The stock market’s volatility this past week was probably easier to stomach for seasoned investors, especially those who have the luxury of calling a financial adviser for some hand-holding. But novices using low-cost micro-investment apps don’t have a reassuring human standing by to help them. So what do they get instead?
Investment apps are sending users messages telling them to stay the course, but financial advisers worry that these investors may still be inclined to make risky decisions.
The Dow Jones Industrial Average DJIA, -3.10% plunged 799 points Tuesday. And some analysts predicted that this week’s fluctuations could presage continued volatility in equities markets for weeks to come.
Amid this week’s ups and downs, investment apps like Stash and Acorns sent their users messages explaining the triggers for the market’s recent weakness and what has occurred following downturns historically.
“Recently rising bond yield and tech stocks triggered a sell-off,” Stash CEO Brandon Krieg said in an email to the app’s customers. “Although we can’t predict the future, try not to sweat the ups and downs…”
In a recent video posted to Twitter TWTR, -3.27% Acorns CEO Noah Kerner explained to users how “every downturn has ended in an upturn…the only way you lose money is if you pull your money out of the market after it’s gone down.”
The messages were clearly designed to stave off risky (and financially disadvantageous) behavior among the apps’ user bases — the sort of behavior that observers were worried about during the stock market’s correction back in February.
During that volatile period earlier this year, scores of consumers who use apps such as Stash and Acorns took to social media to lament their losses. And that’s not surprising, given that a majority of the users of these platforms are first-time investors who are only familiar with favorable market conditions.
The companies said back in February that the market’s volatility didn’t prompt a mass exodus of users or assets by any means — both Stash and Acorns said that there wasn’t any noticeable difference in terms of their buy-versus-sell flows. But financial advisers expressed concern at the time that these apps inherently could promote an active investing mentality that could be costly as the market turns bearish.
“I’ve seen it firsthand,” said Kent Schmidgall, a wealth adviser and advisory team leader with Buckingham Strategic Wealth in Burlington, Iowa. “Undisciplined investors are far more likely to attempt to time the markets during times of volatility when using an investment app, then if they used a traditional service.”
How these apps may inadvertently encourage active investing
Two of the most popular investment apps — Acorns and Stash — operate with similar models. For as little as $1 per month, users can set up accounts that will automatically invest small sums of money.
With Acorns, users’ money is invested in a highly diversified, broad portfolio comprised of exchange-traded funds across six asset classes: Real estate, large companies, small companies, government bonds, corporate bonds and emerging markets.
Stash allows for more customizing: For instance, users can choose from three mixes of investments — conservative, moderate and aggressive. Investors can also tailor their investments to specific interest, such as blue-chip stocks, tech firms or companies that support the LGBT community.
Inherent to all of these platforms is their ease of use. Getting set up is easy — as is cashing out your money. And that means users can easily make emotional decisions that will cost them. “It makes it too easy to check your investments or read about the latest shiny object,” said Joe Sallee, managing partner at Bay Capital Advisors, a wealth planning firm in Virginia Beach, Va. “This allows the user to make rash decisions based on how they feel or the latest sound bite they hear on TV.”
More assured investors might also feel emboldened to make more speculative decisions that an adviser might dissuade them from, Schmidgall said. “For first-time or undisciplined investors, using these kinds of apps during times of market crisis adds an additional layer of risk, since speculative trades can so easily be made,” he said. “Now, in a moment of passion or panic, terrible financial decisions can be executed, all while driving down the road or eating lunch at Arby’s.”
Apps focus on education — even when the market isn’t volatile
Beyond the messages they send users during volatile periods in the markets, Acorns and Stash have worked to educate their users about the stock market’s history, why the markets are volatile and how to approach investing in times like these. “We launched after the bull market started and a lot of our users only know the bull market, so we had to provide that broader context,” Jennifer Barrett, chief education officer at Acorns told MarketWatch in February after the Dow suffered its biggest point drop since 2008.
In its messages to users, Acorns linked to content from its personal-finance website Grow to educate them. The service launched a personal finance course earlier this year through Udemy and sent reassuring, informative messages to those users as well, Barrett said. The course, led by Barrett, is included in Acorn subscriptions and typically costs $75 for other consumers.
Meanwhile, Stash hosted a question-and-answer session via Facebook FB, -2.24% Live during the February correction to give users another outlet to get more information, said Ed Robinson, co-founder and president of Stash. “All the questions were about what they should be doing,” he said.
Both Stash and Acorns also make users go through an initial onboarding process to get them more familiar with how investing works. Overall, the apps hammer home messages involving similar views on investing, including the value in maintaining a diverse portfolio and the importance of a buy-and-hold approach.
Acorns users get periodic Grow newsletters and access to the aforementioned Udemy course. Customer support staff members are also well-equipped to answer questions relating to market, Barrett said. “Education is core to what we do,” Barrett said.
Stash has a feature called Stash Coach that provides ongoing guidance about investing and awards users points for following tried and tested investing rules, Robinson said.
And when a Stash user wants to sell, the app asks why. Depending on their answer, Stash will give recommendations of other investments.
For the most part, investors in these apps aren’t pouring significant amounts of money into them — the average Stash user only adds between $23 and $25 per week, Robinson said. For that reason, some advisers say it can be a great learning tool.
“These apps are a great way for first time investors to dip their toes into the investment world in a way that feels more comfortable to them,” said Grant Meyer, a wealth adviser with Fure Financial, a financial planning firm in Bloomington, Minn. “The important thing is that a person differentiates between their long-term retirement funds and some money they play around with for fun in a stock-picking app.”
Therefore, the standard advice an adviser would give a client invested in a more traditional Roth IRA applies equally well here: Users should let the dust settle before making any changes to their investments. At that point, they can choose to reassess their risk exposure — keeping in mind that the market will inevitably go up again.
