Lessons I Learnt from Investing on Robinhood for 1 Year
By: Paulo Carvalho
Tags: Trading, Investment, Portfolio Management, Robinhood App, Stock Market

I joined Robinhood in 2018. In 2020, I began to actively trade. Having had strong returns, I decided to share here some of the lessons I learnt along the way so other small retail investors like me may also benefit.

Disclosure: This article is not investment, tax, or legal advice, nor is it a solicitation for investment. I may have an affiliate relationship with some of the companies listed below. Furthermore, I am not a financial expert and offer this only as a way to share my experiences.

Introduction

I spent the first 2 years after opening my Robinhood account dabbling semi-passively in trading to gain an intuition for how the markets moved. After this learning period, I decided to take on a more aggressive investment stance.

Despite the volatile markets and downturn in several industries, I was able to reach the end of year with a strong performance that outperformed that of my managed funds.

As 2020 comes to a close, I decided to reflect on my investment journey, what allowed me to get these results and report some of the lessons I learnt along the way.

Lessons

1. Robinhood Targets Stock Pickers

It is my opinion from observing the company’s tools and the way they communicate with users that Robinhood is designed for aggressive investors. These are investors that accept a higher level of volatility in their portfolios and tend to do so by picking specific stocks rather than investing on broad market funds and ETFs.

For this reason, I use Robinhood exclusively for my personal selection of stocks and invest in the general market elsewhere.

2. Diversify Sufficiently but not Excessively

Unrealized return from stock picks held at the time of this writing. Only some of the stocks are labeled on the x-axis. Positions bought and sold throughout the year are not shown here. Green line shows my overall portfolio return for the year. Black line simulates a portfolio where funds were allocated equally among all my stocks. Red line approximates returns of S&P500 for the year.

Even before starting my investment journey, I had often been told of the importance of diversification. Usually as an argument for investing in broad market ETFs such as those that track the S&P500.

However, I learnt that diversification like any tool, needs to be used only where appropriate. If you diversify completely, you will end up tracking the market. It will lower the portfolios volatility and with it the possible returns (or losses).

For instance, this year’s S&P500 return was of approximately 13.6% whereas TESLA returned approximately 670%. That means that someone that invested $10k in TESLA at the start of the year would have approximately $77k at the time of this writing. It would take an investor of S&P500 approximately 15 years to get that same return. Similarly, PLTR, MSFT and others also had very strong returns. Note: I am not suggesting that anyone invest now in TESLA or debating the merits of doing so. Past performance is in no way a guarantee of future returns.

At the same time, if someone thought DBI was the ticker to go with and had invested their whole $10k in it, they would now have only $4k left and would need a significant return just to get back to where they started.

So how did I diversify? I believe in allocating different percentages of my overall portfolio to stocks based on my confidence that they will go up within my expected time frame. I may split the percentages based on my levels of confidence: 3% for low confidence, 10% for medium confidence and up to 15% for high confidence. For instance, 15% of my portfolio is invested in TESLA whereas only 2% is currently on RYCEY.

Although I don’t usually follow the numbers exactly, having them as guidelines ensures that I rebalance my portfolio as the market changes forcing me to realize some of my returns that would otherwise remain unrealized and risk becoming losses if the market turns.

It is also possible to diversify on assets outside of the stock market:

3. Keep a Watch for Dividends & Turn Off DRIP

When considering investing in stocks most retail investors primarily seek returns from appreciation where the stock price at some future date is higher than the price it was bought at. However, dividends can be a good source of steady returns.

For instance, I included in my portfolio the ticker NCV which has a dividend yield of 11.27% per year. That means that regardless of changes to the market price of the underlying security and assuming that there are no changes in the company’s dividend policy, an investor in this stock will get approximately $0.90 for every $100 they have invested in the stock every month.

After a few months holding dividend stocks I noticed that my account’s cash balance was not going up. I discovered that my DRIP (dividend reinvestment) setting was ON. Since I allocate my portfolio very deliberately it did not make sense to me to have automatic market priced orders being placed with the dividend I received and I decided to turn that setting off. That allows me to reinvest my cash balance according to my own strategy.

4. Invest in What You Know

There are a lot of stocks out there. Choose your stocks based on industries you understand the most.

Sometimes, you find a stock that either from its financials or its recent price movements seems like an attractive investment. However, it happens to be in an industry you know little about. From my experience this year, I believe it best to stay away from those and wait for a similar opportunity to occur with a stock in a more familiar industry.

For instance, one of my worst performing picks was DBI which is down 46% from where I bought it. At the time, I thought the recent price movements from the stock indicated it was likely to have a strong rebound. It turned out, that the price would continue to drop for many months. This stock is in the Apparel & Accessories industry which is one I know little about. This meant my intuition and overall understanding of its price movements were not tuned well to this stock.

5. FOMO is Dangerous

As humans, it takes a great deal of training and self-control to avoid making bad investments due to the fear of missing a strong upside. This becomes even more pronounced when certain companies are constantly touted on the media as big wins for investors.

Although, I have done a good job at staying away from these situations, I have fallen pray to this sentiment a few times. The most recent was with the IPO of DASH. I bought this ticker during its first trading day and it is down 16.4% since. I still expect the stock to outperform the initial purchase price long-term but given the hype pre-trading it was a case in which I should have waited longer before entering my position.

Conclusion

My first full year of actively trading on Robinhood was very insightful. It allowed me to hone in on some strategies that I hope to consistently adapt in the future to achieve strong yearly returns.

Excited for a prosperous 2021 and hope the best for other retail investors like me trying to navigate the stock markets.