Investing, Personal Finance

The Robinhood app: My experience and impression

Robinhood has a great interface that makes investing straightforward

Robinhood for Financial Independence: Key aspects when considering this app for trading stocks as part of your journey

This Christmas I got a copy of “The Simple Path to Wealth” by JL Collins, and I’m excited to dig in and really understand index investing even better than I currently do; I have no doubt that at the end of it, all the arguments and logic will support it as an investment strategy will make complete sense as the cornerstone of most people’s portfolios.

At the moment the bulk of my net worth is in my 401k and already allocated to index funds, but I do also really enjoy investing in some individual stocks using a Robinhood account. Their claim to fame is that they offer zero cost stock trades. It was created by two gentlemen who had experience on Wall Street building high tech trading platforms, and they recognized the real cost of trading stocks was actually pennies versus the typical $4.95+ that most platforms charge to buy and sell stock.

Nothing is free: So how does Robinhood make money?

It’s a smart and reasonable question to ask: So how does Robinhood make money? I originally went out on a limb to begin using Robinhood because I noticed they were backed by a number of big players, such as Google Ventures. I have now been using it for several years and have been thoroughly impressed and happy with my experience. I know the gentlemen on Stacking Benjamins have long been skeptical of Robinhood because the company has never provided complete clarity on how exactly they are making money.

I suspect these are some of the core avenues that they making money:

  1. Selling the trading information – I’ve read they sell the trading information from their platform – article . When I perform market orders I also sometimes wonder if my trade was truly executed at the best available price, however at the end of the day it may look off by a matter of cents, and I’m still saving dollars versus buying stock on other platforms.
  2. “Robinhood GOLD” – appears to be a lending aspect of Robinhood, which supports margin lending and temporarily borrowing funds to trade stock and take rapid advantage of opportunities. For small account this service looks to cost $6/30 days, but larger accounts can be charged up to $200/ 30 days for access to such services
  3. Trading international shares – international stocks based on exchanges outside of the United States appear to have costs ranging between $35 and $50 per trade.

I have a full list of Robinhood fees and schedules here if anyone would like to explore and understand them in more detail.

Why do I choose to buy individual stocks?

I am a curious researcher at heart, and I enjoy learning about companies and analyzing them. I am a self-confessed nerd, and I really enjoy looking at various factors such as:

  • Price to earnings ratios (P/E ratios), and forward P/E ratios
  • Cash on hand, and debt load
  • Profit margins
  • Dividend yields
  • Return on Equity
  • Areas where the business is investing for the future

I also feel a thrill when I do buy the stock, knowing that I’m steadily and actively building my “perpetual money-making machine” brick by brick. The beauty of zero cost is that it now becomes economical to buy a single share of stock when your paycheck arrives e.g. one share of Verizon for $50, where historically you would have paid another ~10% or more in fees for such a transaction at traditional brokerages.

At the end of the day I am investing after-tax dollars with Robinhood, and this will likely always remain a relatively small part of my net worth versus retirement accounts and indexing.

Robinhood for Financial Independence: These are my two suggestions

  1. Steadily accumulate and diversify for the long-term

Simply because there are no costs to trade stocks, doesn’t mean that you should go crazy buying and selling whenever you feel like it. I prefer to steadily accumulate stocks into a portfolio of companies I consider to be high quality and with a reasonable likelihood of growing well into the future. There are some exceptions, but by and large I’m focused on buying and building up over time. I don’t pretend to be the next Warren Buffet, but I do really appreciate and respect many of his general philosophies with investing. Buying quality companies and holding them for the duration is how I try to invest in my own account. I also like to get greedy when others are fearful, and I like to buy more than usual when there are market corrections and some companies appear to be “on sale”. I’m also focused on diversifying across at least a few companies and industries, and I want to spread out potential risks that could suddenly surprise even companies that we may consider well-managed.

  2. Always avoid the fees

I think minimizing fees is just an important rule of thumb to stick with in general when it comes to investing. Robinhood GOLD sounds cool and interesting, but I’m not prepared to borrow money to invest in stocks, and pay at least $6 / month for the privilege to do so. A nice feature that they offer free of charge is to get access to up to $1000 of capital as soon as you execute a transfer to Robinhood, even if it will actually take a handful of business days to officially be withdrawn from your external bank account and applied to your Robinhood account. This can be a nice feature if there is a market correction and you want to pounce on what you determine to be “good value” for a company.

Index only? You decide

So, there you have it, my experience and impressions of Robinhood in a nutshell. I can totally understand the logic of always choosing to use index fund investments, but personally I get a lot of enjoyment from getting a little more hands-on with stock investments on a small scale.

If anyone is considering Robinhood as a piece of their own journey, if you want to sign up here we would both receive a single bonus stock because of the referral. This is most likely to be something small, like Ford which is currently trading for less than $8 a share, but every little bit counts towards build that investment portfolio out.

I hope you find it useful as you consider whether it makes sense for your situation.

