Ceiling Fans, Robinhood.com, and Investing Costs

8% of India’s total energy use is spent to power ceiling fans.

India is a country of 1.4 billion people, and I can’t image the total cost to power all those fans. Tony Fadell quoted this stat here.

Most of us wonder about the amount of money we’re spending, and ask ourselves this question:

Am I paying too much?

It’s a particularly good question when we buy a product or service we don’t know a lot about. I wonder about car maintenance costs, because I don’t know anything about car repairs.

This question causes anxiety. But some people- young people in particular- are taking action to control the costs they pay for investing.

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The young investor viewpoint

Young people are forcing down the costs they’re willing to pay for investment advice. This generation lived through the dot-com tech bubble burst of 2000/2001, and the mortgage, derivative collapse of 2008/2009.

This group generally has a lot less trust in financial institutions generally- and they don’t believe that financial advisors can justify their rates. This group would rather pay less, buy index funds– and make their own investing decisions. They favor passive investing (buying an index), rather than active money management (picking specific stock and bonds).

What is Robinhood.com?

I’ve blogged about Wealthfront, which exists to meet the needs of investors who simply want to buy a portfolio of index funds. Robinhood.com tries to do one better.

Free stock trading.

Now, Robinhood got into trouble when the company was not able to manage the huge trading activity in certain stocks- as this article explains.

If you read the fine print, there are some trading conditions, and more conditions have been added after the trading issues discussed in the article link above:

• Self-directed: The investor is using a self-directed cash or margin account.
• Margin accounts: Buying on margin refers to borrowing money to buy securities. The securities themselves serve as collateral for the loan. Caution: If the value of the securities (collateral) declines, you will be asked to deposit more money (or securities) to secure the loan.
• Listed securities: Robinhood allows you to trade US-listed securities that can trade via mobile devices. “Listed” means that a security is listed (is part of) an exchange, such as the New York Stock Exchange or NASDAQ. Many securities do not trade on exchanges.

This link explains the bid/ask system for trading stocks. If you’re willing to accept those parameters (and some others), you can trade using Robinhood.

Is third-party advice necessary?

Technology is certainly pushing down the cost of investing. The capabilities of tech also make investing information much easier to access. I still have one concern, however.

Do you need a calm third-party to advise you during market turmoil?

As mentioned above, we’ve seen huge market declines in the past 15-20 years. Looking back, an investor who held their investments during the decline (or even bought more at the bottom) may have been better off.

Here’s an example: You own IBM common stock at an average investment cost of $40 per share. A market calamity hits. IBM’s sales and earnings are still steady- but the stock is dragged down by the overall reaction to the calamity. IBM’s stock price goes down to $25.

Now, a financial advisor might say: “IBM is the same company at $25 a share that it was at $40 per share. Hang onto your stock. IBM still generates good sales and earnings. In fact, if you bought more at $25, you would lower your average cost per share.”

My concern is that a do-it-yourself investor may not have that conversation with themselves. They sell IBM at $25- taking a big loss. Five years later, the stock is up to $50 a share. They made a poor decision- a decision out of panic.

It’s up to you

If you feel that you have the self-discipline to make rational investment decisions, do-it-yourself investing may be the solution for you. You can use these great new tools and minimize your investing cost.

It’s up to you- and it’s really about understanding yourself. Either way, consult with a financial advisor before you make any decision- including the DIY decision.

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

(email) ken@stltest.net

(website and blog) https://www.accountingaccidentally.com/

(you tube channel) kenboydstl

Image:

Wall Street Two Signs

Terrapin Flyer, Wall Street (CC BY-SA 2.0)