What is micro-investing?

Investing may seem like a daunting and risky prospect, particularly during uncertain economic times. But staking a small portion of funds on a variety of assets could potentially be a way to grow your capital, while trying something new.

When it comes to investing hard-earned cash, you may be apprehensive or unsure as to whether it’s a smart move. There are many different types of investment strategies available, but having so many options can be overwhelming.

You should consider a few things before committing any of your money towards investments: How much are you willing to risk? How safe is the investment platform? Have you built a diverse portfolio? When do you expect to see a return on investment (ROI)?

Traditionally, investments have been a tool for the wealthy. They’re often complex arrangements that require a significant level of financing and incur high fees. However, the advent of micro-investing means you can dip your toes into this arena without excessive exposure.

What is micro-investing?

Micro-investing is the act of allocating small sums, either frequently or infrequently, towards a portfolio of assets, usually through an app.

Most of these apps allow you to set up recurring investments or round up your everyday purchases as a means of investing your spare change. For example, on your way to the office each morning you buy a cup of coffee that costs $3.60. You could trigger the app to round up your purchase to the nearest dollar ($4) and invest the extra 40 cents.

You may also be able to schedule daily, weekly, fortnightly or monthly investments. Alternatively, you might also nominate to invest additional funds sporadically.

These personal finance apps offer users the ability to invest in a diversified portfolio of exchange-traded funds (ETFs) or fractional shares of stocks. Unlike traditional investments, there aren’t usually minimum deposits or fees charged for individual trades. Instead, most micro-investing apps charge a fixed monthly fee, typically based on the size of your portfolio.

Why choose micro-investing?

It’s convenient. Setting up an account generally involves downloading an app and entering your personal details. This can often be done in a matter of minutes. Investments can then be pre-authorised through a micro-investing app linked to your debit card, meaning you can set-and-forget.

If you decide to invest in low-cost ETFs that are tied to broad market indexes you may be able to establish a diversified portfolio for just a few dollars each month, instead of thousands. As such, micro-investing can also promote positive savings practices.

As mentioned above, the fees associated with this form of investing are minimal and are usually charged monthly, based on the volume of your portfolio.

Micro-investing is the antithesis of borrowing to invest. It can be detrimental to take out a personal loan and risk money that isn’t yours on a speculative investment. Instead you’re using small amounts of your income or savings to potentially boost your finances.

This method of investing may appeal to beginners trying to break into the market; those with low levels of capital; individuals interested in automated trading; and investors intending to minimise over-trading.

Here’s a comparison breakdown of some micro-investing apps you might choose to use:

Understanding the risks

As is with any investment, there are inherent risks involved in micro-investing. Your portfolio’s value may decline over time, reducing your initial investment or potential profits.

Engaging a financial advisor or choosing your own ETFs or shares could provide healthier returns. If you already possess an established portfolio, micro-investing may not afford you any additional diversity or exposure to novel, unique or elusive investment products.

There may be monthly or annual fees associated with micro-investing apps, as well as brokerage charges for each transaction. You may also encounter account opening, withdrawal and cancellation costs.

The Australian Securities & Investments Commission (ASIC) warns investors that small differences in both investment performance and fees and costs can have a considerable impact on your long-term returns. For example, total annual fees and costs of 2% of your balance rather than 1% could depreciate your returns by up to 20% over a 30-year period (i.e. Reduce dividends from $100,000 to $80,000).

Past performance is not a reliable indicator of future performance. It’s important to do your research before making any investments, small or large. Make sure you understand how the platform you’re using works, how much you’re committing each time you invest, and that you don’t exceed your budget.

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