As the investment industry works to improve access for consumers, one outlet for change is the introduction of investment apps that put customers' portfolios in the palm of their hands.
Many investment apps offer a range of services, including secure messaging systems and improved access to investment information. But the ease with which users can view their performance can make short-term volatility in the market unsettling and lead customers to withdraw their funds.
Typically, the investment industry recommends an “invest and forget” strategy for most clients to get the best returns, rather than trying to time the market. Adages like “invest in May and forget the rest” have been largely disproven by the market.
According to data from Morningstar Direct, if you invested £10,000 in the S&P 500 on 31 December 2003 and left the money in the market forever, it would have a terminal value of £103,902.84 by 15 August 2024. However, if you invested £10,000 over the same period and withdrew it from May to the end of October each year, its terminal value would be just £36,395.84.
Chris Jasam, managing director of intermediation solutions at 7IM, said more frequent performance checks could increase the risk that investors would withdraw their funds more frequently.
“Our hunger for information is manifested in 24-hour news feeds and doom-and-gloom scrolls on social media. The problem in the investing world is that short-term fluctuations occur more frequently than traditional quarterly or annual reports would suggest,” Jastam said.
“When stock prices fall, we are tempted to take action – to take control. The problem is, emotions get hurt, and selling every time a stock drops has been proven to be damaging to your investment journey.”
See: Are Consumer Staples Still Worth Having in Your Portfolio?
While investing apps are a relatively recent development, Lee Wilde, head of equity strategy at Interactive Investor, noted that access to market information is nothing new.
“Investors have had 24/7 access to vast amounts of market data and stock prices for years, so it is unlikely that dedicated investing apps are the cause of premature, incorrect or inappropriate decisions. Every investor is different and their behavior during market downturns is driven primarily by experience and emotion, not information overload,” Wilde said.
Despite the benefits of technology in investing, such as transparency and flexibility, Joe Wiggins, director of investment research at St James's Place, believes the tools “come with potential behavioural costs” that investing apps could encourage.
“The stress of short-term market fluctuations comes in part from how often you check your portfolio. If you don't see it, you don't feel it. If you look 20 or 30 years into the future, the fluctuations of financial markets on any given day don't actually matter that much, but emotions make it feel like it's the most important thing. Taking a long-term approach to investing is one of the greatest benefits an investor has. Investing apps can help in many ways, but if you're not careful, they can also encourage some of the most harmful behaviors.”
“In an age where you can check the value of your portfolio whenever you want, the temptation to check it daily, or even more frequently, can be overwhelming. The problem with this is that it can hinder your ability to withstand the constant market noise and stay invested over the long term,” Wiggins said.
See also: How to invest in a falling interest rate world
Instead of checking in too frequently, Wiggins recommends adopting a strategy common in many households: “Just like you would limit your child's screen time, most investors should do the same with their investing apps.”
Jastam also recommended setting limits on app use, saying a monthly check-in was “more than enough.”
The Schroders Benchmark team recently introduced a new mobile app for clients, but Benchmark CEO Ed DeMott said the team is aiming for “effective engagement” rather than just the usual use of the technology. He said the app is best used in conjunction with personalized advice from advisors who can offer guidance during times of volatility.
“At the end of the day, we're here to help people manage their long-term finances so they don't feel the need to check the app every day because of short-term fluctuations,” Dimot said.
“Our conversations with advisors have focused on the importance of staying invested and maintaining a long-term perspective.”
Beyond investment apps, Wilde warned about a larger issue for investors: inaccurate or poor quality investment information and advice on social media. Jastam expressed similar concerns and called for more financial education for the public.
“This is not the platform's job, it's everyone's job,” Jastam said.
“Explaining to school-age kids what investing is and why it's necessary would be a good start. We can't allow TikTok to become a generation's dominant voice in this space. Unless we solve this at the root, we'll forever be trying to own a much less compelling and interesting narrative than the latest crypto darling. We owe it to everyone to solve this.”
This article first appeared in our sister publication, PA Adviser.