This article has been updated December 2017.
Fintech is playing a big part in the future of personal finance. Although the basics of investing remain the same and always likely will, the advent of apps such Acorns have changed the landscape of investing. Acorns will probably not appeal to a serious investor, (for some reason I can’t see Warren Buffett opening an account) however it has really done a great job reaching out to a group of individuals that otherwise probably would not have been investing. Surely this alone is makes the app great!?
Acorns is all about micro-investing, investing small amounts on a regular basis. The premise is simple, much like the age old piggy bank that you dump your spare change into at the end of each day (yes I also still do this), the app takes your virtual change from your bank transactions and transfers it in an investment account. So unlike your piggy bank your money actually has a chance of growing. For example when you spend $4.60 on your Soy Mocha Latte and use your card to pay for the transaction Acorns will automatically round that up to $5 and invest the $0.40 in your selected portfolio.
The set up is very easy, once you download the app and set up an account, you link your transaction accounts (savings accounts or credit cards) to the app and adjust the round-up settings to an amount you are happy with. You can simply round up to the nearest dollar or add $1 to each transaction. You then have the option to deposit an initial sum to kick start the account and you can also add a regular deposit. Initially I deposited $100, set up a regular payment of $50 a month and chose to round my transactions up to the nearest dollar.
The are 6 investment types choose from, Conservative to Aggressive and then Socially Responsible large companies, which sort of fits somewhere in the middle. Each one is made up of a mix of cash, bonds and ETF’s (both local and international) with the Conservative portfolio geared towards cash and bonds and the Aggressive towards international and local share markets. Since I am young (at least in working life terms) I have chosen the Moderately Aggressive fund, which is made up of the below:
I like that the portfolios use Exchange Traded Funds (ETF’s) rather than individual stocks as they help de-risk the investment since you are investing across a large range of companies across several markets. So if one company performs poorly it is usually offset by another that performs well. Or if that company has performed poorly consistently it can drop out of the ETF altogether and be replaced by a better performing one. Normally to do this you would need to pay fees to sell the shares, then fees again to buy another one, not with an ETF, this happens at no extra cost to you. ETF’s have also been proven to beat most managed funds over a long period of time, so in my opinion are the best way to buy into the share market. Whilst you aren’t buying ETF’s directly you still get the benefit of them via Acorns.
This type of investing was not previously available to most investors as the transaction costs would be far too high. Acorns charge no fees on Deposits or Withdrawals but charge a monthly fee of AUD$1.25 for balances under $5,000 or 0.275%/yr for balances over $5,000. Whilst this is not exactly on the low side of managed funds fee structures they do offer something that most of the big investment firms do not, they allow you to buy in and continue buying in a very low level all in a very intuitive and modern format that does a very good job and bringing investing to a new demographic.
In the 5 months since I downloaded the app and set up my account I have invested $519 for returns of $4.51 and reinvested dividends of $5.82. This works out to an average of $33.80 a month of round ups to go along with my $50 monthly contributions. Whilst obviously this has not been an earth shattering return is has been a nice saving tool that has the potential to grow rapidly.
It is definitely a long term strategy as it can take some time to build up a decent portfolio and it is probably not something for the serious players, but it is one of the most passive ways of investing, pretty much a set and forget, which does suit a lot of people.
Update December 2017
I have continued on with my Acorns account experiment without paying too much attention to it. My balance has increased to $798 and I have experienced a gain of $47.24 or $6.29%. I’m pretty happy with the result and plan on keeping my account running for the foreseeable future.
The fees for such a small value investment are high when considered in isolation however I think the real value comes in being able to create a well diversified investment with your spare change. Even after fees the rate of return is much better than what you could achieve in a savings account, and if you tried to replicate the investment yourself it would simply be far too expensive given the brokerage fees you would have to pay on each transaction.
If you would like to open your own Acorns account click here for my referral and we will each get a bonus $2.50!