The rise of the micro-investment model, often referred to as Acorns after one of the early-to- market products in the space, has been swift. If you haven’t heard of it, you are probably in the minority – despite being a ‘small’ investment model, these companies often spend big on advertising to target users, with a particular focus on a millennial audience.
How does it work?
These products typically round up your spending to debit small, often unnoticeable amounts from your savings account and put this money into investments– essentially investing your small change. For example, if you spend $90.50 on groceries on your debit card, the app would take $0.50 to invest, rounding your spend to $91.
You can usually increase the amounts too, making individual contributions as often as you like, or even setting the app to multiply the round up amount up to ten times if you want to grow your savings quicker. For example, with the $0.50 above, the app would instead take $5.00.
Taking your spare change and making something of it certainly sounds like a good idea in theory, but is it worth it? Like most investments, the answer really depends on who you are and what you want to achieve.
What are the risks?
Your money is being invested, so there is a potential of losing money if the market falls, but micro-investing is a relatively safe choice.
When you sign up, you will most likely be asked questions to determine the risk level of your investments, which, of course, will have an impact on the projected returns.
Typically, these products are also secured in the same way your bank is – with assets held in custody – to ensure your money is protected should the company go under.
What kind of returns can you expect?
When it comes to investment performance, the major players have performed consistently well, making it a great option for risk-adverse, novice investors. However, like any other investment, your return is determined by market movement, and therefore, a positive return is not guaranteed. It’s also worth remembering it is a ‘small change’ investment, so while you are not likely to have too much to lose, you also won’t have a great deal to gain.
There are lots of media stories that share the user journey, and they all tend to receive a reasonable return rate, but it is important to remember that a good return on a small amount will still only be modest.
What are the benefits?
If you are new to investing, it can be a great way to dip your toe in, with little cash outlay. There is no minimum amount and you don’t need to know much, or anything really, about investing.
It will also give you access to a range of investment options, companies and assets, that might not usually be accessible to a small investor – meaning you can have a diverse portfolio without the price tag.
If you are having trouble saving, the model can be helpful in allowing you to put money aside while also providing a modest return, but likely a little more than you would get in interest from a standard debit account. If, for example, you are planning a holiday and you want to make sure you have some spending money put aside, it’s definitely worth considering a micro-investment app.
What else should you consider before investing?
The costs: All of these products have fees and charges, and it is important that you understand how these fees will impact you. Some commentators are warning that the fees on some micro-investment products can outweigh the benefits for some investors.
Your motivation and goals: Understanding your motivations and goals for investing is important. If, for example, you are looking to grow your wealth or build a property deposit, it is going to be very slow going with micro-investing! If, as I mentioned above, you are just looking to save a little, it might be a good strategy for you.
Your level of control: With these products, you typically choose from a range of set investment options, and while these can be quite diverse, they do give you limited control. If you have specific requirements, it may not be the best option for you. For example, if ethical investing is important to you, it won’t be possible to ensure your investments align with your values.
Micro-investment products can work to deliver small returns for new investors, or those looking to put some money away. However, there are many ways to invest your money and it is worth reviewing all your options before deciding on a strategy.
This is where professional advice is really important – a financial adviser is your money coach and can help you make plans that consider the things you want to achieve and the lifestyle you want to lead, both today and tomorrow. Saving and investing doesn’t have to be about giving up everything you love.
If you are going to invest in products, like Acorns, consider doing it as part of a broader financial plan. In today’s digital world, financial planning doesn’t have to be time consuming either; apps like BeApt put the power of a financial planner in your hands and are designed to help you live for today while planning for tomorrow.
General Advice warning
The information provided in this blog does not constitute ﬁnancial product advice. The information is of a general nature only and does not take into account your individual objectives, ﬁnancial situation or needs. It should not be used, relied upon, or treated as a substitute for speciﬁc professional advice. Apt Wealth Partners (AFSL 436121 ABN 49 159 583 847) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.