COVID-19 has forced people to stay at home, caused massive job losses and disrupted the global economy. But it has also triggered an investing revolution.
Wealthsimple and WealthBar, two of Canada’s top robo advisors, say they’ve experienced double-digit growth since the pandemic took hold in North America in mid-March.
Wealthsimple says it has seen a 24 per cent increase in new clients since the onset of the health emergency, while WealthBar says its client base has expanded by 10 per cent over the same period.
In part, the influx comes from Canadians who’ve ditched their mutual funds and investment advisors in favour of robo advisors’ low-cost, mirror-the-market approach to investing.
In this respect, the market crash brought on by the COVID-19 pandemic is rather typical, says WealthBar’s David Dyck.
Every painful market tumble triggers a degree of soul-searching among investors, which invariably leads some to change their investing strategy, Dyck says.
But the majority of Canadians who flocked to robo advisors in this crisis appear to be first-time investors in their late 20s and 30s.
The average user at Wealthsimple’s robot advisor services is 34. Among WealthBar clients, the average age is now 37, down from around 40 just a year ago.
“We’re seeing folks that are just brand new investors starting out for the first time,” Dyck says.
Nothing like the Great Recession
So far, it seems, the stock market plunge triggered by the novel coronavirus is having a very different psychological impact than the financial crisis of 2008-2009, which largely turned millennials off investing.
A 2017 report from the Ontario Securities Commission, for example, found that while four in five adults under 35 were saving, more than half did not have any investments.
“Memories of the financial crisis, during which many millennials graduated from school or started a first job, may be driving these attitudes,” the report says.
Young investors’ polar opposite reactions to the two market crashes may have something to do with the length of the two crises, Dyck says.
While the market plunge of early 2020 was very steep — by March 23, the S&P 500 had dropped by 34 per cent from its previous peak — it was also extraordinarily short-lived. As of late July, the index has nearly recouped all the ground lost.
During the previous massive market meltdown, by contrast, the S&P 500 lost more than 50 per cent of its value and took more than a year to kick off the recovery. The index peaked in October 2007 and didn’t bottom out until early March 2009.
To many young investors, the sharp but brief drop of 2020 looked like an opportunity to get started investing in a market where stocks were suddenly cheap, Dyck says.
Another possible explanation is that young Canadians know more about financial markets and investing options today than they did a decade or so ago.
“My hope,” says Wealthsimple’s Zoe Wolpert, is that recent inflow of clients is a sign the financial industry “getting a lot better at educating investors.”
The rise of trading apps
Robo advisors aren’t the only draw for young investors. While some are opting for robos’ set-and-forget-it approach of sticking to a broad portfolio of exchange-traded funds (ETFs), others are trying their hand at DIY investing through discount brokerage platforms and trading apps.
In the U.S., Robinhood, a commission-free investing platform, said in May it had 13 million accounts, up from 10 million at the end of 2019.
In Canada, Wealthsimple Trade, which, like Robinhood, allows users to trade stocks and ETFs on their mobile phones, has more than doubled the number of new clients over the past three months, according to Wealthsimple. The company reports its average Wealthsimple Trade user makes three trades per day.
WealthBar, for its part, is planning to launch its own self-directed trading platform working with its parent company CI Financial, according to Dyck.
But the recent rise in popularity of trading apps has sparked concern that amateur investors may be unwittingly exposing themselves to potentially steep financial losses.
Robinhood has said it is adding eligibility criteria and modifying its interface after reports that one of its clients died by suicide leaving a note that revealed confusion how much money he owed after trading options through the platform.
Placing speculative bets on stocks is nothing new, says Benjamin Felix, portfolio manager at PWL Capital in Ottawa. Any period of time during which stocks swing wildly up or down tends to create interest in the market.
But Felix calls frequent trading with just a handful of stocks “just another way to gamble.”
“I think the biggest risk is that this gambling, which is what it is, gets conflated with investing,” Felix says.
And the idea of chasing large profits by placing winning bets on a few stocks runs counter to robo advisors’ investing mantra that one can’t time the market and the best long-term strategy is to buy and hold a diversified portfolio of low-cost ETFs.
One of Wealthsimple’s mottos, for example, is “get rich slow.”
But the company says there’s significant overlap between its robo advisor service, Wealthsimple Invest, and its DIY trading platform Wealthsimple Trade.
“A lot of our clients actually have both Invest and Trade accounts,” Wolpert says.
Often, people keep the bulk of their investments in a diversified, passively managed portfolio but use a smaller portion of their money to try their hand at trading on the app, she adds.
The company also sends Wealthsimple Trade users onboarding emails warning users of the risks of buying and selling individual stocks.
“Research shows that passive investing — investing in big chunks of the stock market and holding — beats the traders who pick individual stocks 84 per cent of the time,” reads one email Wealthsimple shared with Global News. “That’s why we recommend you only pick stocks with money you can afford to lose, as part of your broader financial plan.”
Will the investing enthusiasm last?
Still, even when it comes to Canadians who signed up for passive investing, Dyck is concerned about whether new investors are taking on too much risk.
While a diversified portfolio reduces the risk tied to any one company, industry or country, stocks are more prone to ups and downs than other types of investments like bonds.
And with the stocks rising as quickly as they have since early March, Dyck worries many investors haven’t been able to test their tolerance of market drops.
“They haven’t been tested in a panic environment,” he says.
Over time, Dyck says he hopes to the “euphoria” with which many are approaching investing will turn into “discipline.”
“My hope is that the investing experience people have this year leads to more discipline because they see the value of … a strategy they stick with through the ups and downs.”View link »