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Comment by pembrook | Hacker News Reader

Enticing millenials to "trade" individual stocks is quite possibly the most anti-Robinhood thing I can think of. The only thing more ironic would be to encourage them to take on margin...which as it turns out is literally Robinhood's business model.

99% of users on the platform will ulimately end up participating in a direct transfer of their own wealth to a more sophisticated trader or algo (i.e. The banks and hedge funds who aren't just doing this for "fun" and have the financial and political backing of the world's elite). Side note: even those hedge funds can't consistently beat the market.

If you are reading this, for your own finacial future I beg of you, please take your money to Vanguard instead and buy some index funds. Scratch your "trading" itch by trying to game your asset allocation instead. Future you will thank present you.

If you don't believe me, please look into any of the academic research that has been conducted around efficient markets.

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I've written this on HN before but Fidelity(1) and Schwab(2) have similar low cost index fund offerings to Vanguard as well so don't think you are stuck with Vanguard. Both Fidelity and Schwab also offer the best checking account you can possibly get (no fees, minimums, plus ATM reimbursement) for free as well. Additionally, Fidelity has a great 2% cash back credit card. Even if you don't use Fidelity or Schwab's brokerage accounts it's a no brainer to sign up for a checking account with one of them.

Vanguard, however, is owned by it's investors if that's important to you.

Last I checked you can also trade some Vanguard ETFs on Robinhood as well. I just checked, you can buy VOO, among others, on Robinhood as well as iShares ETFs, which are also low cost index funds.

Basically, if you want low cost index funds you have a lot of options, including Robinhood

(1)https://www.fidelity.com/mutual-funds/investing-ideas/index-...

(2)https://www.schwab.com/public/schwab/nn/m/indexfunds.html

Many VG funds are also traded as ETFs. You can buy those like any other stock. Most brokerages also have a list of commission free ETFs that can be purchased. These typically many include low cost index funds. I agree with you completely, that if someone wants to invest, open a Schwab account (the checking account is one of the best out there and free), and just do it there.

I can confirm that Fidelity has a great checking account (they call it a "cash management account"). They cover all of my banking & investing needs - they even have a 2% cash back credit card that's pretty great.

Schwab has the best checking accounts out there, I use them.

But I use Merrill Edge as a commission-free brokerage (30 trades per month with $50k assets, 100 trades per month with $100k assets). The upside (apart from not being limited to iShares at Fidelity and Schwab at Schwab) is in the credit card, which beats Fidelity.

Bank of America Travel Rewards rates:

* $50k+ Merrill Edge Balance: 2.25% travel rewards cash back

* $100k+ Merrill Edge Balance: 2.625% travel rewards cash back

Bank of America Cash Rewards:

* $100k+ Merrill Edge Balance: 3.5% groceries, 5.25% gas cash back.

Great deal. Oh, and they'll often pay you about 0.5% (up to $1000) of assets to transfer your equities in. Holding Vanguard/Schwab/iShares ETFs there is a dream for a personal finance geek. The credit card deal alone makes it all worthwhile.

Thanks for sharing your experiences. I know people who use Merrill Edge (owned by BoA) for index funds as well but I didn't feel comfortable writing about something I don't have any experience with and only a vague knowledge of.

My point was, while Vanguard is certainly a great option, there's plenty of other great options out there as well.

> If you are reading this, for your own finacial future I beg of you, please take your money to Vanguard instead and buy some index funds.

Yup, even Warren Buffet tells his rich friends to do so too:

http://www.berkshirehathaway.com/letters/2016ltr.pdf

Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion.

I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.

That professional, however, faces a problem. Can you imagine an investment consultant telling clients, year after year, to keep adding to an index fund replicating the S&P 500? That would be career suicide. Large fees flow to these hyper-helpers, however, if they recommend small managerial shifts every year or so. That advice is often delivered in esoteric gibberish that explains why fashionable investment “styles” or current economic trends make the shift appropriate.

The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive.

>Enticing millenials to "trade" individual stocks is quite possibly the most anti-Robinhood thing I can think of.

Listen, I understand that this is widespread, so I'm not targeting you specifically. But could we try not to use generalizations like "millenial", especially when they refer to vaguely defined generational boundaries?

