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The Robinhood app has taken the investing world by storm, but is often discussed in the context of day trading rather than long-term investing. This article looks at the pros and cons for using Robinhood as a vehicle for long-term investments, those funds and stocks that an investor may want to hold for five to ten years or even longer.
Robinhood had 18 million accounts as of the summer of 2021, with many accounts from younger and first-time investors who seem to appreciate the technologically savvy and easy to use interface of the app.
The app stands out from many legacy brokers for its ease of use and beautiful design. On the downside, the app has also been compared to a video game or gambling app by its many critics.
Below we take a look at the pros and cons of long-term investing with Robinhood, backed by opinions from personal finance and investing experts.
The Attraction of Long-Term Investing
While there is no universally agreed set number of years to qualify as a long-term investment, most sources agree that a minimum of five years is required to view an investment as long-term.
Many mutual fund managers encourage their investors to have a long-term investing outlook of at least five years, if not ten. Part of the reason for this is that long-term investing requires the ability to weather a full market cycle and there will be periods of months (or even years) when a long-term investment could lose money on paper (also known as a drawdown).
To have a long-term investing outlook is to accept some level of volatility in the short-term in order to achieve an acceptable long-term objective.
The fascination with long-term investing is likely rooted in the heroics of famous investors such as Warren Buffett, who turned relatively small investments in his investing partnerships and later, through his holding company, Berkshire Hathaway, into hundreds of millions of dollars for his early investors and, eventually, billions for himself.
An original investment of $10,000 in Berkshire Hathaway in 1964 was worth more than $240 million by 2017, according to the Motley Fool.
While Buffett’s investing acumen, discipline and character are rare, one of the primary strategies he used is available to every investor: compounding investment returns over long periods of time.
In fact, Buffett himself has declared: “My life has been a product of compound interest.”
And this directly relates to the idea of long-term investing. Buffett provided the following advice to an investor who asked him how to become as rich as the Oracle of Omaha:
“Start early. I started building this little snowball at the top of a very long hill. The trick to have a very long hill is either starting very young or living to be very old.”
Long-term investing is also a strategic pillar of the Financial Independence, Retire Early movement. The favored investment strategy among FIRE-adherents is to save a significant amount of one’s salary and invest it in a total stock market index fund, with the investment continuing to compound and provide for the early retiree through their extended retirement.
Now that you know what long-term investing is and why so many covet its potential rewards, we now turn to evaluating the Robinhood app’s suitability for such an endeavor.
Robinhood: Pros for Long-Term Investors
Here are the pros in favor of Robinhood:
- Ease of use – When considering Robinhood’s attractiveness to new and younger investors, there is something positive to be said about the app for getting people started who otherwise may have been intimidated from investing by traditional brokerages. Remember Buffett’s advice to “start early.” The Robinhood app is generally miles ahead of other brokerage competitors in terms of its welcoming feel, ease of use and attractive interface. Many other brokerages have a complex array of options that can be intimidating, leading to analysis paralysis or the need to ask outside experts for help, something not everyone is comfortable doing. As Stanford professor and habits expert BJ Fogg says, “The feeling of success is what wires in the habit.” Robinhood is designed to make new investors feel competent and successful. However, there is also a downside to Robinhood’s ease of use which we will discuss later in this article.
- Ability to access index funds – Warren Buffett famously advised the typical retail investor to invest through index funds and to “keep contributing through thick and thin.” The great news for Robinhood clients is that the app offers an array of excellent index fund options for long-term investing including VTI, the ETF version of the Vanguard Total Stock Market Index Fund that is beloved by FIRE enthusiasts. You can also access S&P 500 index funds and various international indexes through a wide range of providers like Vanguard, iShares, SPDR and Invesco. Anna Rathbun, Chief Investment Officer of CBIZ Investment Advisory Services, told CNN Business in a 2022 article that index funds offer many benefits from broad diversification between growth and defensive stocks and most importantly, extremely low fees compared to other types of actively managed funds. And saving on fees over years and decades can add up to a significant portion of your ultimate return on investment.
- Ability to set up recurring investments – The ability to dollar cost average, that is, to fund your investment with a consistent sum on a regular basis (such as monthly) is consistently touted as an ideal way to meet long-term investing goals by personal finance experts. Robinhood makes this process relatively easy with an option to create recurring investments into a variety of different types of investments including index funds mentioned above. For more on this option, check out Robinhood’s recurring investments help page.
Getting started is often the hardest part, but getting started early is one of the most important factors contributing to long-term investing success because of the nature of compounding returns.
Robinhood makes investing easy, attractive and accessible. In addition, the app offers high-quality index funds recommended by most finance experts for the new investor to build wealth over the long-term and makes regular contributions easy through the ability to fund recurring investments. So far, so good? However there are a few potential drawbacks to using the Robinhood app for long-term investments which we explore below.
Robinhood: Cons for Long-Term Investors
Here are some potential cons to keep in mind when evaluating Robinhood for long-term investing:
- An interface that may encourage overtrading – Robinhood’s attractive user interface can be something of a double edged sword. The same benefit of making investing easy also makes it easy to trade and some critics would allege, gamble. For investors who simply want to allocate a certain amount of monthly dollars into a total stock market index fund, the Robinhood app may offer too many additional features and distractions than needed. The green and red numbers that show whether your investment is up or down on a given day should be considered irrelevant to an investor with a ten year or more time horizon, but seems designed to induce an emotional response that may encourage additional trading. Additionally, the Robinhood app heavily promotes individual stocks, options and cryptocurrencies that are often more volatile, risky and can sidetrack long-term investors from their main goals.
- Robinhood’s most popular stocks list is dubious – As we have covered previously in an article on Robinhood’s portfolio diversity, a glance at Robinhood’s most popular stocks list shows that Robinhood investors seem to gravitate towards riskier growth stocks and shares often priced under $5. These stocks are typically much more volatile and risky than a total stock market index fund and may not provide the steady, long-term compounding that index funds have historically provided. While there is no evidence that Robinhood is actively steering investors towards some of these questionable stocks, the fact remains that many of the most popular stocks traded on Robinhood are riskier than average. This is something for cautious investors looking for steady long-term compounding (and not thrills) to be aware of if they choose Robinhood as a broker.
- Option temptations lurk in every trade – Robinhood has received some scrutiny for not only democratizing investing and trading for the everyday investor, but also options, which are inherently more complex and risky investments. Entire online communities such as Reddit’s Wall Street Bets have sprung up around short-term options trading that glorify both huge wins and major losses on single trades that have the capacity to wipe out entire accounts overnight. If your account is approved for options trading then every new investment you enter will presented you with the ability to trade options within that investment (assuming that the investment has liquid options). Most other brokerage accounts segregate options or at least make it more challenging to easily access options when placing simple buy orders on investments.
Conclusion
If you’re committed to long-term investing and feel you can ignore the flashier aspects of the Robinhood interface, including the temptation to dabble in the “100 most popular stocks list” and options trading, then Robinhood has all the elements available to create a successful long-term investing strategy. It is ultimately up to you to decide if your own behavior is likely to be impacted by Robinhood or if you would be better off with a more standard (and boring) brokerage account for your investing goals.