Sometimes the best opportunity to invest in a stock is when everyone else is selling and its price is declining.
On Wall Street, this strategy is known as buying the dip. And it’s popular because it allows investors to get into a trade at a discounted price. (It can also backfire of course. Just because a stock drops, doesn’t mean it’s going to go back up.)
That’s exactly what investors using smartphone brokerage app, Robinhood, are doing, according to cofounder Baiju Bhatt.
During a wide-ranging interview with Business Insider, Bhatt said users of Robinhood, who skew younger, viewed a market downturn in the first quarter of 2016 as a buying opportunity.
Anxiety over the Chinese economy sent stocks into a tailspin for a few days, ushering in the worst start of the year for the markets on record. The Dow Jones Industrial Average declined about 8% between December 31 and January 15.
“Those were the days we saw the biggest net deposits we had ever seen,” Bhatt said.”With this younger generation, when the market takes a slide, they see it as an opportunity to buy.”
This, according to Bhatt, provides a counter to the argument that investors using pure-play mobile investing apps, which lack the human element of incumbent brokers such as Charles Schwab and TD Ameritrade, would pull their money out if the markets were to witness a major downturn.
Charles Schwab, the $US3 trillion asset manager, released a study showing 75% of millennials reported they would want to talk to a human adviser during “complicated” situations. A note out by a group of analysts at Morgan Stanley, led by Giulia Aurora Miotto, supports the results of the Schwab study.
“The financial sector consumer often needs some sort of human contact, especially when abrupt market moves lead to unexpected losses,” the analysts wrote.
Robinhood’s brokerage app launched in March 2015 and quickly became a favourite among younger people looking to invest without paying a commission for buying and selling stocks.
Since its launch, Robinhood has amassed over 2 million users who have bought and sold billions of dollars’ worth of stocks.
Here’s the relevant passage from the interview:
Frank Chaparro: You mentioned the Great Recession. And that makes me think of this question hanging over the investing space regarding apps like Robinhood and other online investment startups. Without someone to guide them through the bad times, do you think investors are more prone to pull their money out if there’s a major correction?
Baiju Bhatt: That’s an interesting question because we have actually seen a correction since Robinhood launched. Granted, it was not on the same scale as what happened in 2008.
But if you remember, in the beginning of 2016 there was a pretty significant sell-off in Q1. And there were multiple days when the markets witnessed single-digit drops in the S&P, and that was kind of interesting. Because we saw for the first time how people behave when the market is going down. And the behaviour we saw was actually pretty interesting. Those were the days we saw the biggest net deposits we had ever seen.
With this younger generation, when the market takes a slide, they see it as an opportunity to buy. They view the market as being on sale. It’s kind of interesting, because I remember during Brexit, Betterment decided they wouldn’t let their customers withdrawal money. I think that stems from this mindset of not thinking people should be in control of their money. It tends to be better to give people control over their money, rather than restricting their access to money during such times, because they’re more likely to wait it out.
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