Your point is very strong, and stands on its own without making what I interpret as an implicitly ageist assumption about a large swath of the population. Millenials are adults. Young adults, sure, but they have agency. It is no more predatory or clearly unethical to lend to them versus lending to baby boomers or gen X.

I take issue with this because you have implicitly robbed them of their agency as a group by phrasing your criticism as "Enticing millenials...". There's no reason to single them out. They may have less money as a group, yes, but there's nothing about trading on margin that makes it inherently more dangerous for millenials over any other generation.

You didn't mean to intentionally portray them this way, but you singled out a particular group because, like I said, it's ubiquitous. We should really try to curb that, in my opinion.

I used the term as it was originally intended, to describe an age group in the context of marketing a product. Robinhood's massive growth is being driven largely by their target of "millennials" (ie. young adults) coming to the platform without any allegiances to legacy brokers. The millennial customer base is one of the reasons cited for their valuation, since legacy brokers have had trouble gaining younger customers.

Any negative assumptions being read into the phrase "enticing millennials" are created by the reader's own bias. I think because so many articles are published complaining about "those damn millennials" we automatically assume anyone using the word is doing so in a negative way. I wasn't (I am a millennial myself).

Robinhood's strategy would be predatory in the context of any target market. If they were going after boomers, I would have said "enticing boomers."

> Robinhood's massive growth is being driven largely by their target of "millennials" (ie. young adults) coming to the platform without any allegiances to legacy brokers.

Are you sure about that? I'm the only person I know in my age group using Robinhood. But it's gotten popular with my parents and their friends for example. My mom tried to sign up for Gold before I stopped her.

I don't think they're enticing millennials, just anyone who doesn't understand finance or trading very well, which it seems is most people.

You do know that the oldest millennials are turning 37 this year?

And a lot of the oldest boomers are now dead. If your point is that time only moves in one direction, yes I agree ;)

FYI, in the context of traditional brokerage houses (and in most places outside the valley) a 37-yr old is still a "young" customer.

That may be true, but you're comment wasn't written in the context of a traditional brokerage firm was it?

Here's an example of how badly active funds underform passive funds:

'Given that active managers’ performance can vary based on market cycles, the newly available 15-year data tells a more stable narrative. Over the 15-year period ending Dec. 2016, 92.15% of large-cap, 95.4% of mid-cap, and 93.21% of small-cap managers trailed their respective benchmarks.' [1]

The question folks need to ask is this - Will my stock trading strategy + low (zero with Robinhood?) trading fees outperform 90%+ of the top fund managers who are using the most sophisticated investment tools available? If not, just buy index funds and spend as little as a few hours / year managing your investments :)

[1] http://us.spindices.com/documents/spiva/spiva-us-year-end-20...

I use Robinhood for passive funds. VOO, VYM, UPRO, SHY, etc.

Nice, I would probably use it the same way.

Would you know if Robinhood supports pre-authorized purchase plans? For example the ability to buy x shares of VOO on the first day of each month automatically? I didn't see anything on the FAQ but maybe I missed it. Pre-authorized purchase plans + no commissions could be interesting.

I'm not aware of any such feature. You can set up a monthly deposit into your Robinhood account, and you'll get a notification on your phone each time it goes through, but you have to manually submit purchase requests each time as far as I know. At least, that's what I'm doing! I'd love to hear of an alternative. Not that hard to hit the sequence of buttons each month, though.

They have an auto-deposit feature[0], but it doesn't purchase the stocks for you.

There is an unofficial api[1] you could use to cron-buy, though it's unofficial-ness means I don't officially endorse :)

[0] https://support.robinhood.com/hc/en-us/articles/206445496-Tr... [1] https://github.com/sanko/Robinhood

You can use Quantopian to write a Python script that trades on a live Robinhood portfolio. Their target audience is algorithmic traders, but I've written a simple script that just rebalances my portfolio among a small set of index funds each day. Pretty simple to do and completely free.

I'll try to do a blog post when I get the chance.

Robinhood is severely lacking in features and it is mobile app only, no website. If you want that kind of thing with index funds go with another brokerage (Fidelity, Schwab, Vanguard, all have commission free index funds.) The other really crappy thing about Robinhood is that it doesn't integrate with other platforms so if you want to track your wealth with Mint or Personal Capital you can't.

Your research is sound and I agree with the bottom line but, in the interest of transparency, that's not a fair comparison.

