Updated Sept. 13, 2018: Stop any #millennial on the street and ask them about their investments. There’s a good chance they’ll stare at you, blank-faced, slowly backing away while calling the police on their Apple Watch. This is why you don’t randomly stop people on the street.
According to Bankrate, only 1 in 3 millennials invest in the stock market, and that’s including people who invest through a mutual fund or retirement account. The two biggest reasons millennials don’t invest? 1) They don’t have enough cash (or have too much student loan debt) and 2) they don’t know anything about stocks and bonds.
While there are a ton of new online investment services out there, I want to look at two apps that are specifically taking aim at getting first-time investors onto the stock market: Stash and Robinhood. Despite having the same goal – or at least the same marketing tactic – these two apps take entirely different approaches to first-time investing. Are either of these apps a winner for millennial investors? To judge, I’ll be looking at how they handle millennials’ biggest concerns: cost and education.
Stash (also known as Stash Invest) is an iOS and Android app that allows investors to start investing with as little as $5. It offers users the ability to buy fractional shares in a curated selection of exchange-traded funds (ETFs).
Does that sound like gibberish to you? Basically, buying a share of an ETF allows you to buy a small part of a larger fund that holds different stocks. For example, a common ETF in many portfolios is the Vanguard S&P 500 ETF, which buys stocks from all 500 companies on the S&P 500. Stash allows you buy a fractional share, which means you buy just a small part of a more expensive ETF.
Stash is designed to move you away from thinking about individual stock. Instead, Stash wants you to think about your portfolio in terms of what you believe, want, or like. Those are literally the three categories the Stash team have organized their ETFs into – I Believe, I Want, and I Like. Stash also renames the ETFs to fit those categories. For example, the First Trust NASDAQ Cybersecurity ETF is called "Data Defenders," and lives under the I Believe tab.
Stash Invest charges users $1 per month until their balance reaches $5,000, when it changes to 0.25% of your balance.
Robinhood is an online stock brokerage, similar to competitors like TD Ameritrade or E-Trade. However, unlike their competitors, Robinhood allows you to buy shares of stocks and ETFs with no commission. There’s also no minimum account balance you need to maintain.
Unlike Stash, there’s no curation on Robinhood. This is the real deal – you have direct access to buy and sell over 5,000 U.S. listed stocks and ETFs.
Robinhood’s interface emphasizes real-time market data, but not much else. If you navigate to a specific stock, you’ll find recent headlines and some statistics on the stock’s performance, but not much in the way of in-depth research or guidance for first-timers.
There’s no cost to using Robinhood, though there is an optional monthly subscription to Robinhood Gold, a margin account for advanced users. Unlike Stash, you must have enough money in your account to buy a full share of a stock or ETF.
Which app is best if I don’t have much money?
Let’s tackle the number one concern of #millennial investors: money. If you feel like you don’t have a ton of cash to start investing, you’ll probably be attracted to Stash’s promise that you can start investing with just $5. It’s a pretty low-risk way to start investing – you can start just by putting $5 or so into a different type of ETF every week, watching your portfolio grow over time.
If you’re money-conscious, however, you’re probably not going to like Stash’s $1/month fee. Ok, yes, that seems low on the surface, but it’s actually an insane fee. If you put $5 per week, you’ll put in roughly $260 your first year. With a $12 annual fee, you’re paying 4.6% of your portfolio as a fee. Sure, this doesn’t take any growth into account, but even if your account grows a generous 8% – the highest Stash’s "Potential" calculator lets you go – your earnings wouldn’t even cover half the fee. Other competitors like Betterment, Wealthfront, and Wealthsimple charge between 0.25% and 0.5% with no minimum deposit, or about 65 cents on a deposit of $260
For an app focused on first-time investors making small contributions over time, this fee seems almost criminal. This fee only starts to make sense once you start contributing more and more money.
Additionally, unlike other online services like Betterment or Wealthfront, Stash takes this fee out of your bank account, not out of your portfolio. That means, in addition to whatever money you’re putting into Stash every month, you’re getting more money taken out for the fee. Take that into account when you’re budgeting.
