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Technology Can Harm Investors

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…

Articles by Betterment Editors

By the Editorial Staff
Betterment Resource Center  |  Published: August 23, 2012

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  • The regulatory system is outdated.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?

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