How tech is democratising trading and investing
By Oleg Giberstein, Coinrule
A few months ago, I visited a fancy event in the City of London. Polished bankers, glass of wine in hand, had come together to discuss Fintech. “Normal people should not be trading” was the general agreement in the audience. With a slightly disgusted look on his face, one of them told me straight out that “these people don’t know what they are doing, they will just lose money if they get their hands into the market”. Given the track record of banks, this seemed just slightly out of touch, but one way or another, the message was clear.
I am recounting this anecdote because it fits into a narrative that has become widely accepted: ‘normal’ people are too stupid to make money investing. They should just put their funds into a so-called robo-advisor like Nutmeg or Wealthify which will put their hard-earned cash into index-tracking passive investment funds.
This type of investing is often referred to as ‘black box’ investing is a very bad idea. Black box investing involves a computer using complicated formulas to achieve returns in the desired way. However, because an investor may not understand the model (and may not be able to do so), it can lead to unforeseen problems that the investor is unable to react to or even mitigate against. This investment approach also goes against the Fintech trends that are beginning to unfold. It looks backwards to a time when investing was for the elite. This isn’t the case anymore. Investment is being democratised. Now everyone can do it – and they don’t need to be a full time, highly paid expert.
Here is some advice that will help the everyday, non-professional investor get the most out of the markets:
Robo-advisors are a class of financial advisers. They provide financial advice or investment management online with moderate to minimal intervention from a human being. They provide digital financial advice based on mathematical rules or algorithms only. Robo-advisors, despite their automated nature, still charge a management fee, often as much as 1% of your funds. That’s £500 on a £50,000 portfolio, per year.
But that’s not all. The ‘passive-investing is great’ mantra has been sung repeatedly over the past 10 years. And it’s worked – as all the markets have been going up. Everyone’s a genius in a bull market. But this won’t go on forever. Remember Michael Burry? The ultra-nerd Hedge Fund manager in “The Big Short” had predicted the Subprime Mortgage crisis that led to the financial crisis of 2008/09. He is now warning that Index Funds are the next massive bubble.
What you can do:
With just a little bit of research, anyone can create their own long-term, low-cost multi-asset fund held via a platform, with total costs of below 0.5%. Explore platforms like eToro or IG Index to either buy an index fund that holds a range of stocks directly or create your own.
In order to spread your risk, pick a range of stocks from different industries and decide what percentage of your portfolio you want to allocate. If that percentage becomes higher or lower over time, you can buy or sell respectively to balance it out. Do it once per month and save on the fees of robo-advisors.
When the dotcom Bubble of 2000 collapsed, it took the market over 17 years to recover. Who had been left holding worthless stocks? Mostly the retail investors who had been lured into buying the ‘trend-of-the-day’. The trend-of-the-day today is passive investing into index funds.
For too long, normal people have been pushed into seemingly ‘risk-free’ investments that end up destroying their financial wealth in a crisis but which lack the potential for huge gains.
What you can do:
A modern-day investor does not have to run complex strategies to beat the ‘trend of the day’. I personally keep most of my funds in safe, liquid assets but I have about 20% of my portfolio invested in high-risk high-reward assets, like certain tech stocks or cryptocurrencies. This is called a ‘Barbell strategy’ and has become better known in the mainstream thanks to famous author, professor and trader Nassib Taleb, author of ‘Black Swan’.
Most of us panic if our funds are sitting in cash on a 0.1% rate savings account. But having the majority of your money in cash, gold or bonds, means that you are well protected from risk. And you can buy when everyone else is panic-selling during a market crash because you have cash available. The famous mantra “buy when there is blood on the streets” has allowed many famous investors, such as Warren Buffet, to build a top-class stock portfolio at a great price.
In normal times robo-advisors give you average annual returns. But when all hell breaks loose, as it inevitably will, sooner or later, I would not want to be sitting in an index fund when everybody is trying exit through the door simultaneously.
