Should you dabble in Dabble? A new investment platform is revolutionary, but know the risks

By Derek Rose |

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A new platform that offers unlimited trading of US shares for a low monthly fee is “brilliant” but also potentially dangerous, financial experts say.

Neobank Xinja plans next month to launch what it’s calling Dabble, a share trading platform that will give investors easy access to more than 3000 US shares and exchange traded funds (ETFs) via the Xinja app.

Trades will be free for just an $8 monthly subscription plus a one per cent foreign exchange fee.

“There’s a lot of dangers, that’s a nice way to put it,” says Justin Bridger, a financial planner and the director of Advice Plan in Heatherton, Victoria.

“It’s dangerous in the wrong hands,” but also revolutionary, Mr Bridger says.

FREE CAN BE DANGEROUS

Scott Phillips, the chief investment officer of the Motley Fool Australia, worries that offering people “free” trading will make them want to trade more.

“Behavioural psychology has a lot to say about ‘free’,” he tweeted recently. “It’s a drug: Addictive and boundary lowering/reducing.

“You really think we should encourage people to trade more??? This will make a lot of people a lot poorer, because they’ll convince themselves they’re ‘investing’…”

People could lose their life savings, he added.

“If you’ve got a big fee there, it acts as a disincentive” for repeat trading, agrees Robert Coyte, the CEO of Shartru Wealth Management in Belmont, NSW.

Short-term trading is “pure speculation,” more like gambling than investing, he adds.

“I concur that people will get themselves in trouble very quickly if they’re using it as a quick fix.”

In the United States, the commission-free investing platform Robinhood has become a cultural phenomenom, sometimes luring in with young, unsophisticated investors with devastating results.

One young man even killed himself in June after seeing a $730,000 negative balance on his account.

Xinja chief executive Eric Wilson was travelling and didn’t respond to an interview request – but Xinja has clearly tried to steer Australians away from riskier investments.

Dabble won’t let its users “pattern trade,” or  trade the same stock four days in a row, and leveraged ETFs and options are blocked, as are tobacco and weapons-related stocks.

Mr Bridger says overall the concept is revolutionary for the Australian market  but people need to know the risks.

Australians investing in US shares will also be taking on currency risk – the danger that the Aussie is weaker against the greenback when they sell their stock from the time they bought it.

“It’s magnifying losses, in the same way that it could also magnify the gains,” Mr Bridger says.

Buying on the trading on the US market will also mean becoming a night owl as Wall Street is only open from about 11pm to 6am, Australian time.

“Good luck with that. You’ll become nocturnal.”

But the idea of gaining access to the US market – the home of tech giants like Facebook, Amazon, Netflix and Microsoft – for just $96 a year is “absolutely brilliant,”  says Mr Bridger, adding that he can’t understand how the platform is so cheap.

The app will also let Australians buy fractions of shares, which both Mr Coyte and Mr Bridger praised.

While ASX-listed shares typically trade for less than $100, on Wall Street many stocks are priced at several hundred or even thousands of dollars. Shares in Warren Buffett’s investment company Berkshire Hathaway are the most expensive, having traded at over US$300,000 per share.

Xinja’s Mr Wilson said in a statement that the neobank hoped that the option to buy a portion of share would open “up markets and investing to people who want to grow their wealth over the long term.”

“Many US-listed companies’ shares trade at very high prices, which locks a lot of people out of the market.

“So while brand recognition for leading US companies is very high, few people invest directly. And entering the market hasn’t been easy.

“We want to lower the cost and make it simpler to bring those opportunities to Australians.” The platform is expected to launch on Xinja’s app in August.

WHERE TO START 

If you’re looking to take a dabble on Dabble, one way to start would be through buying shares in the SPDR S&P 500 Trust ETF (NYSE:SPY) – an exchange traded fund that tracks the price and yield of the S&P500 index in the United States.

You’d be investing in America’s 500 biggest companies – the likes of Amazon, Facebook, Microsoft, Procter & Gamble and Johnson & Johnson.

That offers instant diversification, so you’re not putting all your eggs in one basket. The index has averaged returns of about a 10 per cent a year, over the long term.

Of course investing in individual companies offers the potential for more  reward – but is riskier as well.

Nick Twidale, the general manager of IC Market in Sydney, suggests that would-be investors start by thinking about the trends they see occurring in the near future and then consider what companies they think will benefit.

For example, by mid-March it was clear that the coronavirus pandemic was going to result in people across the globe working from home.

Investors who had the foresight to snap up shares in videoconferencing company Zoom as late as April are now looking at returns of around 67% in just three months.

In addition to America’s tech companies such as Amazon, Mr Twidale believes that its financial institutions will continue to perform well.

“You’ve got to be thinking that banks will still be making money,” he said.

Justin Bridger, a financial planner and the director of Advice Plan in Heatherton, Victoria, says investors should be wary of the red-hot companies that are on everyone’s lips because they have performed so spectacularly.

“I wouldn’t touch Tesla with a barge pole,” he says.

Stock in Elon Musk’s electric vehicle company is trading at around $US1,500 a share – more than triple the value that it started the year at.

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