5 red flags to look for in investing apps, according to an expert

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  • Behavioral finance expert Dan Egan of Betterment says there are a few ways that investing apps try to increase user engagement.
  • Color psychology is a big part of these apps; they often use red and green to get an emotional response from investors. 
  • Another red flag is right on the home screen. If your app opens to show you a short-term view, it might be trying to influence you, as long-term views tend to look much more stable. 
  • If your app feels more like gambling than long-term wealth building, that’s another red flag. 
  • Start investing today with Betterment »

Investing apps have put the process of investing in the palm of your hand. But while having easy access to your portfolio may be useful for some investors, it might not always be the best thing for your money.

Behavioral finance expert Dan Egan of Betterment says that some investing apps are engineered to keep you trading, using certain design features like color and the layout of the homepage to keep investors engaged. 

Egan says that many brokerages make money on the cash you keep with them, as well as on the number of orders they fill. In other words, the more you buy, the more they make. Since brokers earn a percentage of each transaction, “they design things and use technology to increase those activities on the part of clients.” 

For most investors wanting to build long-term wealth, constantly trading and keeping an eye on your investments is counterproductive. Most experts suggest buying investments and keeping them for a long time — a method that helps to even out sharp drops in the market and gives investments a longer time to grow.

But that’s the opposite of the way some investment apps are designed. “You want to excite people as much as possible over a short period of time,” Egan says.

Here are five common ways investing apps keep people buying and selling investments — and red flags you should watch out for. 

You open the app to see red and green 

Egan says that investing apps often use color to influence customers, especially red and green.

“Neither of those are calming colors. Red is very much a fear-associated color; it’s something that kicks up your adrenaline quite a bit. Green is also a little bit of an exciting color,” Egan says. Many investing apps use these colors to grab attention and elicit emotional responses from investors.

The way the colors are used is also important. “I think it’s an important distinction when these numbers show you what happened, what is past,” he says. “If the market is down today, you cannot go into the site and change all of those numbers to green through your actions. Instead, they are portraying to you what happened in the past…not necessarily what’s going to happen or what you can do about it.”

For many people, that’s an overly alarming sign, and can cause people to act in ways they wouldn’t otherwise. While it might mean trading more, it might also mean selling off investments or taking a loss out of panic. 

The first thing you see is a short-term view

If you open the app and immediately see a red or green graph that’s all over the place, you’re more likely to take action. Oftentimes, looking at your investments in the short-term view shows more dramatic ups and downs than a long-term view would, and Egan says that’s what some investing apps want you to see. 

“They tend to show you [your investments] over as short a time period as possible by default. You log in, and start by seeing what happened generally today or yesterday. Since markets tend to even out with time, there’s a better chance that you’ll open you home screen to see red when set to this short-term view.”

“If they were to set it at five years, the vast majority of the time you would log in and it would be green,” Egan says. “The chance that you’re going to observe a loss goes down dramatically over time.”

Seeing a short-term view can stir investors to take action, and some investing apps use this to their advantage. 

It feels like a game 

Between the bright colors, the constantly flickering numbers, and the fact that you mostly see a volatile short-term view, some investing apps make it feel more like playing a slot machine than intentionally growing your wealth.  

“These things are making investing much like gambling or something that’s more like entertainment,” Egan says.

If your investing app makes you feel like you’re at a casino, you’re probably using the wrong one. The better approach is focusing on the long-term outlook rather than short-term changes. While that’s far less exciting, it can be a better way to handle the markets, especially when markets are volatile. 

‘Free’ is a buzz word

If you’re seeing ‘free’ all over your app, chances are you’re just not seeing the fees. “Any time I hear that something is free, it makes me very uncomfortable,” Egan says. 

He compares it to social media, which makes money indirectly and doesn’t charge clients directly for its services. For many investing apps, Egan says the earnings can come through fees you can’t see. “Somebody else is paying [the company], and that sort of incentive scheme is going to flow through from start to finish.”

You’re getting notifications often

With investing, less is more — you shouldn’t be looking at your portfolio every day. That becomes difficult when your app is sending through frequent notifications. “One of the things that gets me is when something has a lot of push notifications,” Egan says. 

Constantly being prompted to interact with your investments isn’t only annoying, it can also mean trading more often or making impulsive choices. Many investing experts say that leaving investments alone for a long time is the best path to growth. And notifications simply don’t help with that. 

Turning notifications off for your investing app, or finding an app with fewer notifications, might be a smart move. 

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