Those who went ‘through the door’ before others won’t be the ones suffering. The smart Hedge Fund manager who long ago secured his investment position by buying insurance or setting up stop losses that will sell down his holdings in the event of a crash is able to react to market changes quickly. John Paulson, the famous investor, posted profits of over $2bn during the 2008 Financial Crisis.
What you can do:
Small time amateur investors tend to avoid anything more complex than simply buying and selling. By doing so they miss out on major market opportunities. A simple ‘Put’ option can act as an insurance that allows the trader to sell a certain financial asset at a predetermined price: perfect when you want to protect yourself against a market crash.
Moreover, automated trading rules allow hobby investors to trade like professionals with algorithms. Platforms like Coinrule give normal people the tools to build strategies that protect against losses and help to catch market opportunities. By designing and then automating the strategy you don’t need to sit in front of the computer all day or constantly watch the markets. Innovation is starting to provide access to the markets for more and more people. And the professionals are hating it.
Trading and investing are hard. There is no doubt about that. For someone with less time and experience it certainly makes sense to act conservatively in the markets. However, that does not mean that regular people are too dumb to learn to make their own investment decisions. Today, professional traders can make money whether markets are up or down. Non-professionals can do the same.
There is no good reason why today’s markets must remain esoteric to those outside the industry. Behind scary, technical language are actually some simple concepts. Don’t listen to the bankers-in-suits claiming that ‘this is not for regular people’ but only for the ‘Masters of the Universe’.
Most of the problems holding normal people back are related to access. Access to the right trading instruments, the right knowledge and the necessary experience. If you just put your money into a passive fund, you never learn and are forever victim to whatever crisis may hit the market.
What you can do:
Read and study the markets. Books like “The Intelligent Investor” by Benjamin Graham, “What I Learned Losing a Million Dollars” by Paul and Moynihan and many others provide great introductions to the topic. Tools like TradingView make chart reading accessible for everyone. Free resources and communities allow normal people to get up to speed and learn quicker than ever. Other new entrants into this sphere are beginning to offer products that allow non-professionals to trade on easy-to-use platforms with a wide range of assets available. The days when you needed to navigate complex, confusing interfaces are truly over.
Platforms like Robinhood, Freetrade or Revolut have taken the retail online investing market by storm because they offer smooth user experience, modern interfaces and great accessibility. But they don’t go far enough when it comes to financial inclusion. Famously, Robinhood sells on its user’s trading orders to be executed by high-frequency trading firms like Virtu or Citadel Securities. This puts these firms in a position to place their own trades in such a way that regular people will often end up overpaying. This is a win for the trading firms, but most definitely a loss for you.
On the other hand, despite years of talking about the ‘end’ of cryptocurrencies and the ‘scams’ in the market, everyday people are trading these products more than ever. The need for a market that, at least has the potential for full transparency, fast learning and large opportunities, is there. And cool new tech is making it a reality.
What you can do:
Do your own research and learn to make your own judgements. Just because a new platform is hyped or a market is attacked in mainstream perception does not make it more or less right. Use the platforms and tools that offer full transparency and have the ethics in place that you value. Companies like Luno, eToro, Coinrule, Kraken, TradingView and many others stand out as frontrunners in making more and more exciting investment opportunities accessible to normal people.
We Can Do Better
Trading is a time-consuming business and there is risk involved. But any day I would prefer a world where everyone faces the risks which are out there instead of simply following the crowd and ignoring the risk element. This can only end in tears. We all need to take responsibility for our own finance. Nobody else will do that for us and although we may sometime fail we will learn huge amounts about investing. We are now in exciting times where Investment is being democratised.
ABOUT THE AUTHOR
Oleg Giberstein is co-founder of Coinrule, a beginner-friendly and safe trading platform enabling you to automate your crypto investments across multiple platforms, helping you protect your funds and catch the next great market opportunity.
Coinrule gives investors, from beginner to pro, access to algorithmic trading without having to learn a single line of code.
Coinrule is both educational and gamified helping deliver financial inclusion for all by giving everyone the tools to compete in a new world of trading.