"Top fund managers" are working with billions in AUM. If you have found meaningful alpha on a portfolio of $100k - $10M (or a section of capital within that range), you will have an easier time capitalizing on that strategy than a fund manager who needs to figure out how to scale a profitable strategy to billions in assets.

Difficulty in getting orders filled on one end and literally moving the price on the other are two big reasons it's far easier to find profitable strategies on relatively smaller portfolios. It's not just a comparison of the tools and skills used in institutional funds. The amount of money they are working with is an obstacle in of itself.

This is also why, incidentally, the most successful hedge funds in the world typically close their doors to outside capital and cap it at, say $10B or so.

Trading is how brokers make money. It shouldn't surprise you that this is Robinhood's business model.

I totally agree with your investment strategy, and you can do that on Robinhood, by the way.

However the other online Brokers don't call themselves "Robinhood" and claim to be the champion of the little guy while simultaneously encouraging you into a strategy that has been proven to lose over the long run.

Use the advisor (robo or human) services of any of the top online brokers and they will recommend you put your money in index funds.

Also, putting together a "long term" portfolio of indexes at Robinhood assumes that Robinhood will be around offering free trades for the next 40 years. Otherwise you're looking at hefty capital gains taxes to transfer when they pivot or go belly up.

There once was a company called Zecco...

> Otherwise you're looking at hefty capital gains taxes to transfer when they pivot or go belly up.

you should be able to account transfer out without causing a taxable sale.

how well that will go in the event they pivot or fail and have to transfer your assets over to some backup service is of course unknown.

If I'm not mistaken trading (commissions) is not where they make their money, which is why most of them offer free trades now in some capacity to compete. If they don't you call them up and tell you are going to someone else and they will give you free trades. They make their money by having your money in their account. This gives them credit with other banks and allows them to trade on margin or borrow or lend and charge interest.

Out of my own ignorance on the subject of "buy some index funds": what happens when 50%, 75% or 90% of the market buys index funds? How will stocks be priced properly if no one is trading them directly?

The traditional answer is that the incentive to find and exploit market inefficiencies gets higher if more and more funds are parked in indexes (e.g., if $GE is underpriced due to excessive indexing, savvy investors will swoop in and buy up more stock in $GE, this bringing the market back to efficiency).

Okay, there's two parts to this: "in theory", and reality.

---

Yes, you need somebody to listen to the news, crunch numbers, and then actively trade stocks in order to set an accurate price. But what matters here isn't the percentage, it's the absolute number of active traders, and their analysis "skill". Let's say you start with 50k professional bankers and 50k totally passive etf investors like you and me. Let's say that the passive investors buy/sell based on events that are totally uncorrelated with the market; they buy small orders of VTI every once in a while when they have a bit of extra cash, and they sell large blocks when they experience major life events like buying a house or having a kid. In other words, their effect on prices is random. Also let's assume that new passive investors are introduced into this system gradually, and that we're taking a "long term" view of everything. In this case, having another 100k, or 500k, new passive investors riding the wave of market growth doesn't change anything.

On the other hand, going back to our 50k/50k split, if you add another 100k poorly-performing analysts into the mix, e.g. uneducated consumers day-trading on emotion instead of news, they'll distort prices and create a bit of market inefficiency. Distorted prices are actually good for the above-average analysts, since they'll capture those extra pennies on their trades by more-accurately pricing stocks, but obviously bad for the below-average traders themselves--who will underperform the market--and the passive investors--who just buy/sell at market prices. You can kind of think of this situation as the etf investors paying an additional "management fee" to the good traders for their trading expertise.

So to summarize, the percentage of passive traders to total traders doesn't matter as long as the absolute number of active traders doesn't decrease, which won't happen because of the large incentives created whenever the system moves away from equilibrium.

---

Now, in practice you'll never have completely passive investors. People will panic if they lose 10% of their investments overnight. Also, merely making a decision to invest in a particular index, like the S&P 500, is making an active choice to invest in Apple and McDonalds but not Tesla or thousands of other companies. So in practice a horde of passive investors buying Vanguard ETFs won't be completely neutral to the maket, but nonetheless the effect will be minor and--according to some people--perhaps even positive: http://www.businessinsider.com/passive-investing-makes-marke...

Oh man - just read Matt Levine's stuff: https://www.bloomberg.com/view/articles/2015-07-22/index-fun...

