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Are micro-investment services a good deal for consumers
Lately, we have been receiving many questions regarding micro-investment services like Acorns and Stash Investing. These investment services emphasize the idea that there is an easy way to start investing—and that’s probably true.
However, the ability to save money (and cut expenses) is a skill that most successful investors exhibited at the point in time when they started investing. Learning how to save money instills a discipline that you will need as an investor. Truthfully, you’ll need to have a lot more than just expense optimization skills to be a good investor… for example, a good stomach!
Principally, Stash and Acorns could potentially help brand new investors get started on the investment path, but in all reality, they fail to do so.
Here are a couple of reasons why these micro-investment services are a bad deal for the consumer:
They are expensive
To subscribe for these services, consumers pay a hefty tax (unless you have a valid .edu email address). The cost is $1 per month on assets up to $500. Let’s say your portfolio is worth $250; if you’re not a student, you’ll be paying $12 per year to maintain your Acorns account. That’s almost a 5% fee on an annual basis, which is large by any means.
A better way to invest might be to save $250 first (yes, you can do it), and then buy a share of your favorite index ETF (e.g., S&P 500 ETF). You’ll wind up paying less (or significantly less) than a 0.1% fee (ETF expense ratio), plus a trading fee, which can be as low as $0.
They are focused on emotional, not financial needs of the consumers
The micro-investment services make most consumers, including poor ones, feel like rich investors. Unfortunately, they make the path to wealth longer by taking away a portion of your savings every month. Investing, often overcomplicated, can be made really simple; check out the examples of couch potato investing to learn how to get more out of your investment dollars.
Also, another theme you’ll find among some micro-investment services is that their products are uniquely branded to attract the millennial consumer. Think about names such as “clean & green”, or the “American innovator”—while branding is great, new investors need to understand what they are getting themselves into before pouring in their hardly-earned money. Investing in a “clean & green” security without knowing what it entails is like drinking a Frappuccino without knowing you’re drinking coffee with bananas, sugar, milk, cream and some spice.
If you are really interested in maximizing your investment return, you need to take control of your savings first. Like with any investment product, managing the cost if key. Don’t be fooled by the names that make micro-investment services sound like a sexy product. What you really need to get started is to tighten your belt, eliminate silly, high-APR (e.g., credit card) debt, accumulate savings as soon as possible, and then choose a diversified, yet cheap way to invest your savings, such as low-cost index funds.