Wealthsimple claims to have seen a 24% increase in the number of new customers since the onset of the health emergency, while WealthBar says its customer base has grown by 10% during the same period.
READ MORE: Dividend stocks stumbled amid COVID-19: What does it mean for investors?
In part, this influx has come from Canadians who have abandoned their mutual funds and investment advisers in favor of the low-cost, mirror-market investment approach of robotic advisors.
The story continues under the ad
In this regard, the stock market crash caused by the COVID-19 pandemic is rather typical, says David Dyck of WealthBar.
Every painful market crash triggers some introspection among investors, which invariably causes some to change their investment strategy, Dyck says.
But the majority of Canadians who have flocked to robotics advisers in this crisis appear to be novice investors in their late 20s and 30s.
The average user of Wealthsimple’s robotic advisory services is 34 years old. Among WealthBar customers, the average age is now 37, down from just 40 years ago.
“We see people who are just new investors starting for the first time,This Dyck.
Money 123: Should you use a robo-advisor to invest?
Nothing like the Great Recession
So far, it appears that the stock market crash triggered by the novel coronavirus is having a very different psychological impact from the 2008-2009 financial crisis, which largely deterred millennials from investing.
A 2017 report from the Ontario Securities Commission, for example, found that while four in five adults under the age of 35 were saving, more than half had no investments.
“Memories of the financial crisis, in which many millennials graduated from school or started their first jobs, may be at the root of these attitudes,” the report says.
The opposing reactions of young investors to the two stock market crashes may have something to do with the duration of the two crises, says Dyck.
READ MORE: 6 Reasons You May Want To Change Your Investment Strategy With COVID-19
While the market’s fall in early 2020 was very steep – on March 23 the S&P 500 had fallen 34% from its previous high – it was also extremely short. At the end of July, the index almost recovered all the lost ground.
In the previous massive market crash, however, the S&P 500 lost over 50% of its value and took over a year to initiate the recovery. The index peaked in October 2007 and did not reach its low until early March 2009.
For many young investors, the sharp but brief drop in 2020 seemed like an opportunity to start investing in a market where stocks were suddenly cheap, Dyck says.
Another possible explanation is that young Canadians know more about financial markets and investment options today than they did a decade ago.
Trump signs orders to lower drug prices, including importing from Canada
British Columbia Reports 27 New Cases of COVID-19, Community Outbreak in Haida Gwaii
“My hope,” says Zoe Wolpert of Wealthsimple, is that the recent influx of clients is a sign that the financial industry is “improving a lot in educating investors”.
Money 123: ensuring the sustainability of your savings throughout your retirement
The rise of trading applications
Robotics advisors aren’t the only draw for young investors. While some opt for Robos’ set-and-forget-it approach of sticking to a large portfolio of exchange-traded funds (ETFs), others are dabbling in DIY investing via discount brokerage platforms and trading applications.
In the United States, Robinhood, a commission-free investment platform, said in May that 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 in the past three months, according to Wealthsimple. The company reports that its average Wealthsimple Trade user makes three transactions per day.
WealthBar, for its part, is considering launching its own self-managed trading platform in conjunction with its parent company CI Financial, according to Dyck.
But the recent increase in the popularity of trading apps has raised concerns that amateur investors are unintentionally exposing themselves to potentially large financial losses.
Robinhood said he was adding eligibility criteria and changing his interface after reporting that one of his clients had died by suicide, leaving a note revealing confusion over how much he owed after trading options through the platform.
READ MORE: The next recession will be a first for robotics advisors. Are they ready?
Placing speculative bets on stocks is nothing new, says Benjamin Felix, portfolio manager at PWL Capital in Ottawa. Any period of time in which stocks fluctuate wildly up or down tends to spark interest in the market.
But Felix calls frequent trading with only a handful of stocks “just another way to play.”
« I think the biggest risk is that this game, which is what it is, gets confused with investing, ”says Felix.
READ MORE: All-in-one ETFs – why you might just buy one investment and hold it until retirement
And the idea of chasing big profits by placing winning bets on a few stocks goes against the investment mantra of robotic advisers that you can’t time the market and the best long-term strategy is to buy and hold a diversified portfolio at low cost. AND F.
One of the mottos of Wealthsimple, for example, is “get rich slowly”.
READ MORE: Robot vs Human – When to Invest with Robotic Advisors
But the company says there is a significant overlap between its robotics advisory service, Wealthsimple Invest, and its DIY trading platform Wealthsimple Trade.
“A lot of our clients actually have both investment and operating accounts,” says Wolpert.
Often times, 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 in-app trading, she adds.
The company also sends onboarding emails to Wealthsimple Trade users alerting them to the risks of buying and selling individual stocks.
“Research shows that passive investing – investing in large parts of the stock market and owning it – beats traders who pick individual stocks 84% of the time,” read an email Wealthsimple shared with Global News. “That’s why we recommend that you only select stocks that you can afford to lose, as part of your larger financial plan.”
Money 123: Canadians could lose a lot because of investment fees
Will investor enthusiasm last?
Yet even for Canadians who have signed up for passive investing, Dyck wonders if new investors are taking too much risk.
While a diversified portfolio reduces the risk associated with any given company, industry or country, stocks are more prone to ups and downs than other types of investments like bonds.
And with stocks rising as quickly as they’ve been since early March, Dyck worries that many investors haven’t been able to test their tolerance for market declines.
“They haven’t been tested in an environment of panic,” he says.
Over time, Dyck says he hopes the “euphoria” with which many approach investing will turn into “discipline.”
« Hopefully, the investing experience people have this year will lead to more discipline, as they see the value of a strategy they stick to despite the ups and downs.
Show link »
© 2020 Global News, a division of Corus Entertainment Inc.