It's been a wild year on Wall Street, and millennial investors are loving it. Online investing app Robinhood, which is known for its commission-free trades, gifting of free shares of stock to new members, and fractional shares investing, has gained millions of new users in 2020. That's noteworthy because the average age of Robinhood users is only 31.
Seeing young people put their money to work in the stock market is a fantastic thing. The earlier people begin investing, the more time can work as their ally. With multiple decades ahead of these investors before hitting retirement, they should be able to compound their nest egg many times over.
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Robinhood investors aren't always making the best investment choices
But Robinhood has proved to be the oddball of the investment community. Because it's attracted so many young and novice investors, and because it lacks educational tools to educate its users about the importance of long-term investing and compounding, many of its members are buying terrible companies.
Robinhood's leaderboard (the 100 most-held stocks on the platform) mostly contains penny stocks and whatever happens to be the flavor of the week on Wall Street.
In particular, Robinhood investors have been chasing three exceptionally dangerous trends: Canadian marijuana stocks, coronavirus disease 2019 (COVID-19) vaccine stocks, and airline stocks. The affinity for cannabis stocks is understandable; it's a high-growth industry in North America and young people generally view marijuana favorably. It's also reasonable to be optimistic about vaccine developers, even if the field is crowded and many of the players are priced to perfection. But what younger investors see in airline stocks is truly baffling.
Rather than chasing innovative, brand-name, or proven business models, Robinhood investors are buying into a capital-intensive, low-margin industry that has shown time and again that it cannot handle long-term economic adversity. It's investments like these that have, at times, made Robinhood users the butt of jokes on Wall Street.
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The smartest investment Robinhood users have made
However, a closer examination of Robinhood's leaderboard also turns up what could arguably be described as the smartest investment possible. Little pleases me more than to see the SPDR S&P 500 ETF Trust (SPY -1.27%) hovering around the 50th-most popular holding on the platform.
Buying into an exchange-traded (ETF) fund that virtually mirrors the movements of the broad-based S&P 500 (^GSPC -1.30%) probably sounds boring. This is, after all, a site whose members are known for chasing growth stocks, companies that pop over 100% in a week, Canadian pot stocks, and penny stocks. An index-tracking ETF doesn't exactly fit the bill of what you'd expect from the Robinhood crowd.
But here's what you might not know: Buying and holding the SPDR S&P 500 ETF over a 20-year period is a foolproof moneymaking strategy.
Earlier this year, Crestmont Research released data on the 20-year rolling total returns for the S&P 500 over a 101-year period (1919-2019). Rolling returns means the annualized returns for an investment over a defined period (in this case, 20 years). For instance, the rolling 20-year total return for 1980 would involve adding up the total return, inclusive of dividends paid, for the S&P 500 between 1961 and 1980.
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Crestmont looked at this average annualized 20-year rolling total return for every single year between 1919 and 2019 and drew a fascinating conclusion: No matter when you initially purchased an S&P 500 tracking index, you'd have made money if you held it for 20 years. Only two of the 101 years featured an annualized 20-year total return below 5%, while more than 40 years would have featured a double-digit total return. In fact, if the median total return of 8.9% held true over the long run, long-term investors would be able to double their money three times (that's an eightfold increase from an initial investment) every quarter of a century. That's some serious moneymaking power.
What's more, we've witnessed the power of the S&P 500 in action throughout history. Despite undergoing 38 stock market corrections of at least 10% since the beginning of 1950, the widely followed index has eventually erased each and every one of these dips. Since the S&P 500 is packed with profitable, time-tested businesses, and operating earnings growth leads to valuation expansion over time, it's an index that's essentially guaranteed to head higher.
The SPDR S&P 500 ETF isn't a sexy investment by any means, but it's unquestionably the smartest thing Robinhood investors have been buying.
