On the investing front, technology has created a wealth of opportunities. We’re all for retail investors profiting off of the stock market. After all, efficient technology is the reason for Betterment’s very existence.
You might be surprised then, to hear our CEO, Jon Stein, say that technology hurts investors too. You can read all about it over on Forbes, but here’s the crux of it:
- The regulatory system is outdated. Many security laws were created before modern technology, when the playing field was somewhat level. Now, technology can encourage poor decisions that are costly to the investor. At the same time, big institutions have an unfair advantage with information, access, and technology, allowing them to profit at the expense of regular people.
- Active trading is sexy. Shiny new tools, like apps that allow you to scan a barcode to find a product’s ticker and execute a trade on the spot are removing the barriers. The “big deal” factor has lessened; making a trade is a snap! Brokers are utilizing technology to increase trades (which helps to bump up their commissions). All of this encourages impulsive and frequent trading – which increases fees and harms returns.
- Technology has created a huge gap between institutions and individuals. High frequency trading, where stock purchase and sale orders are sent and matched in milliseconds, make it impossible for retail investors to keep up. At the same time big data and insider information make it difficult for individuals to make fully informed decisions when investing in individual stocks – even if they could match the trading frequency of the professionals.
There is a heated discussion on investing technology in the industry following some recent scandals. “How A Software Glitch Essentially Killed A Major Wall Street Company,” screamed a headline in Business Insider. It referred to the now famous trading fiasco, where Knight Frank lost an astounding $440 million in a half hour.
We immediately think of Facebook’s botched IPO – scary as hell for retail investors, and the flash crash of 2010 (caused by high frequency trading).
Andrew Ross Sorkin, in The Times, says greed, not technology, is to blame for the fear injected into the market. He says that for consumer faith is to be restored, the fundamentals need to be fixed (hear hear!).
Vanguard founder, John Bogle, said in Sunday Business that the “market sea is the roughest he’s ever faced”.
Meanwhile, over on the Bucks blog Ron Lieber offers up an alternative for the truly fed up – an option for those want to opt out of Wall Street.
So what’s our take?
As Jon said in his Forbes article, “Financial services technology should help you achieve your goals in life – a home, retirement savings, college, kids”. Technology is great, when used for the greater good.
It’s never been more important to have faith in the stock market. While acknowledging the challenges of the current market, Bogle still advises long-term investors to hold stocks. Need an example? Data from our own customer activity demonstrated the value of the buy and hold approach – keeping calm means better returns.
Thankfully, it looks like common sense is prevailing. Recent figures from Morningstar reveal that investors are long on passively managed funds, with more than $40 billion invested this year.
What do you think? Has technology enhanced or harmed investing?
This reminds me of when particular people I know always exclaim to me, “Boy! Had I known about half the things you know about financial planning when I was your age, I’d be retired by now!” (Imagine that as if it were an old drill sergeant’s voice, because it is.)
Technology really is an excellent thing especially for the younger generations. I’m talking about generations that have essentially been raised with the internet, an immediate and omnivorous source; a vast ocean of information immediately available at anyone’s fingertips. All one has to do in our era to find out simple things that make us smarter is look it up, and instantly find out the answer. Of course, their are subjects which require a more in-depth approach, such as reading and understanding different hypothesis’ and making up your own mind. That’s one of the beautiful realizations of our time; the Internet is encouragement to think for yourself and find out your own information. (Cont.)
I can, firsthand, testify to the extreme usefulness of this tool, as it is a source equivalent to the mind of humanity. A lot of people, I being one of them, learn most things out of an interest of appeal to something. In earlier times, just 30 years ago perhaps, a boy couldn’t simply go type, “Do we really only have access to a limited portion of our brains?” Without the internet, the boy would have to go through a lengthier process to find the answer. Problem is, he might not have any connection to a neurologist, and reading a book on the matter is reading the opinion of just one author. The internet demolishes these roadblocks to learning, and delivers an overwhelming source of information equivalent to the information collectively gathered over thousands of years by billions of human minds.
Technology has helped us more than we will ever know. Computers processing speed may continue to follow moore’s law until we reach the singularity. Very significant times await us in the future as long as we maintain a disipline to understand that which we’re inventing at all times. Technology is a double-edged sword, and with it, as you have said in your article, people can make irrational and spontaneously dangerous decisions on the fly in the heat of emotion. Remember we are very fortunate to have so much access to knowledge. What is the most valuable thing in this world, and it’s free? Knowledge. Take advantage of it, because with it, you’ll go the distance of planets in your lifetime.
-Brennen