We’ve all had piggy banks, maybe it was to save up for something big, or just a spot to collect change until you emptied it at a bank; well, this is the new piggy bank. This piggy bank is a bit different from what you and I know though, rather than sit in your house, it sits on your phone or computer. Better still, it actually makes you money.
Micro Investing is where you put away small amounts of money at a time, which then gets invested into a pre-made portfolio. The best part? You don’t have to do anything. Seriously, nothing. Sounds too good to be true right? Find out how and why it works, and why you should be micro investing today.
How Does It Work?
Micro Investing works by your money being invested into a large fund, that thousands of others are also a part of. Your money is then handled by professional investors who work for the fund, who will make expert decisions to grow your wealth.
It’s super simple stuff that is a pretty unstoppable model. Through investing like this, you don’t have to pay traditional fees like on transactions, that usually stop most amateur investors from ever getting off the ground. No fees means that you can put away little amounts each week and never suffer from it. In fact, all you do is win.
So Why Does It Work?
For those who never studied economics, there’s this weird little theory called ‘economies of scale’. Let me explain it with an example. If your local takeaway wants to buy some bottles of orange juice to sell to customers, they could expect to pay, say $1.50 for something they’ll sell for $4. Now if McDonalds comes along, you best believe they won’t be paying as high as $1.50.
This is because it benefits both the supplier and the company obtaining the good for it to be at a lower price if the quantity is higher. McDonalds could easily go shopping around for a cheaper orange juice supplier and a lot of money is involved due to quantity, so they want to incentivize McDonalds to choose them.
You may be wondering how orange juice is related to the share market. Replace orange juice with shares and McDonalds with micro investing platforms and bingo, the same theory applies. The takeaway in this situation, are standalone investors, paying normal market price for everything they do.
Put simply, platforms like Raiz and Spaceship Voyager handle a lot of money, so when a company wants to sell off some shares quick, they’ll get it at a slightly lower price than everyone else. Then, when it comes time to sell up, they’ll be selling it for the normal market price.
Where Is Your Money Being Invested
The point of these platforms is to create a high return, yet safe investment. So how is this achieved? Here, safety is found in diversity. Your money is actually going into ETF’s (exchange trade funds), which have not only shares from many different companies, but also corporate bonds, government bonds and cash.
ETF’s usually invest in dozens of companies at once in fractional amounts. Here is no different, in fact some platforms will invest in over 100 companies. These will all come from different industries and be both local and international. The reason for that is to protect their investors; despite in a global market crash, it is very rare for many different industries or countries to downturn at once.
Short Term Growth
One thing that these companies always do really well is look for the best upcoming industries and companies. While you can usually choose between a portfolio for you based on how aggressive it is, almost all of them will adopt both a short and long term approach.
I’ll talk about long term in a moment, but the short term part is where most the work goes into. That’s because investing short term is a lot harder than long term. Comparatively, it’s fairly easy to know what the world is shifting towards and which industries will be more popular in 2, 5 or 20 years time. Knowing what will do well in 6 months time however, that’s anyones guess.
That’s why these companies have a team of professional investors to monitor the every move of a lot of companies. One company I keep seeing pop up a lot across the different platforms is Tesla. Currently, Tesla stands alone in their field of creating semi-luxury electric cars at a reasonable price. A bit of digging will show you though that there are start ups all over the world coming to take a slice of that profit. But those companies are years away from eating into Tesla’s profits.
As long as your platform sells before then, no problem.
Long Term Growth
Many of the platforms often look towards tech companies to predict what will work in the future. The tech industry is just the obvious choice here and while it may be tough to predict how much they will grow by, it’s pretty assume they will, as a whole, grow.
That’s why micro investors take an industry wide approach to what they will target. After industry analysis, finding a company with a strong history and long term potential isn’t difficult.
You may be wondering why do they invest in cash? Traditionally, it’s a very volatile and unpredictable way to invest with not a great deal of return. It’s actually got nothing to do with returns, but instead is the key to the whole idea of micro investing. Having a small portion of each portfolio being cash allows for an instant payout when you want it, without having to make huge changes to the portfolio. This is called Liquidity
So Why All The Negative Press?
Private Investing Companies Hate It
Considering how easily accessible micro investing is compared to traditional investing methods, a lot of people have started to shift away from investment firms or ‘wealth managers’. So I wondered what they would say about it all. If you’d guessed they were mad about it, you’d be right.