Good question - this is an on-going topic in the market actually. The correct answer, like a lot of financial economic theory goes, is that no one actually really knows.

You can also scratch the trading itch by buying a small amount of some of the more specialized etfs and just holding forever. Think water is the next crisis? Look into PHO. Think India's being underestimated in the world economy or Palladium prices are going to skyrocket or the US tech sector will outperform the broad market? There are etfs for that, just use them sparingly and do your research.

Many of the newer ETFs have high expense ratios and alarming clauses in the prospectus (e.g. a forced sale if the ETF drops below $x). If you aren't a professional day trader you should be very wary of the proliferation of opaque ETFs, especially the high leverage ones.

> take your money to Vanguard instead and buy some index funds

Why Vanguard? Why not buy SPY through Robinhood? Same index fund, except no commission.

Vanguard lets you buy Vanguard funds and ETFs without a commission in their accounts.

The GP was pointing out that Robinhood also let's you buy Vanguard ETFs without a commission.

I wonder what percentage of their customer base is holding leveraged ETFs in a hope to get rich fast.

Nothing wrong with leveraged ETFs in principle. It's just another, slightly sub-linear, point on the risk/reward spectrum (ie. 2x/3x extra risk for slightly less than 2x/3x reward).

http://ddnum.com/articles/leveragedETFs.php

It isn't myth. Prospectus of these leveraged ETFs say don't hold these instruments over a day. This is from JNUG which is popular with millennials:

"Because of daily rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Index's performance increases."

Understood. But please read the whole link; you don't take a long position in any etf, geared or not, if you're expecting the underlying index to give negative or neutral returns. The whole point of the market is to grow--which is does "most of the time". (Caveat emptor, yadda yadda.)

They're 50/50 bets.

"Sophisticated investors" aren't doing any better.

+ 100000000000

Buying indexes is definitely safer than individual stocks, but also leads to lower returns over the long term compared to winning stocks. Also, they only go up while the market is going up. If you're just betting on the market, might as well buy and hold something like XIV and get higher returns/pay no fee on it.

This comment is so wrong I don't even know where to begin.

What a condescending response. How is it wrong? Look at VFINX for example:

- VFINX is up 72% in 10 years. AMZN for example is up 1220% in the same 10 years.

- VFINX is up 72% in 5 years. XIV is up 530% in the same 5 years.

"Just pick winning stocks" and "sell them before they go down" are not strategies that any human OR algorithm has been able to perform consistently over long time frames. And no, Warren Buffet didn't make his fortune just trading stocks.

So I assume based on your strategy you put all of your money in AMZN 10 years ago, sold it right before each drop, re-bought right before each rise, and are now filthy rich. Oh you're not? I wonder why.

Also, XIV is an inverse volatility trading vehicle. It's not meant for long term investors and frequently goes through 90% drops. This kind of extreme volatility is corrosive for long term returns. The last 5 years have had abnormally low volatility due to extremely low interest rates, hence why that ETF has done so well over that time period. Of course it's effortless to cherry pick winners when looking backwards instead of forwards.

> So I assume based on your strategy you put all of your money in AMZN 10 years ago, sold it right before each drop, re-bought right before each rise, and are now filthy rich. Oh you're not? I wonder why.

No, that's just a buy-and-hold... just the same as an index fund. I didn't cherry pick anything. Plenty of high profile stocks went up more than 72% in the last 10 years. They're not even hard to find.

Of course it's not hard to find stocks today that went up over 72% in the PREVIOUS 10 years. That's not the problem.

The problem is how do you pick the ones that will beat the market beforehand, when everybody has access to the same information about the prospects for future growth & earnings?

It's been proven by hundreds of studies to be a statistical near-impossibility over long periods of time. Any outperformance over the short term can be mathematically reframed as random luck (which a retail investor like you and I will incorrectly attribute to being the result of our own abilities).

Lookup: Survivorship Bias

Hey, xkcd just made a really good comic about that!

https://xkcd.com/1827/

> How is it wrong? Look at VFINX for example:

That's like looking up last night's lottery numbers and picking them for tonight's ticket because they won last time.

It's not hard to find stocks that have done well.

It's hard to find stocks that will do well, and do better than the market as a whole, and to never make a mistake and pick one that goes bankrupt.

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