Disclaimer – I am not a financial advisor, and I recommend that you consult with a financial professional before making any serious financial decisions. The content on FIandFlyFree.com is for informational and entertainment purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor.

Additional disclosures can be found here

Investing, Personal Finance, Retirement Savings

Finding satisfying 403b and 457b plans

Exploring 403b and 457b plans? There were a few important considerations as we dug into the different options available to us.

While many public schools across the country offer pension programs for their teachers, I think it’s fair to say that they are now regularly looking at ways to scale back benefits for new teachers, and over time many states are facing long-term fiscal challenges that will likely eventually lead to broken promises for their pensioners. We live in New Jersey, so I think about this a lot!

So, the smart thing to do would be to empower teachers with alternative programs, where they could take greater ownership of their future retirement plans and progress. My wife is a public-school teacher and among a group of professions who are fortunate to have a variety of vehicles at their disposal for retirement savings which includes both the 403b and 457b plans, which are both pre-tax investment vehicles. In 2019 such professions could fully fund these with $19,000 per account. The episode of ChooseFI where they outlined that it was possible for teachers to fully fund both of these accounts simultaneously has to have been the most life-changing tip so far, that will really help us in our journey; the next step is to make and free up enough money to achieve those full contributions.

Retirement savings for teachers though 403b and 457b plans will likely gain increasing importance in the years ahead, as pension plans become increasingly strained.

The catch with these plans: Watch the fees and expense ratios

The kick in the pants for teachers and other professionals with these options, is that schools will often offer a limited set of investment companies to open one of these plans with, and in many cases, these plans will only have mutual fund or annuity options with relatively high fees and expense ratios attached. This is a New York Times article that nicely captured my frustrations with this:

The index funds that so many in the FI community adore for their simplicity and low cost, are often unavailable or not easily found by the teachers. Often schools will have representatives from various providers visit and run seminars to encourage and educate the teachers about the 403b and/or 457 plans that their companies offer, but I get the impression that in general they tend to focus on selling options that are most profitable for themselves. After some research into options offered at my wife’s school, I could find two programs that worked best for us:

  1. The NEA Direct Invest program by Security Benefit

This option is a lower cost self-directed investment tool. It currently costs $35/year for balances below $50,000, and that disappears once the account balance exceeds $50,000. You will find investment options in here that include a handful of Vanguard Index funds with Expense Ratios as low as 0.04%

2. The Lincoln Investments Participant Directed Platform (PDP)

This program is not mentioned anywhere on Lincoln Investments options, and I only found this option because of conversation threads I found online (such as Bogleheads and 403bWise ). It sounds like the state teacher’s union (NJEA) has an agreement in place with Lincoln to make this platform available, even if they don’t actively encourage or advertise its existence.  We recently emailed Lincoln ( inquiries@lincolninvestment.com ) and gained access to the documentation to establish an account. It looks like the annual custodial fee is $35 and there are also offer a variety of Vanguard Index funds with low expense ratios.

Our decision and next steps

Ultimately, we chose the Lincoln Investment PDP for simplicity, because it appears that platform will support both 403b and 457b plan contributions, while the NEA Direct program currently only offers a 403b. Our long-term goal is to simultaneously fully fund both a 403b and 457b plan. That would allow us to be saving $38,000 in pre-tax income towards retirement for my wife.

To date we have been fully funding my 401k contributions, and historically avoided contributing to 403b and 457b plans because we were always so demoralized by the available investment options and associated fees. To be honest I realize that has probably been a mistake on my part. Saving in less than ideal mutual funds, and their typically higher expense ratios (>0.5%) is still better than not saving at all, especially when you factor in the tax savings associated with these retirement savings vehicles.

Knowledge is power, and we are now on the path towards fully funding a 403b and 457b plan for my wife, and utilizing more optimal vehicles with low expense ratios to boot. We’ve only just started on this path with 403b contributions, and it will take a bit to adjust our life and budget without that $19,000 in pretax income, but I’m hoping we can stretch ourselves in 2019 to also begin funding the 457b plan, and then ultimately long-term progressing towards fully funding the 457b and really maximizing our pre-tax buckets.

Some may argue that the 457b should be the priority, because you could access those funds at an earlier age if you separate from the employer, which is a key difference to 403bs and supportive of FIRE (Financial Independence, Retire Early) aspirations; but to be honest I feel that’s splitting hairs, and I’m determined to quickly get the stage where both are being fully funded, its just going to take time, focus, and determination to get there.

I’m a geek, but I find it exciting to think about getting to a stage where we will be saving $57,000 before taxes through our combined 401k + 403b + 457b plans across both of our jobs. Steadily contributing that for a decade with compounding could really lay a solid financial bedrock to FIRE things up. 

Good luck to everyone exploring their 403b and 457b plan options, and stay wary. I’d love to hear what others have done to optimize the 403b and 457b options that may be available for their professions.

Disclaimer – I am not a financial advisor, and I recommend that you consult with a financial professional before making any serious financial decisions. The content on FIandFlyFree.com is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor.

Additional disclaimers can be found here