Biz/Tech    |   #finance

The Perspective on Small-Change Investment Apps

By Kira Goldring
 Getty Images: Drew Angerer
A poll shows that 40% of people ages 18-34 believe investing takes a lot of money, which they don’t feel they have. Small-change investment applications like Acorns, Stash, and Moneybox – apps which invest your money in small increments – provide people with alternative platforms through which to break into the stock market. Are these apps the future of investing, or is there reason to avoid them and stick with a broker?
Here are three reasons to take a chance on small-change investment apps, and three reasons why they aren’t worth your time.


Take a Chance on Small-Change Apps


Leveling the playing field

Small-change apps make investing accessible to everyone, without breaking the bank. Only 54% of American households own stocks, with 84% of the market belonging to households in the top 10% of net wealth. Investment apps allow anyone with a smartphone and some spare change to have a chance to grow their money. Unlike mutual funds, which often require a minimum investment of $500-$3,000, these apps let you allocate mere pennies towards your investments if that’s all you have to spare. For example, the Ashton Kutcher-sponsored app Acorns allows people to mindlessly invest their spare change, by rounding credit card purchases up and investing the extra change across a number of stocks. Such apps provide a solution for lower-income Americans to save.


Steady saving wins the race

Twenty percent of people ages 25-34 have less than $1000 saved in total, and most people start saving altogether at a later age. Small-change investment apps allow people to start saving earlier, and as is the case with most saving, time will grow your stash from small change into real money. Like Acorns, UK-based app Moneybox rounds up spare change from credit card purchases, saves it for you, and funnels it into investments. While small change sounds, well, small, let’s do the math. As Techworld aptly puts it while describing the UK-based app Moneybox: “It’s small change, but given the average user makes 120 transactions per month and rounds up on average 28p [39 cents] per transaction, that’s about £36 [$47] saved each month and about £440 [$564] saved per year.”  Though not a significant enough amount of money to hurt your day-to-day dealings, over time, these investment apps will help your money will grow into something substantial.


Simplicity, simplicity, simplicity  

In addition to not requiring a lot of money, these apps also take away the technical and bureaucratic processes involved with investing. You don’t need a four-year degree in finance to invest successfully with small-change apps. Many people don’t have time to properly sit and study the market, which is why these user-friendly apps do the work for you. Apps like Stash do research on companies that support causes you believe in, categorizing them for you and making it easy to choose in what to invest. Additionally, you can make automatic payments through these apps, enabling investing without a second thought.


Stick to what you know


Aversion to automation

Small-change apps often use algorithms and questionnaires to ascertain the level of their investors’ risk tolerance, and then proceed to invest the money accordingly. However, because this process is automated, many feel that the risk tolerance determined by the app may be inaccurate, leading to bad investment choices. While automated processes are often adept at detecting patterns (which is important for analyzing market trends), algorithms are claimed to be useless when it comes to determining if those patterns are meaningful. This is where the human component would normally come in, but it’s missing from these apps. Investment already comes with risk, and using an automated, impersonal app rather than trading through a broker or financial adviser heightens this risk.


Limited investment choices

Small-change investment apps usually restrict you to specific stocks or Exchange-Traded Funds. For example, Acorns has you pick one of five default portfolio options, and none of those options include tax-deferred accounts like Roth IRAs (i.e., government-sponsored retirement funds that are stable but grow slowly). For long-term investment goals, this could confine your options. Additionally, when your income stream eventually goes up, you may want to diversify your portfolio in ways that the apps won’t allow. Your money should be working for you; if there’s a time in your life when you suddenly have money to invest (like after your wedding, or when your company gave you a car and you sold yours…) then investing in small-change stocks isn’t for you.


Don’t take shortcuts

Illustrious investor Warren Buffet warns people to “never invest in a business you cannot understand.” He advises to only invest in companies that you already know about, which is difficult to do with small-change apps that often invest in companies of their choosing. Depending on apps to do your work for you may be advantageous in the beginning but will hinder you from learning the craft of investing long term and learning how to make real money by investing independently. When the time comes for you to invest more than just your spare change, how will you know with which investments to start? Practice makes perfect, and investment apps won’t give you that chance.


Bottom line: What small-change investment apps provide in convenience and affordability, they may lack in variety and long-term gains. Would you use an app to invest?

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