Life

I Explored the Investment Apps That Promise to Make You Rich

The pandemic and looming recession had me thinking about sorting my finances. So what's the deal with apps like Plum, Wealthify and Nutmeg?
03 August 2020, 12:41pm
Investing app
Illustration by Esme Blegvad

Want to earn money by sitting on your arse? Investment apps like Nutmeg, Plum and Wealthify promise just that by repackaging daunting financial services into friendly-looking investment apps. Unlike traditional banking, they’re positioned as “fun” – Plum has a Facebook Messenger style app, with investing options based on which emoji-illustrated “mood” you want. Think investment banking for the Love Island generation, advertised on London tubes and buses.

Unlike traditional investment banking, these cuddly apps are accessible to younger, less well-off people. Don’t have £10,000 to invest? Don’t worry. Many of the businesses offer low minimum deposits and claim the potential to earn returns far higher than interest on an average savings account. They appear easy to use, too: you shove money in, as you would a savings account, and the firms invest your cash into various combinations of stocks and shares. If it’s a success, you make money.

So what’s the catch?

Thomas Jefferies, TJ to his mates, is a 28-year-old NHS worker who has been putting money into Nutmeg since 2019. Nutmeg is one of the bigger new investment apps and has a variety of account options, including a stocks and shares ISA that TJ signed up to on a friend’s recommendation. After setting up a monthly direct debit for deposits, his balance rose to over £1,700 by the start of 2020 – and then coronavirus hit.

By March, his balance was down a whopping 25 percent, with around £400 wiped off. He quickly cancelled the direct debit and stopped checking the app, but he doesn’t sound too bothered about losing out. “I like gambling anyway,” he says. “I don’t mind losing money... maybe if I lost all of it I’d be quite pissed off, but if I lost a quarter of it I’d be fine.”

The popularity of apps such as Wealthify, Moneyfarm and Freetrade has followed the wider rise of financial technology (fintech) that has seen an explosion of new banks like Monzo and Revolut and a number of online money management and investment tools. The technology that made this possible has been around for years, growing out of the last financial crisis in 2008. But more and more young people have recently started paying closer attention to their personal finances – I mean, there’s nothing like a pandemic and looming, massive recession to focus the mind, is there?

Whether it’s Wolf of Wall Street wannabes trading forex, crypto bros buying the latest celebrity-backed cryptocurrency or people like TJ just trying to get a return on their savings, technology is introducing investing to a new generation of young speculators.

“In terms of the large financial institutions, many individuals will not be able to afford the fees or even the minimum,” says Janine Hirt, COO of Innovate Finance, UK fintech’s industry body. “Fintech can cater to a much wider segment of the population, so we’re seeing how it is really creating the democratisation of finance, in a way.”

Sat in the pub, TJ checks his Nutmeg account for the first time in months and is happy to see he’s now only down around two and a half per cent (around £50) on his initial investment. For better or worse, he’s an example of how financial technology has opened up the world of finance to more young people. Along with his stocks and shares ISA, TJ has also tried investing in individual stocks on other platforms with mixed success. He’s made £600 on a £1,500 investment in a UK-based software firm, but he’s also lost out on other investments.

He points out that savings rates with traditional banks are so low that he felt he had little choice but to invest. “Your money is depreciating in a high street bank,” he says. “So you can either buy something tangible, like a house, or if you don’t have enough money to do that, which not a lot of people in their twenties do, then this is probably the next best option. Also, just putting your money in a bank is quite boring, isn’t it?”

The thing is: investing should be boring, if you’re doing it properly. The DIY investing boom has exposed a huge financial knowledge gap among young people. Holly Mackay, CEO of financial website Boring Money, says that apps like Nutmeg are not the biggest issue, as they can help less confident people begin investing. She says Nutmeg’s accounts tend to be diversified – meaning their stocks and shares are from different places and industries – and this helps spread the risk. If your eggs aren’t in one basket (i.e. you have multiple stocks and shares), you’re likely to be protected from downturns in particular areas (i.e. if the industry of one stock suffers a financial downfall).

But there are still other popular apps and services that do offer riskier types of investment. This includes spread betting, contracts for difference (CFD) trading, where around 75 per cent of consumer accounts lose money, or those that encourage people to buy individual shares of familiar brands. This is where investing gets complicated.

“This can blow up in people’s faces,” Holly says. “Trading volumes went through the roof both here and in the States in lockdown and some believe this was to substitute for the lack of available gambling on cancelled sports or alternatives.”

Recently, The Times reported that amateur traders were losing more money during the coronavirus lockdown than at the start of the year on such platforms. In July, the suicide of a 20-year-old university student was partly linked to his losses on the US platform Robinhood. The platform has now indefinitely postponed its launch in the UK.

While investment apps have the potential to open up finance to those who would otherwise be uninterested or unable to afford a financial adviser to do the dirty work for them, there are ultimately two things you have to understand: never invest money that you can’t afford to lose and don’t expect quick returns.

If you’re still determined to invest, Holly says it all comes down to timeframes. If you are saving for less than five years, shares are just too volatile. “Risk isn’t about how ‘chance-y’ you feel,” she says. “It’s another way of asking how long you have up your sleeve before you need to sell up and cash in these investments. Going into shares for a year or two is a really bad idea, however glitzy the app.”

Despite taking a hit from the corona crash, TJ isn’t ready to give up on investment apps just yet. “It’s a better and more exciting way to use your money,” he says. “You know who Warren Buffett is, as a shit example. Only chumps put their money in the bank.”

@HaydenVernon