User-friendly apps have lured hordes of new investors to the sharemarket during the pandemic. But with 2022 looking volatile, are they prepared for what could be a wild ride By Peter Griffin.

Investors who flocked to online share-trading platforms during the pandemic face a white-knuckle ride this year as a host of global issues weigh on sharemarkets.

The early months of 2022 have not had the sheer, heart-stopping drama of March 2020. That’s when fears over the spread of Covid-19 saw the US stock markets shed value in a crash reminiscent of Black Monday in 1987 or the Great Crash of 1929. But investors have still had a bad start to the year – the worst since 2009, with some high-growth tech stocks experiencing 20-30 per cent declines.

Fears over inflation and interest rates started the slide. Both are on the rise everywhere, which is bad news for sharemarkets. Inflation, which hit a four-decade high of 7 per cent in the US last year and 30-year high of 5.9 per cent here, eats into consumers' purchasing power. The buying frenzy of the past couple of years, on everything from houses to iPhones, is coming to an end and even necessities such as groceries and fuel are causing bill shock.

For a long time, low interest rates have deterred small-time investors from plonking their spare cash into low-risk assets like term deposits. Seeking higher yields, they have instead ploughed their money into higher-risk assets, such as shares, property and cryptocurrency, to get better returns. But now that interest rates are climbing again, it has made safer investments such as bonds and business loans more attractive, so investors are likely to rebalance their portfolios in their favour.

Add in the Russian invasion of Ukraine, and the lingering uncertainty of supply chain disruptions and mid-term elections in the US, and it is no wonder markets have got the jitters. At the time of writing, the NZX 50 was down 7.2 per cent for the year to date, while the S&P 500 Index had dipped 10.2 per cent. Another long-predicted crash is inevitable at some stage, but who knows when?

In many countries, including New Zealand, the fundamentals remain surprisingly good, with solid single-figure growth in gross domestic product (GDP) predicted for most developed nations and low unemployment. Nevertheless, the shaky market sentiment may signal an end to an incredible run for many shareholders.

Central banks pumped mountains of money into their economies in 2020, fearing a deep recession as the pandemic took hold. That cheap cash was used by businesses to fund record-breaking levels of mergers and acquisitions all over the world. That and the way in which the pandemic transformed entire industries, forcing them to go digital and send their workers home to operate remotely, had a remarkable and unforeseen effect – triggering one of the largest market bull runs in history.

In March 2020, as the panic selling set in, I registered an account with the locally founded online share-trading platform Sharesies, opened the pink-themed app and started buying. Against the advice of those around me, I bought Air New Zealand and invested in index funds on both sides of the Tasman. I bought Google and Amazon, tech-laden exchange-traded funds (ETFs) in the US and even cryptocurrencies. I'd sat on the sidelines as the markets steadily climbed through the 2000s and 2010s, delivering about a 10 per cent annual return to investors. Now was my time to get in at a discounted rate. I wasn't alone in "buying the dip".

Sharesies, founded in 2016 by three young Wellingtonians who developed the business while resident in the Creative HQ tech incubator, in January reported a major milestone, reaching 500,000 users in New Zealand and Australia. Its rival, Hatch, which has similar origins as a Wellington-based start-up, has about 150,000 users. They make their money from brokerage and transaction fees (deposits and withdrawals). Meanwhile, the Kiwi-owned InvestNow and Australian-founded Stake have tens of thousands more between them.

Retail share trading used to be largely the domain of older professionals, who would call their brokers at ASB Securities or Jarden for advice and pore over analysts' reports before putting in buy or sell orders. The new generation of share-trading platforms have cut out those intermediaries. They don't dispense financial advice, charge lower fees and are happy to process tiny transactions.

The platforms claim they are "democratising" share trading, giving younger investors, many of them shut out of the property market, an opportunity to start growing their wealth. But the investors they are attracting are often inexperienced and many have seen only an upward trajectory in share values over the past two years. Are they ready for the volatility and potential for red ink lighting up their share-trading apps that this year might bring?

"If you are someone who is prone to get really upset seeing red, but you're still confident in your portfolio, the best thing to do is just not to look," says Kristen Lunman, the co-founder of Hatch, which started life as a project within government-owned wealth manager Kiwi Wealth and was last year sold to FNZ​, a global funds-management service also with its roots in Wellington.

"My portfolio is 99 per cent high risk and have taken bit [sic] of a hammering in the past few weeks like most," wrote Phil, in a post to the 60,000-strong Sharesies Club Facebook page, in early February. "Have medium and low risk investments seen the same tumble or held their ground? interested [sic] to know if the low risk stuff was safe?"

Even relatively low-risk blue-chip stocks have lost ground this year, but not as much as the high-risk stocks that have drawn retail investors in large numbers during the pandemic. Social media is central to the new share-trading platforms and to that frenzy of interest in certain hot stocks such as Apple, Tesla and Zoom. Facebook, Reddit and Discord are among the places where investors gather to give each other reassurance and to share tips and screenshots of their investment portfolios.