One of the top results on Google when you search ‘what is micro investing?’ you’ll find an article from quietgrowth.com.au who appear to give a seemingly unbiased opinion. They repeatedly call it a “temporary option” and encourage everyone to “act beyond micro investing”. Sure, maybe you could make big gains with a personalized professional making highly calculated moves with your money, but you could with the professionals at micro investing companies too.
Unsustainable For The Economy
It’s also giving people an incentive to put away their money for a long period of time. I know that’s nothing new, but we all have a psychological issue with not rewarding ourselves for our hard work, ie. spending money. Now, you can get that little serotonin boost from seeing your portfolio balance grow, instead of reinvesting it into the community. Less money in the community stops the flow of money and is certainly not a good thing.
Round Ups are one of the most appealing features of the whole micro investing movement. How they work is simple, you link your credit or debit card to the platform you use (Raiz does this best), then enable round ups. From now on, every purchase you make will be rounded up to the nearest dollar and the difference will be invested into your account.
Over time, you will actually invest quite a bit into your account without even realizing. Admittedly, I spend too much money on takeaway, so I’m tapping my card a fair bit; I managed to invest $400 in 6 months of using round ups. The best bit, because it’s incremental amount here and there, you barely notice the difference in your bank account.
You can tweak the settings on this if it’s a bit much for you. A purchase that is, for example, bang on $5 will automatically round up to $6 and invest the full dollar, but you can change this so that purchases bang on an amount only round up by a specified amount, like 50c.
Is It Safe?
In terms of is it a scam? You’re safe. It certainly isn’t a scam (from my own personal experience as well as everyone else out there).
In terms of is your investment safe however, slightly different story. Unfortunately, no investment is ever 100% safe. Micro investing does minimize some of the risk however. Typically, the riskier the investment, the bigger the potential gains involved, but that rule doesn’t really follow here. That’s why I love this method so much, the gains don’t match up to the usual risk at all. Let me explain how.
The whole point of micro investing is to make investing easy and accessible to everyone, but that does have some draw backs. Just like you will, I started out with a fairly small amount in my Raiz and Spaceship accounts to see how it would go.
Truth be told, I’d always been interested in investing, but never watched the markets or had the know how to be brave enough to ever do anything. As soon as I put money into my accounts though, all of the sudden, I was checking my accounts daily for 5 cents of movement. I was an amateur, but I was an excited amateur, so I started learning more about it all. The Spaceship homepage is particularly useful in bringing complicated news to you in a fun and easy manner.
It came to a point where I had a rough idea of the general shifts of the market both locally and globally, which in theory should mean that I could maximise my earnings by pulling out my balance then reinvesting at the right moment.
But the delays can be crippling for this very reason. Due to the nature of the service, there is always a delay between telling them you want to deposit or withdraw and it actually happening. Sometimes this can be an entire week, by which time the markets changed already and you’ve now lost money instead of gaining it.
Micro investing is never meant to be short term, but beating the system is an extremely tempting game to play, just know you probably won’t win.
One deterrent that a make a lot of people avoid these platforms are the fees. While they’re relatively low to traditional investing, they also could be the reason you’re reading this right now, weighing up if it’s worth it. Let me break down the fees for you
- Spaceship – free under $5,000!
- Raiz – $1.25 a month
- First Step – $1.25 a month
- Stash – $1 a month
- Rize – 0.25% of your investment
- Robinhood – free!
In terms of how much you will gain on your investment, you shouldn’t worry about these fees. But just in case…
How To Beat The Fees
We don’t want to be losing money on our investment do we. So we need to gain more on our investment than the fees take out. All you need to do is have more money in your account than the average market gains, so if we take the fees of Raiz and First Step (because they’re the most expensive), we need to make more than $15 in gains in a year. The average market gains in a year are 6% in most parts of the world, so we need at least $250 in our account to break even.
Of course, there are other ways if you don’t have $250. Most of these companies offer a refer a friend program that will invest either $5 or $10 into both yours and your friends accounts when they sign up. Or, a lot easier, you could just go for one of the free companies. At the end of the day, they all have different features, but they’re really not that different.
Should You Be Micro Investing?
Micro Investing is going to be the big market craze of the 21st century. The model is just too good to fail in the long run. In my opinion, this is the best way to be investing your money without being an expert. Even if you’ve not thought about investing before but have savings, sit it in a micro investing account and watch it grow before your eyes.