There’s a new micro-investment app called Acorns, available for iOS, that’s creating some buzz so I thought I’d check it out. But before I dive into the app, let’s briefly speak about investing.
A Look at Investing
Investing for the future can be hard. Knowing what to invest in, and monitoring your investments can be a major time drain and for some it’s painful. And no matter how much you research, you’re never investing with certainty – risk is always there.
I’m a pretty risk adverse person. I like to be paid for my work and my contributions. But I understand the value in investing for your future. And I understand the importance of financial markets and their effects on the world.
But there’s one thing that catches me off guard. When people say they’ve made a killing off the market investing in stock xyz. I get all giddy and excited as a result – could I too, make thousands? But the second I begin to research how I’ll dive into the big money pit I see restrictions like minimum account balances, commission fee, management fee…. and my head begins to spin.
Once I level out and take a few steps back I realize; it’s almost uneconomical to invest with a few hundred dollars. You need a good amount of capital to have a shot at making some money.
Frankly, you should not be investing at all until you have an emergency fund set aside and then another $1,000+ to invest with.
Where Acorns Fits
Acorns is a unique concept. It aims to let its users invest their spare change. Yes, their change. It’s a spin from the micro-investments paradigm.
It works by letting you connect your credit card or debit card, and automatically rounds up the change from every purchase you make to add to your investment portfolio. So if you spend $1.75 on some random purchase, Acorns rounds your purchase to $2.00 and takes $0.25 to add to your portfolio.
It’s like a digital piggy bank.
It sounds cool, right? The money that’s sent to your Acorns portfolio is then invested by Acorn to hopefully make you some more money. Acorn says their team is compiled of investment analysts, mathematicians, and economists. People who know what to invest in and when. They make a special note that their portfolio management is helped by the father of modern portfolio theory, Dr. Harry Markowitz.Sidenote: If anything, Acorns obviously has a good marketing team.
At any time, you can make a deposit into your account to boost your portfolio. You can also switch/choose between five different investing risk options. Ranging from aggressive to conservative. And you have the option to withdraw your money out of your portfolio anytime.
And I have to add. The app is beautifully designed. You can watch how your investments are performing over time with visually stimulating graphs and the likes. My hat goes off to their design team too.
Let’s Look Deeper at where Your Money Goes
Investment is a tricky beast, especially when you begin taking a look at how Exchange Traded Funds (ETFs) work. But here’s the gist.
Acorns uses ETFs to invest your money. From their investments page, they invest in six index funds.
There are as follows:
- CORP: PIMCO Investment Grade Corporate Bd ETF
- SHY: iShares Barclays 1-3 Year Treasury Bond
- VB: Vanguard Small-Cap ETF
- VNQ: Vanguard REIF ETF
- VOO: Vanguard S&P ETF
- VWO: Vanguard FTSE Emerging Markets ETF
You’ll see that Vanguard is quite popular with Acorns.
Here’s what makes Acorns unique. Vanguard ETF’s typically require about a $3,000-$5,000 buy in to begin investing. Acorns appears to be using a manged mutual fund models for their ETF system, which allows you to invest while avoiding these large buy-ins.
The founders of Acorns, whom I assume thought this up, had a pretty neat idea.
Acorns Invests your Money
Acorns claims to have an automated portfolio management process that’s driven by experts. I found that there are two stand out jargon words that they use throughout their pitch:
- Diversification: To maximize expected returns for a given amount of risk by carefully diversifying across multiple asset classes.
- Automatic Re-balancing: Portfolio allocations can deviate from risk adjusted targets due to natural market fluctuations. Acorns automatically re-balances your portfolio to keep it aligned with your selected level of risk.
Here’s the reality. Acorns is just moving around your money through the 6 funds we pin pointed above based on your selected risk level. They simply allocate which funds your money is put into.
And on that note, here are the 5 risk levels and their distribution between the various stocks and bonds.
You’ll see the levels follow a simple investing rule: bonds are more conservative, stocks are more risky. Allocate accordingly.
How Acorns makes Money
Acorns makes money by charging you fees. As of January 1st, 2015 Acorns has changed their fees to be either $1 a month (for balances under $5,000) or .25% of assets per year (for balances above $5,000).
Prior to this change the fees included a monthly $1 fee for every active account and a management fee of 0.5% annually for your first $5,000 and 0.25% annually for any additional funds.
January 15,2015 Update: The new fee structure is a welcome change but doesn’t alter my overall opinion. The targeted user of Acorns is likely to use the service as a piggybank rather than as a large sum investment tool and in both cases there are better options.
Is Acorns Worth Investing With?
This is an interesting question and it will cause quite the debate. If you’re not investing already and Acorns can help you earn some extra money, why not, right?
But at the same time. Acorns is not the best deal in town when it comes to investing your money, especially considering their fees and the size of expected investments you’ll be working with.
According to TechCrunch,
On average, users are investing $3/day in roundups alone, and portfolios have expected returns ranging from four to nine percent annually.
But here is how I see it.
Acorns charges you a $1 per month to gain access to a small portfolio of specific asset allocation ETFs. Ones you’d have difficulty accessing without greater funds. But a well tuned asset allocation portfolio should not be your priority with small figure investments.
My biggest problem with Acorns is that they are charging a very high flat monthly fee for investing a very small amount of money. You’re paying a dollar a month to invest a few dollars. Think about that.
And don’t forget to add to your calculations, the annual management fee -which is higher than what you’d normally pay for a passive index.
When you start thinking about it deeper,you’re paying a premium for using a shiny app on your phone. One that gives you the belief that you can invest well for your future by spending.
It’s my belief that it is cheaper to invest on your own. Just save the money you would put away into Acorns until you are able to open up a proper investment account. Heck, you can even invest in the same ETF’s that Acorns does and bypass their management fee. Because after all, you’re investing to make money for yourself, not for someone else.
I’m also against giving up my banking information to use the Acorns app. You need to provide your bank account log in information before you can even test or play around with the app. And even though Acorns claims that nothing is stored, in this day and age, I like to avoid middleman interactions. You never know. Who would have guessed that hackers would have gained access to nude celebrity pictures, or gotten access into the servers of major retailers like the Home Depot and Target.
Mistakes happen, and inserting another party into your financial transactions may be opening the door to something unexpected.
I advise to err on the side of caution.
My Take Home Message
When your portfolio is small, you should be focusing on finding the lowest fees, and not on perfectly tuned asset allocation – which Acorns is targeting. Using Acorns is only worthwhile if you can not invest in any other way. And chances are you can.
Since writing this post I’ve found an excellent alternative to Acorns with a much lower fee structure. Betterment.com. It works in a similar fashion to Acorns – it invests your money into a diversified set of ETFs. But the management fee is only .35% annually for balances less than $10,000.
The catch is you have to add a minimum of $100 per month to your portfolio to avoid a $3 monthly penalty. But to me that isn’t really a catch. You shouldn’t be investing your money if you can’t afford to put away $100 a month. Stay tuned for a review of Betterment in the near future too.
Acorns has changed their fee structure for 2015 – see above section, “How Acorns Makes Money” for more detail. The changes make Acorns arguably a better choice than Betterment.com as the account management fees are now lower – .25% vs .35% for balances under $10,000.
That said, both services have their own merits and I recommend exploring both to see what fits you better.