"The community came into its own with the recent dip," says Lunman, who keeps close tabs on the Hatch Investor Club, the company-run Facebook forum with 16,000 members. "Because that's where everyone gets together and goes, 'Oh, how are you? Feeling that hurt?'"

Hatch has a particular focus on US stocks and attracts investors interested in high-growth companies, which usually also have a higher risk profile. The vibe in the forum is one of nervous optimism, says Lunman.

"We are not seeing panic selling, which is great. Our buy and sell ratios haven't changed. But a lot of people are seeing buying opportunities and simply bringing down the average [share] price of their investment."

Sharesies co-founder Leighton Roberts says traders, who buy and sell quickly to bank gains from share price increases, make up less than 5 per cent of Sharesies users, 72 per cent of whom are aged under 40, down from 80 per cent when the company began trading.

"Our largest holdings on the platform, you could say, are pretty boring, like the NZX 50, the S&P 500, the Pathfinder socially responsible funds and PIE funds," he says.

However, individual stocks such as electric car maker Tesla, down 28 per cent for the year to date, and NZX-listed Air New Zealand, up 1 per cent for the year to date (but up 58.2 per cent since March 2020, when I bought in), are heavily traded on Sharesies.

"People are using Sharesies to bring some risk into their life and I don't think anyone is naive about that," says Roberts.

The share-trading platforms churn out blog posts and articles that emphasise three key points: the need to keep a diverse portfolio of stocks; invest for the long term; and employ dollar-cost averaging, where you buy stock at regular intervals over time rather than in one purchase, to decrease your risk of paying top dollar for shares that then sink in value.

"Dollar-cost averaging is what most of our investors use as a strategy," says Roberts. "But it is a rubbish strategy if you are only buying when the price is going up."

That implies there are opportunities once again to buy the dip. But Sharesies is careful not to dispense advice about particular investments, which would make it subject to Financial Markets Authority (FMA) regulations, which apply to the country's more than 3000 registered financial advice businesses.

In fact, this new breed of share-trading platforms benefit from fairly light-touch regulation. As sharebrokers, they must be on the Financial Service Providers Register and sign up to its disputes resolution scheme. They have to comply with fair-dealing provisions under the Financial Markets Conduct Act and, as providers of custodial services, where they effectively hold on your behalf the shares you purchase via their platform, are required to obtain reports from auditors to independently review their processes and controls. They also must report on their obligations under the Anti-Money Laundering and Countering Financing of Terrorism Act.

The likes of Hatch and Sharesies don't need a licence from the FMA to operate. Sharesies and Stake do hold transitional licences from the FMA allowing them to become financial advice providers.

Hatch doesn't offer financial advice, but does have a "coaching" service for which it charges $149 for a session. What's the difference between advice and coaching?

"If you want stock tips, go to an adviser; if you want to get the confidence and tools to manage your money your way, talk to a coach," Hatch suggests. The move into offering financial advice is a logical next step for the share-trading platforms, whose users are clearly hungry for an expert's steer. Many of them may be willing to pay for the privilege.

Sharesies was last year issued with an "official warning" for failing to meet its obligations under the act, with the FMA finding that it hadn't sought enough information about the nature and purpose of the proposed business relationship from most of the customers signing up on its platform. Sharesies has since changed its sign-up process to gather the required information.

It was a slap on the wrist for a platform that grew hugely through 2020 and last year, both in its user numbers and the value of the company itself. A fundraising round completed late last year raised $50 million and valued Sharesies at $500 million. One of the new shareholders was Ngāi Tahu Holdings Corporation, the investment arm of the South Island tribe, which invested $3 million in the company. "It was quite a long dating period with them," says Roberts. "But they really liked what we are about, which is financial empowerment."

He says the company's research suggests Māori and Pasifika people have low representation among Sharesies' users. When the deal was announced in January, Ngāi Tahu Holdings kaihautū Craig Ellison said: "To build wealth and opportunities for our iwi over the long term will require continued investment into innovative, sustainable, earlier-stage companies such as Sharesies."

The FMA, which has pursued several high-profile insider-trading cases in recent years, has no authority to investigate share-trading platforms to determine the risk profile of the investors using them. According to the Sharesies app, 100 per cent of my share portfolio is "high risk".

Roberts says Sharesies would never intervene to stop an individual investor on the platform who was racking up major losses making highly speculative investments. But the platform will issue warnings when certain stocks or sectors are experiencing high volatility.

A fairly conservative approach to how these share-trading apps are operated has, to a large extent, insulated them from local criticism to date. While they use gamification-type tricks to keep people engaged with their platforms, they've largely steered clear of the tactics that have seen the likes of US share-trading platform Robinhood draw the scrutiny of regulators.

