Of course, speak with your own financial adviser or investment professional to decide what’s best for you. What she and every other financial professional we spoke to suggested was the opposite of day trading individual stocks: investing in highly diversified and low-cost exchange-traded funds (ETFs) or index funds and leaving that money in there for a long time. “It’s very dangerous for average investors.”Īll this is to say, day trading - buying and selling stocks over short periods of time - is not a reliable way to build wealth, according to these financial advisers.Īs Gretchen Behnke, principal at Pearl Financial Planning, put it, “Individual stock picking is almost always going to be too risky for regular people.” “In the context of day trading, it’s that on steroids,” Clark said. There’s reason to believe regular people could be even more susceptible. These institutional investors fall prey to confirmation bias, in which a positive trade makes them overly confident in their abilities, he said. Investors in equity mutual funds consistently underperform the S&P 500 index, according to Cory Clark, chief marketing officer at financial services market research firm Dalbar and primary author of a longstanding report on the topic. Still, even professionals don’t have a great track record picking stocks. “We see evidence that most Robinhood customers use a buy and hold strategy, and research published by the National Bureau of Economic Research found that Robinhood customers acted as a market stabilizing force through market volatility in 2020.” “We are proud to expand access to the financial system and enable millions of people to learn and invest responsibly,” a Robinhood spokesperson told Recode. Robinhood has been criticized for letting people trade on credit and for making investing feel like a game, using elements like confetti and color-coding in the app to stimulate trading. He added, “It’s probably one of the biggest negative returns documented by academics.” Put another way, “if you were a Robinhood user and bought those top 10 stocks every day, you would have lost 97 percent of your money over two years,” Schwarz said. Robinhood is the only trading app that’s disclosed user holdings so the researchers did not compare investors’ performance on its competitors.
The study, which was conducted using Robinhood trading data from 2018 to 2020, found that those who invested in the top 10 newly purchased stocks saw returns in the next month that were 5 percent lower than that of the S&P 500 index - a “pretty horrific” outcome, Schwarz said. When too many people crowd a stock, “the price of the stock overshoots what it should be and over subsequent days it corrects.”
On Robinhood, people were already more likely than other retail investors - people who aren’t professionals - to invest in the same stocks as other users, according to Christopher Schwarz, faculty director of the University of California Irvine’s Center for Investment and Wealth Management and one of the authors of a paper looking at outcomes of investor behavior on Robinhood. Particularly worrisome are “herding events,” including those fomented in Reddit’s WallStreetBets community that encouraged hoards of people to invest in certain stocks, like GameStop and AMC. And regular people who invest in individual stocks in the short term are likely to lose money, no matter what you hear on TikTok.
Many professionals spend their entire careers trying to do so, with varying levels of success. The thing is, it’s impossible to predict the market. There are potentially less risky - and equally user-friendly - app options out there. According to a number of financial advisers, the app appears to be democratizing certain types of risky investing, like day trading. The recent astronomical rise of meme stocks brought many people to the stock market for the first time, typically through Robinhood, the commission-free stock trading app that has promised to democratize access to the stock market.
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