Micro-investing has been steadily rising in popularity over the last few years. Apps like Raiz and Spaceship Voyager are built around the concept of investing small amounts regularly for returns greater than traditional savings accounts. Micro-investing avoids the time consuming research and costs associated with investing through financial advisors or stockbrokers. This is particularly useful for those who want to build their wealth, but may be too cash or time poor to do so through the conventional ways.
What is micro-investing?
Micro-investing is similar to a modern day money box. But instead of placing loose coins in a slit at the top, the spare change buys a proportion of shares or assets electronically. It involves investing small amounts of money regularly. Competitive returns on investment is possible with time in the market.
How does it work?
Micro-investing can occur through ‘round-ups’ linked to a debit card. Round ups to the nearest dollar occur for each transaction on the debit card. The micro-investment account receives the extra cents. Lump sums or recurring deposits may also generally be made into this account. The account is used by micro-investment platforms to pool funds to purchase Exchange Traded Funds (ETF) that match the investors’ risk tolerance. Each investor then has a share of the owned ETF in proportion to their contribution.
An ETF refers to buying a basket of shares or assets. It contains a collection of stocks, commodities and bonds. The net asset value (NAV) of the collection determines its price. There are numerous different types of ETFs. Diversification benefits and low costs are some key reasons why ETFs are used on micro-investing platforms. It is hoped that in the long term, ETFs and the financial industry as a whole will continue to rise in value. This is the idea that underpins micro-investing.
In return for their services, micro-investing platforms may charge a small monthly or annual fee. These fees are only a fraction of the fees that may be charged by a traditional advisor.
Is it worth it?
There are many advantages and disadvantages to micro-investing, some of which have already been touched on. These include:
Advantages
- A lack of knowledge on stocks does not prevent competitive returns.
- Minimum investments can be mere cents as opposed to traditional methods.
- Accessibility to micro-investing platforms from personal devices. Allows for instant updates, deposits or withdrawals.
- ETFs that include highly profitable assets can be owned proportionally.
Disadvantages
- Returns made on micro-investing platforms will still be subject to Capital Gains Tax (CGT).
- Greater returns made by investing in ETFs directly and in large lump sums rather than through a micro-investing platform.
- Micro-investing still presents the risk of losing money.
- Fees on some micro-investing platforms may not be worth it, particularly for those with low balances.
Conclusion
Overall, micro-investing is a wealth building strategy that can be highly useful. This is especially true amongst young people or those with little investing experience. It presents a great opportunity to gain some financial literacy and get into lifelong saving habits. As with all financial products, it is important to do your own research and read the Product Disclosure Statement before making a decision.
