Strategy Versus Predictions . . . Always the Right Choice

Strategy vs Predictions

July 3, 2020

Strategy Versus Predictions . . . Always the Right Choice

Last week, NECN (New England Cable News) gave me a call and asked me to come onto their evening and weekend shows to provide some insight into the recent upsurge of activity on online trading platforms. While live interviews can be intimidating, I enjoy doing them and certainly appreciated the opportunity to raise the awareness of the potential risks and pitfalls that accompany app-based trading. While those engaging in frequent and highly speculative trading are hoping to get rich quick, the overwhelming majority instead find themselves with an expensive lesson about the risks and dangers that type of trading. 

Unfortunately, less than 48 hours after the interview I was stunned to read the horrible news that a college sophomore named Alex Kearns, who trading on the app-based “Robinhood” trading platform, had taken his own life after misinterpreting his “Robinhood” account balance. When preparing for the interview, I certainly didn’t anticipate a tragedy of this magnitude. Even though this young man was a “legal” adult, having my own child of roughly the same age as him reminded me that our vulnerability continues well past the age 18.

The pandemic has created a rush of young adults entering into the financial markets using app-based trading platforms. Many of them have lost their jobs and are using the extra time, coupled with their stimulus checks, to try their hand at timing the market.  The “Robinhood” platform alone has added over 3 million accounts this year and now numbers in excess of 13 million accounts with a median age of 31.  Essentially, there has been a massive entry into the financial markets of young people with little to no experience or understanding of the risks they will encounter. The result is a troubling large number of new investors who are relying on predictions rather than strategy.  A financial system based on predictions is basically gambling, and unfortunately the losers far outnumber the winners.  

Many long-time market experts are watching these new speculators with a mix of caution and befuddled amusement. These newly-minted “day-traders” often seem to be shunning quality in favor of chasing a “possible” big payoff from shares in companies that have already declared Chapter 11 bankruptcy, such as Hertz (rental cars) and JC Penny (retail). This is even more curious when you consider the debt (or bondholders) get paid off before the equity holders (stockholders) in a typical Chapter 11 bankruptcy re-organization.  Quite often, there is little left over for stockholders.

Heck, maybe they know something I don’t know. But what’s more likely is that they lack the depth of knowledge and experiences to know how these things play out.

So, during the interview I was asked what would I tell folks considering the use of an app-based trading platform? Educate yourself.  Educate yourself about all the aspects of the app-based platform. Can you actually trade on it or is it solely a monitoring app? Educate yourself about the fine print.  How does the app work? What are the fees for accounts or trading? What happens after you invest? Is it a “set it and forget it” system or do you need to closely monitor your account?  And most critical of all, you need to be aware of all the risks associated with types of investments you are making on the app. Investing involves risk and you need to be thoroughly educated about the risks.

I went onto explain the first two weeks of March and how so many folks were not prepared simply because they did not understand the risks associated with their financial system . . . and I fear these kids are falling into the same trap.  I fear that these kids don’t understand that the markets and economy are in uncharted waters, and they do not have a safe harbor.

I explained to the interviewer that another – and better – option may be to seek out the assistance of an experienced investment professional who has the capacity to design and deploy a comprehensive financial system.  You know, a comprehensive financial system means implementing a process that is strategy-based rather than just a bunch of speculative predictions. It’s a system that allows the market upside to take care of itself, by including downside risk management to help a portfolio withstand the significant market’s lows.

A very small few will “strike it rich” speculating. Folks, that always happens.  However, history shows that enjoying a financially successful and secure retirement usually requires an enduring and trusting relationship with a qualified retirement specialist.  The other thing to keep in mind is that it’s never too early to start. Now, I don’t have a secret or gimmick to turn a 25-year old’s $1200 stimulus check into a life-time of riches by the time they turn 30, but I can help you find the tools to map out long term plan for success. And that’s not speculation!

So as always – be vigilant and stay alert, because you deserve more!

Have a great week.  And Happy 4th of July to the greatest Nation on earth.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at jeff@cutterfinancialgroup.com.

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