For some investors, being able to buy fractional shares may be well worth the relatively high fee. Not only does it let you invest in funds you otherwise wouldn’t be able to afford, but it also guarantees that every dollar you put into your account is being invested. On the other hand, if these are your main concerns, you’re probably better off with a Betterment account. While Betterment, we only refer products we love.* only lets you choose from a set portfolio of ETFs, they also offer fractional shares, don’t require a minimum account balance, and only charge a 0.25% annual fee for their basic account.
You could also just put $5 a week into Robinhood instead. Because Robinhood is completely free to use, you can put as much or as little money into it without worrying about incurring a fee. Of course, the big risk with Robinhood is that your money will just be sitting there for a long time while you save enough to buy your first stock or ETF, which can be a pretty big psychological drag.
If you’re looking for a few low-priced ETFs to start off with, however, you can look at Stash for inspiration but buy through Robinhood. That "Data Defenders" ETF I mentioned earlier is currently trading at around $21. Many of their other options are less than $100 a share. You can also check out a site like ETFdb.com, a database of ETFs. There’s a wide world of ETFs beyond what Stash offers, and you can get most of them through Robinhood.
Winner for small investments: Robinhood, just because it’s literally free. Stash’s $1/month fee is relatively high compared to what you’re getting, and you should seriously consider your other options before committing to Stash long-term. If you like the idea of fractional shares, consider Betterment instead. If you want to pick your own ETFs and stocks, you should check out Robinhood.
As a side note, beware the hidden cost of ETFs. Most ETFs have a fee associated with owning them that is separate than the fee you’d pay Stash or Betterment. This fee is called an expense ratio, and it pays for the management of the fund. Some fees are incredibly low – Vanguard, for example, is well known for having expense fees under 0.1%. Some of the ETFs that Stash features have much higher expense ratios. "Data Defenders," for example, has an expense ratio of 0.6%, and "Robots Rising" has an expense ratio of 0.95%. These fees add up in the long run!
Which app has better educational resources?
Robinhood’s founders love to talk about how they’re helping less wealthy investors save money, and their new referral program was designed with novice investors in mind. But for an app so focused on people new to investing, there’s not a lot of guidance available in the app.
And when I say guidance, I don’t mean advice on which stocks to buy. I mean the literal basics of investing. What is a stock? How do I judge a stock’s performance? What’s an ETF and how do I know if the expense ratio is too high? When should I buy and when should I sell? There are lists and lists of basic questions about investing, and Robinhood doesn’t help answer a single one of them.
That’s in stark contrast to Stash, which almost makes up for its steep fee by providing a library of information about investing and the funds they’ve curated. Stash’s "Learn" tab is hardly perfect, however – it looks more like a collection of blog posts than a true resource library. I’d love to see Stash develop this section further, as it could help justify their fee.
Winner for education: Stash, by virtue of the fact that it actually has educational resources. Considering the fact that many millennials feel like they don’t have enough knowledge about investing, there’s a big gap in the market for someone to build an app that actually teaches you the fundamentals of investing while you’re investing. For now, though, you’re better off reading through the resources at Investor.gov, a government website run by the SEC that is actually pretty useful.
The verdict: no clear winner for #millennials
For two apps that are highly focused on courting #millennial customers, both apps have pretty big Achilles' heels. Robinhood is completely free to use, but offers no guidance or education. Stash will help you build a diversified portfolio, but does so at a relatively steep cost.
Plus, both apps fail to offer tax-advantaged accounts, such as an Individual Retirement Account (IRA). Tax-advantaged accounts are crucial for young investors, as they’re the most cost-effective way to save for retirement. Robinhood says IRAs are on the roadmap, but have no clear timeline for when they may be available. Stash is working on a new retirement product called Stash Retire, but that product is supposed to cost $2/month when it arrives for all users this summer. That means they’re doubling your fee so that you can access a tax-advantaged account.
If you’re looking to learn more about investing, I’d suggest reading some resources online, picking up a few books, and opening an account at Robinhood. If you lose money through Robinhood, at least you won’t have to worry about the fact that you paid a commission fee to lose that money. But if you just want to invest your money long-term without really worrying about the specifics, I’d suggest an account at Betterment. Betterment gives you the benefits of Stash’s fractional shares at a more affordable price. Plus, you don’t have to pay double to get a retirement account.
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