Step Away from the Smartphone
Why new investors should stop checking their portfolio
Fifty-eight, that is the number of times each day that on average we check our smartphone. Many of us spend more than three hours or a quarter of our waking moments scrolling. It’s the first thing we check in the morning and the last thing we look at before bed. In the intervening hours, we are Whatsapping, Facetweeting, and Instaglamming in endless loops.
More time on our devices is not necessarily a bad thing, during the pandemic they have been a lifeline to those living alone in isolation. But the research and weight of evidence are conclusive; the longer we spend on our screen the more anxious, depressed and lonely we are likely to feel.
Let’s be honest non of this is likely to be news to you. After all, this is an investing blog; so today we are going to look at the impact of a relatively new phenomenon- the ability to trade anywhere. Checking your portfolio is now just a click away, whether at the gym, in the pub, or indeed on the toilet you can be constantly plugged into the market. How will this effect our returns? And will it make us better investors?
Set it and forget it
Fidelity is are one of the big four asset managers. At the last count, they had $10.4 trillion under management. Yes, that’s not a typo a Trillion! In 2013 they commissioned a study that focused on the previous decade, they audited customer accounts to determine which group of investors had the best returns. Intuitively you may think that those who were regularly trading would outperform their peers. Instead, researchers found that inactive accounts held by people who had switched jobs, forgotten about their 401(k)’s or were deceased had the greatest returns. This is a fascinating finding revealing that overtrading is your enemy, getting to the heart of why managing your money is as much a mental battle as it is about the mechanics of asset allocation.
We’ll all get Lambos
A combination of helicopter cheques, Reddit and lots of time on our hands (really there is only so much Breaking Bad a lad or lass can watch) has meant that a whole new generation under thirty is putting money into the markets. Not long ago when you wanted to place a trade you had to call your broker, mail off a form, or visit your high-street bank. Fast forward to 2021 and you can grab your smartphone and buy and sell to your heart’s content, instantly. The technology and the trading platforms that we all have access to have almost entirely removed all the friction from the process. The image of an investor being a cigar-smoking, slipper-wearing sixty-something has been well and truly replaced, with a generation behind their keyboards consuming subreddits and youtube advice like there is no tomorrow.
Ben Carlson over at Wealth of Common Sense has an excellent piece on the meteoric rise of Robinhood. The trading app now boasts more than 18 million users, half of which say it is their first foray into investing. The same percentage report using the platform daily that’s about the same as the most successful social media companies.
Growth in users:
Even more impressive is Robinhood has now risen to the top of the download rankings in the Apple App Store ahead of Reddit, Facebook or Instagram. Yes, that’s right we are more excited to trade than watch cat videos, stalk ex’s or check out the latest swimsuit models.
Before UK readers hit the Google Play Store it is only available across the pond.
Don’t quote me on the numbers but on average the stock market moves down on 30% of trading days. That means each time you reach into your pocket to check on your holdings of Tesla, Gamestop, or AMC you are likely to feel a pang of disappointment. This is not a recipe for building wealth and stokes the innate fear and greed that we are all susceptible to.
Asleep at the wheel
But now to my own story. I first heard about Bitcoin back in the summer of 2016 with the price hovering around $600. I was skeptical of my friend’s enthusiasm. In the years prior I had consumed vast amounts of blogs, podcasts, and videos most of which espoused good ol’ index funds as the one sure path to financial independence.
Nevertheless, in late 2017 I caved and took up a small position in Bitcoin. I was intrigued by the prospect of being your own bank. Watching it go up was intoxicating, I was succumbing to that old investor pitfall, attributing dumb luck to my investing prowess. As we know the price soon started a precipitous decline. What I did next or more precisely what I didn’t do is useful to examine. I went to sleep on my coins and missed 3 years or so of market gyrations. In general, the price traded sideways and I’d saved myself a great deal of angst by not following the daily price. Only when the price picked up and the mainstream media started reporting on it hitting all-time highs was I sucked back into following news from Coindesk.
Hopefully, this tale illustrates a couple of relevant points:
- We should all be seeking information outside our echo chamber. Are you a dyed-in-the-wool dividend value investor? Then spend a bit of time reading about momentum trades. You’ll likely gain a whole new perspective which will help you make smarter investment decisions.
- In hindsight, I probably did the right thing. Sure, I could have bet the farm on Bitcoin but there was a non-trivial chance it could have gone to zero. As a result, a small allocation in my portfolio was a good match for my risk tolerance. In a future post, I’ll take a deeper look at Bitcoin and why I am still on the fence.
Sit on your hands
In most areas of life be that business, health, or relationships inputs equal outputs and being active is the best way to get ahead. You’ve probably heard the saying; there are those that make things happen, those that watch what happens, and those that wonder what happened. However, when it comes to investing the individual is best served by exercising a degree of caution.
Here’s what Jason Zweig said back in 2006 in his commentary notes in the classic The Intelligent Investor.
If, after you step up an online autopilot portfolio, you find yourself trading more than twice a year- or spending more than an hour or two per month, total on your investments- then something has gone badly wrong. Do not let the ease and up-to-the-minute feel of the Internet seduce you into becoming a speculator. A defensive investor runs and wins the race by sitting still.
Young investors should probably heed that advice.
Warren Buffet, Ben Graham’s most famous student has many great tit-bits of advice on the craft of investing. But a piece I heard several years ago stuck with me. It goes something like this: Imagine you have a punch card and can only make 20 holes, each representing a trade you can make in your lifetime. Once the 20 is gone that’s it. This approach forces you to do your due diligence when acquiring or disposing of company stock providing a break on trading when your emotions are running high.
Gradually, then Suddenly
WallStreetBets would have you believe they have found the secret sauce, a guaranteed shortcut to riches. And if smartphone screenshots are to be believed maybe a few have. But the path to wealth is a marathon, not a sprint. For us young investors the early years of dollar-cost averaging into the market can feel like an upward slog. You are throwing a few hundred pounds into the market and it can feel like treading water. The key is not to be discouraged, rest assured the magic of compound interest is working around the clock.
Think like Odysseus and tie yourself the mast, stuff your ears with wax and uninstall the Freetrade or Robinhood apps to avoid the Siren song.
The most important thing is that month by month you are acquiring units. The price is somewhat of a distraction and as I explained here -young investors in the wealth accumulation phase should be welcoming price falls. These units are your small share in the great businesses of the world and as long as you are steadily increasing your portion then you will slowly grow rich.
Robinhood has doubtless done a lot of good; commission-free trades are laudable and they have brought a whole new generation of investors into the capital markets. On the flip side, there is evidence that they are front-running trades. Not exactly robbing the rich to feed the poor. It is my (perhaps naive) hope that many new users will have their interest in optimising their LifeEnergy® piqued and will go onto reading the classic investing books:
- Little Book of Common Sense Investing:
- One Up on Wall Street
- The Most Important Thing
- The Psychology of Money
That Apple, Samsung, or Xiaomi device is a pocket-sized portable slot machine engineered to keep us hooked with random rewards that trigger dopamine spikes. So wind back the clock to simpler days:
It is time in the market, not timing the market that builds wealth.
