Whether you're a seasoned investor or a novice just sticking your financial toes into the water for the first time, the appeal of an app like Robinhood isn't hard to miss.
From no fee commissions (now emulated by the likes of traditional stalwarts like Fidelity and Charles Schwab) or the ability to purchase fractional shares of expensive stocks like Amazon or Tesla, the app quickly became a darling of the millennial set on its way to more than 6 million users and a valuation of more than $ 5 billion. But as with anything that seems to good to be true, beware of the pitfalls.
"Robinhood has its merits as far as encouraging people to engage with the stock market," says financial expert and Contributing Editor for NextAdvisor.com Farnoosh Torabi. "We know that not enough people are investing and you need to invest in order to grow your money more aggressively than putting it in a simple bank account for your future. The onus is on individuals to prepare for retirement, so apps like Robinhood, for some, can be a gateway into the world of investing. That said, I don't think its the best way to create a long term portfolio for yourself."
Torabi says Robinhood is "gamifying the world of stocks" with flashy graphics and user interfaces that are attractive and exciting for someone not familiar with the stock market, without providing the financial consultation many novice investors need whether they know it or not.
So, before you leap into Robinhood or travel down similar investment paths, here's a few simple tips for investors that may save a few shirts along the way.
Set Your Financial Goals Upfront
Get your financial house in order before you dive into investing, financial author Erin Lowry told NBC News. Lowry is the personal finance expert behind Broke Millennial and author of "Broke Millennial Takes on Investing: A Beginner’s Guide to Leveling Up Your Money
“It’s really important to write down your goals,” Lowry says. Then you can figure out when it makes sense to save versus when to invest."
For example if your short-term goals, like moving or replacing your car, are your priorities then saving traditionally is probably the way to go. But for long-term goals like funding a child’s education, starting a business, or buying a house, investing might make more sense.
Start With a Retirement Fund
Most employers offer either a 401k or 403b plan. It reduces the risk of purchasing individual stocks.
"Start with your workplace retirement account where you can automatically have money taken out of every paycheck allocated to your 401k so you don't have to take any extra steps," advises Torabi. "We know that behaviorally works best. Don't put the money in my hands and then ask me to invest it. Take it out before I see it."
And of course take advantage of the company match most organizations will offer their employees. It's literally free money.
Do Your Research
To find the right fit for your investments, ask friends, parents, and coworkers what they recommend, and look at online reviews. From that list, play around with the web sites and apps. Make sure whoever is working for you has your best interest in mind.
Only after you have those basics handled should the young investor take a hard look at Robinhood says Torabi. " It's kind of like the thing you do after you have all of your other bases covered and you're really OK with risk and you understand what you could lose."