loss and repurchase the stock at higher prices. What can you say? Don't mess with the internet's love of video games, I guess. 

Melissa Cox CFP explains Short Selling Gone wrong

While this strategy and rally behind GameStop and others, like AMC, have seemingly worked out in the short term for small investors, unfortunately, it isn't indicative of the everyday reality and dangers of using investing apps. 

Why are Investment Apps so Enticing?

Melissa Cox explains the excitement of investing Apps

There are a few reasons that investment apps have become very popular. As technology has improved and we've been able to seemingly take everything into our own hands, finance firms, like Robinhood and Acorns, have built applications that make investing almost like a game. Have you ever been scrolling your social media and see an ad of some guy or girl laying in bed investing money and immediately hearing a CHA-CHING? WOW! They've made a TON of money in their PJs! I see ads like this all the time, and they're part of the reason that investment apps have gotten so popular. 

In my opinion, the major problem with the investing apps is unfortunately they are not just games! It's real money that was hard earned!

There's also a romanticism of taking your fate into your own hands. As silly as it may seem, who wants to deal with banks and brokers when you can just lay in bed and play the Stock market.  Whether it's advertising or our own ego, we have a tendency to believe we're the smartest person in the room and that we're going to handle our money better than anyone else would or could. As a financial planner, I have to say that I've seen and heard some horror stories, and you're undoubtedly better in the hands of a professional, even if it means you have to throw on a pair of pants to deal with us.

The Dangers of Investment Apps

Melissa Cox CFP explains the dangers of Investment Apps

Like I said, investing by yourself doesn't always work out so peachy. In fact, the internet throwing itself behind a faulting stock, like GameStop,  is really a freak occurrence. My worry is that it could be why retail investors throw themselves entirely behind investment apps and lose a lot of money. Education is the best tool you can use for… anything, and being educated on the risks of investment apps will help you have a better idea of what you're getting yourself into. 

Recently, I wrote about Dollar Cost Averaging and how it's a way of spacing out your risk over time. When you take something like investing into your own hands, you may have a tendency to ignore sound strategies in favor of putting large amounts of money into one investment… like GameStop or AMC. While this can work out from time to time, it's a considerable risk and is akin to gambling. Having a third party who's less emotionally attached to your money allows them to make the best objective decisions when it comes to managing your investment assets. 

Terms and conditions of applications should also be a worry. Not all of these applications work the same way, and some are a lot more reputable than others. If you're using them to invest large amounts of money, it's crucial to know the ins and outs of what happens to that money, what their cut (fees or commissions) will be (both before and after returns), and what their "rules" are. 

Lastly, whether it's planning, market strategies, or how stocks and bonds work - with many of these companies, they're very gung-ho to sell to you but don't really care if you know what comes next. Personally, I make sure that all of my clients are educated to the fullest extent before we make any moves that may involve risk. That isn't the case with some of these investment apps. They don't care if you know how to handle your financial goals, if you're making a good decision or a bad decision, or if you know about the stock that you're buying because they get their cut either way.

The Better Solution for Investing 

Melissa Cox CFP explains there is a better solution for investing!

In my opinion, there is a much better solution to using an investment app.

Long term investing, dollar-cost averaging, and working with a CERTIFIED FINANCIAL PLANNER™ will really help you along the way when you're investing. As you space out your planned investments, you're mitigating your risk over time and lowering the likelihood that you're overpaying for investments - that means you could have a chance of having the better return on investment (ROI) possible. 

Talking with a financial professional also ensures that you're fitting your investments into your financial plan. Instead of dumping random sums of money into the same stock/bond, it's better to approach your financial plan as a whole. Create that emergency fund, start savings, get a good grasp on your fixed expenses and what you have to pay for - then you know how much you can begin investing at regular time intervals. Working with a financial planner also means that you're taking advantage of things like Dividend Reinvestment.

Horror Stories of Investing Apps

Melissa Cox CFP has experienced Investment App Horror stories

When you're researching apps like this, there are countless stories of people losing tons of money. Sometimes their app crashes, sometimes they're stopped from selling for whatever reason, and they're forced to take losses. I would go more into these stories, but it is challenging to tell what is a legitimate gripe and what someone is upset that they've lost money. If you're interested in using these apps, I'd highly recommend you take a little time and just do a quick YouTube search of "[insert investment app name] horror stories." It can be very eye-opening to how these companies operate and how they do business.

It's also important to keep in mind that they're selling you investments for a lot of these applications, but you aren't their customer - you're their product. Whether it's your data, your money, or your investment, some of them are creating profiles on what they call "dummy investors" (as opposed to what they call "smart investors" like hedge funds). These help them better understand market trends using AI and create other buying and selling tools that they can then sell to "the big guys."

A CERTIFIED FINANCIAL PLANNER™ Can Create a Comprehensive Financial Plan To Help You Invest to Meet Your Financial Goals

As a CFP, Melissa Cox helps clients invest to meet their financial goals

If you're really interested in the stock market, please work with a professional. If you'd like, I'd be more than happy to help you become educated in trading, creating financial plans, and using sound financial strategies and principles instead of relying on investment apps and internet trends. Please, feel free to call or email to schedule an appointment with me. I work with my clients to make sure they're making the most of their investments and know what they're doing and why they're doing it.


Schedule a call with Melissa Cox CFP®

Until next time...this is Melissa Making Cents!

Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is also a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.

Read last week's blog post by Melissa Cox CFP®