Micro-investing: Does size really matter?

“Micro-investing” is the latest buzzword to hit the finance industry. It’s been popularised by smartphone apps like Raiz (previously Acorns) and Stash Invest that round-up and invest any spare change on debit or credit card purchases.

These apps sound like a great idea, and there’s no doubt any service that not only encourages investing but also makes it virtually effortless, has a lot going for it – in theory at least.

How micro-investing works

Raiz (previously Acorns), which also allows users to invest a regular flat sum on top of the spend round-ups, requires no minimum investment through funds are only invested once the account balance reaches $5. Investors can choose from one of a handful of portfolios with varying levels of risk, and any returns are automatically reinvested.

Stash works slightly differently, allowing app users to decide how much they’d like to invest (for instance, $5 per week) and then transferring this amount into the user’s investment of choice within the options offered by Stash.

The providers of these apps make money by charging fees. As at 03/2018, Raiz levies a flat fee of $1.25 per month on balances under $5,000 or 0.275% annually for accounts worth $5,000 or more. Stash charges fees of $1 per month for balances below $5,000 or 0.25% a year on accounts of $5,000-plus.

The high cost of small fees

These fees, while small in dollar terms, can be extremely high as a proportion of an investor’s account balance.

On a balance of, say, $100, an investor could pay annual fees of $15. That equates to a massive 15% in account fees – way above what you could pay on a more traditional managed fund. Even the 0.275% annual fee charged by Raiz on balances over $5,000 starts to look a bit steep when you consider the underlying investments are exchange traded funds (ETFs). ETFs, which are listed on the Australian Securities Exchange (ASX), have become popular among investors because of their low fees.

Size does matter

The idea of investing small but regular amounts certainly holds merit. But there’s “small” – and there’s “tiny”. Let’s be honest, investing 50 cents each time you hand over a fiver for a $4.50 coffee will see your portfolio move ahead – though with all the speed of a glacier. Especially when you’re being slugged $1.25 in monthly fees.

More worrying is the concept of rounding-up change on credit card spending. Unless the card balance is paid off in full each month, the extra spending racked up on the plastic can attract interest charges of up to 24%. And that can definitely take an investor’s financial wellbeing backwards.

Follow your own strategy

It’s worth stressing that micro-investing apps encourage people to take an interest in investing, and that’s a good thing.

However, a more effective strategy might be to set some personal goals and take a look at your budget to work out how much you can afford to invest each month. Working with an adviser, you can then identify how you can use the same “invest on autopilot” principal for your regularly growing savings, such as setting up automatic funds transfers to enable you to invest in equity type investments (such as ETFs), or holdings in managed funds.

The verdict

Checking out a pint-sized portfolio on an app may be fun. But it’s nothing like as rewarding as building genuine wealth through investments that are hand-picked to suit your goals and tolerance for risk, and which help you tick off your long term bucket list.

If you want to bring your dreams to life, you need a real nest egg. Not a micro-nest egg. As your local FinChoice Financial Adviser, we can help you develop an investment strategy designed to assist you in achieving your personal goals – not just collect your small change.

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