People often think that it takes big bucks to be an investor. In fact, despite wanting to invest in the stock market, 38 percent of Americans say they don’t make or have enough money to get started, according to a recent survey by personal finance site GOBankingRates.
But with the rise of micro investing and fractional investing, it’s now possible to get going with as little as $5. And there are many benefits to beginning to invest early, even if you only have a small amount of cash to do it.
What is micro investing?
Aptly named, micro investing is investing in super small increments, made feasible by the ability to buy mere fractions of shares. That makes highly priced stocks, such as those of big names like Amazon (around $1,760 a share, as of mid December) and Google-parent Alphabet (about $1,350 a share), accessible to investors who couldn’t otherwise afford to dedicate that much of their portfolio to a single share of any one company.
Even investing in mutual funds and exchange-traded funds, which are relatively more affordable than individual stocks, can demand sums of money that many regular investors might find intimidating, especially for those just getting started. For example, many mutual funds have required minimum initial investments of $1,000 or more. And ETFs can have pricey shares, too. Vanguard’s S&P 500 ETF (found in some Acorns portfolios) is more than $290 a share, and iShares iBoxx $ Investment Grade Corporate Bond ETF (also used in some Acorns portfolios) is about $128 a share.
Investing through Acorns, though, you can buy fractional shares of those ETFs and others with just your spare change. Here’s how it works: You set up your account and link it with a funding source (like your checking or Spend account) and the debit or credit cards you use to make everyday purchases. With the Acorns Round-Up feature, whenever you use your linked card, the charge gets rounded up to the next dollar amount. Once that change adds up to $5 or more, the money is pulled from the bank account you listed as your funding source and invested into your custom portfolio, a mix of ETFs designed to match your risk tolerance.
Is it worth it to invest in such small increments?
Absolutely. Any pittance stands to grow into a nice cash cushion, if given enough time, thanks to a little thing called compounding. That’s how your money is able to grow earnings on top of earnings on top of earnings, et cetera. So the sooner you start investing, even if you have just a little bit of cash, the more time you’re giving it to compound.
For example, let’s say you save $10 a week. After 10 years, you’d wind up with $5,200 if you simply keep your money in a good old-fashioned piggy bank. Not bad! If you use a savings account that pays 1 percent, compounded monthly, that would bump your total after 10 years up to $5,468. Pretty good! But by investing, and earning 6 percent (a reasonable expectation for average annual market returns over time) on that $10 a week, you’d rack up $7,115 after 10 years. That’s an extra $1,915 just for putting your money in a different place. Totally worth it, right?
To be clear, though, investing $10 a week or only your spare change may not be enough to fully fund major long-term financial goals, such as your retirement, even with decades of compounding to work. But it’s a good start. And hopefully, just getting started can show you how easy investing can be and motivate you to keep it up and to save and invest even more as soon as your budget allows.
But isn’t investing risky?
Yes, investing does require taking on risk. But not investing can be risky, too. One of the biggest threats to your uninvested savings: inflation. The current inflation rate of about 2 percent, according to InflationData.com, means that even the money you “safely” put into a savings account is likely losing purchasing power while it sits. (Remember that even savings accounts are offering an average rate of just 1 percent, according to Bankrate.) Investing is your best bet at beating inflation over the years.
Of course, this isn’t necessarily an either-or situation. For your overall financial plan, experts advise setting money aside for both savings and investing. Typically, you want to have an emergency fund and other cash you expect to need within the next few years accessible in a savings account. Any money you can put away for longer can be invested.
Within your investment portfolio, being well-diversified can help minimize risk. That means spreading your cash out across a variety of investments that offer different levels of safety and potential returns. On the safer side, you have cash investments (like money-market funds or certificates of deposit) and bonds, and on the riskier but potentially more rewarding side, you have stocks.
And even within those broad categories, you want to diversify more narrowly, too. In the stock portion of your portfolio, for example, you should consider buying both foreign and domestic stocks, as well as companies of different sizes and in different industries. Among your bonds, you want picks from different types of issuers (i.e. government and corporate) and with different duration levels (i.e. maturing in the short-term vs. the long-term). Mixing it up like this boosts the odds that you’ll always have at least one asset winning at any given time.
With just a small amount of money to invest, being well-diversified was once a big challenge. That’s why micro investing and fractional investing is such a game changer, making diversification accessible to the masses. Taking advantage of this relatively new possibility using Acorns or other similar financial services means you can get started with investing sooner and reach all your financial goals earlier.
Investing involves risk including loss of principal. This article contains the current opinions of the author, but not necessarily those of Acorns. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.