With more than 22 million users attracted by its commission-free brokerage services, Robinhood has reduced barriers for share traders in the same way its Kiwi contemporaries have. But it has also drawn sharp criticism for the gamification aspects of its app and aggressive tactics to recruit new investors. In 2020, Robinhood settled a lawsuit with the US Securities and Exchange Commission for US$65 million over claims it misled investors about how it makes money from the platform.

Robinhood's approach hasn't been emulated here. But the FMA is clearly interested in how this new breed of amateur investor behaves and the risks they face in having such immediate access to fast-moving and potentially volatile markets.

In an FMA-commissioned survey last year, in which research firm Kantar Public asked online users about their share-trading activity, about 80 per cent said they were buying shares and holding them for the long term. Only 2 per cent were day trading. "But, while they have good intentions, Fomo [fear of missing out] is still a driver. Almost one-third of investors said they'd jumped into an investment in the last two years because they didn't want to miss out," Rob Everett, the FMA's then chief executive, said of the report's findings. "And 14 per cent of investors are looking for a 'Moon shot', indicating they are okay with risking a lot of money if there is a big reward," he added.

That fear of missing out and endless quest for exponential returns run through the social media forums. In late January, nearly 1500 Sharesies users logged into a live-streamed "Lunch Money" session hosted by co-founder Sonya Williams and featuring veteran financial commentator Rod Oram and Devon Funds Management head of retail Greg Smith. The three ignored a stream of questions asking advice about individual stocks and sectors, advising investors to weather the storm.

"We have seen far more extreme volatility than this and volatility that's completely blown apart financial markets," said Oram, relating how, as a Financial Times journalist based on Wall Street, he had sat in front of the Dow Jones terminal on Black Monday (October 19, 1987) and watched the Dow Jones Industrial Average plummet 25 per cent in a single day. It was "completely petrifying", he told lunchtime listeners, many of whom wouldn't have even been alive to witness the 1987 crash.

"I think a correction in 2022 was to be expected," Smith told them. "Since those pandemic lows, the US markets have gone on a massive run. Markets don't go linear, one way in either direction, forever. I think the next few weeks and months are opening up opportunities to get into great quality stocks which just ran too far too fast last year."

The question is how many newbie share investors ran too far and too fast with them and will this year see their portfolios go into the red. The New Zealand Shareholders' Association, which represents about 1500 shareholders and could be described as "old-school" rather than part of the hordes of new investors using Sharesies or Hatch, sees the rise of the online trading platforms as a good thing.

"If it gets us away from our obsession with property, that's a good thing as far as I'm concerned," says chief executive Oliver Mander. "They're actually encouraging people to invest in equities or other financial products as an alternative to simply investing in property or in term deposits, which are ultimately going backwards in a high-inflation environment."

Mander is on a mission to modernise the association and introduce new educational products that will appeal to younger shareholders. The association publishes basic governance and financial reports on every company listed on the NZX, which are available free to members or for $2.50 per report for non-members.

He'd like to see more information made available to enable share-trading-platform users to make better-informed investment decisions.

Roberts says he is open to doing so via Sharesies. But he doubts the Sharesies audience, used to googling their own information, watching YouTube videos and learning from each other in chat forums, would find financial reports or analyst commentary that useful. "I'd argue that for most people they just aren't that helpful, and I'd put myself in that category," he says.

It should be no surprise to anyone that the majority of retail investors are largely flying blind when it comes to the under­lying financial fundamentals of the stocks they are investing in. That's why ETFs and managed funds are so popular, allowing investors to spread their risk across a basket of companies or a particular sector, such as renewable energy projects or pharmaceuticals.

Volatility in the sharemarket will have its pros and cons for the likes of Hatch and Sharesies this year. They make money from transaction fees on share trades. If investors sit tight until markets recover, that means fewer trades and fewer clips of the ticket. But cashed-up investors will see an opportunity to go share shopping at more realistic prices than they faced late last year, which may keep Sharesies, Hatch and their rivals busy.

"2022– it's going to be bumpy," admits Lunman. "China is yet to even seriously go through Omicron with their zero-Covid policy. We get a lot of goods from China, so that will be disruptive. I'm still waiting on a couch I ordered five months ago."

People have done very well on Hatch over the past few years, she says. "But we are seeing a lot of red being shared as well at the moment. There's no shame, we are all here for the long term."

As for my forays into "buying the dip", since opening my Sharesies account in March 2020, my "high-risk" portfolio has had a fairly pedestrian rate of return of 6 per cent, rescued only by those Air New Zealand shares and the Smartshares Australian Dividend fund, which is up nearly 50 per cent.

My individual stock picks in technology, an area I’m passionate and reasonably knowledgeable about, haven’t fared so well. Palantir is down 23 per cent, Alibaba is off 36 per cent. I’m not shying away from tech, but this year I’ll invest via ETFs rather than making individual stock picks in a market where the only certainty appears to be more uncertainty.