Is an Investment App a Good Option for You?

Aug 31, 2020
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Financial experts have long- advised a solid investment in financial securities as one of the most effective ways to meet your financial goals and build wealth over time. In recent times, this has become increasingly easy to do, as user-friendly investment apps have made investing in stocks, bonds and other tradeable financial assets considerably more accessible. We’ve broken down the basics of how these tools work to cover their major benefits and limitations, and provide a better sense of whether they may fit into your overall financial strategy:

Pro: You don’t need to be knowledgeable to start investing

Micro-investment apps that allow you to invest small amounts of money and guide you toward sensible choices customized to your priorities have taken much of the groundwork out of investing. For instance, the highly popular Acorns app completely eliminates the need to choose and trade stocks yourself. Instead, the money you invest is placed in a portfolio of exchange-traded funds (EFTs) designed to maximize your potential return for your selected level of risk. In simple terms, EFTs are broad holdings of stocks or bonds that often replicate an asset class or index like the S & P 500 or Dow Jones Industrial Average. In addition, Acorns will automatically rebalance your portfolio as needed according to market shifts.

On the other hand, an investment app like Stash gives you the latitude to choose your investments from a wide selection of recommendations based on your answers to a series of questions about your personal financial situation, preferences and personal interests. A unique feature of this service is the opportunity to buy smaller, affordable “fractional shares” from stocks or funds priced at more than $1,000 per share.

For seasoned investors interested in more active trading, plenty of options are available. One is the commission-free provider Robinhood, which requires no minimum balance, nor a monthly fee (unless you want to access their margin-lending service). You can use Robinhood to invest in a wide spectrum of financial instruments, from stocks and options to EFTs and cryptocurrencies.

Pro: You can get started with very little resources

The micro-investment apps Acorns and Stash both have a multi-tiered investment program that start at a fee of only $1 per month. But one aspect that makes them so affordable, and so popular among young people, is that they allow you to invest after accumulating only $5.00 in your account.

For the sake of comparison, it is certainly true there are large mainstream brokerage companies that  offer zero or low account minimums and no maintenance fees, and even no trading fees for certain securities. However, these firms generally do require that you deposit a significant amount of money before you can start investing. For example, Charles Schwab doesn’t charge fees to open or maintain an account. According to Money magazine, it even provides free online trades for stocks and EFTs. But as The Motley Fool explains, you’ll need to fund it with $1,000 to “do anything with it.”

Pro: They are super easy to use and make investing fun:

Fintech companies have made it quick and simple to accept one-time deposits as well as recurring transfers when funding your investment accounts through their apps.

But some also use convenient and innovative features like “Round Ups,” which add another interesting layer to your investment strategy. Once you opt in, this function automatically rounds up purchases you make on your linked debit or credit cards to the next dollar and deposits the difference in your investment account. For instance, if you pay $ 3.25 for a coffee drink using a linked card, the app will squirrel away the remaining 75 cents for your investments. Acorns even allows you to increase the contributions you make every day using “Round Ups” by setting it to multiply your spare change investment by up to ten times the original amount. Using the $3.25 coffee drink example, this would mean that $7.50 would be rolled into your Acorns account from this one transaction (.75 x 10).

Pro: You can get access to special perks such as bonus investments

Proprietary rewards programs like “Found Money” from Acorns and “Stock-Back” from Stash offer  opportunities to boost your investment account from the purchases you make. Shop at a partner brand of Acorns with a linked debit or credit card, and the merchant will put a percentage of the purchase  back into your investment account. Acorns has 350+ Found Money partners, including brands like Airbnb, Chevron, Sephora, Walgreens, Walmart, Macy’s, DirecTV and many other favorites.

Con: You’ll need to evaluate whether they make sense for you once your account reaches a certain threshold

Once your balance climbs above a designated amount, you may start paying higher fees for the use of investment apps. You’ll want to compare these fees to those that you would pay elsewhere, because you may get more competitive rates with another brokerage firm. However, you may also find that you’re just fine leaving your investments as they are. As an example, Acorns has a transparent pricing model that changed in 2018. Prior to this time, Acorns customers with a balance of $5,000 or more paid an asset-based fee of 0.25 percent per year. Under their new system, pricing is largely based on the types of accounts you have (e.g. taxable-investments versus tax-advantaged accounts) and whether you want to establish custodial accounts. Until your account reaches $1 million, Acorns does not charge transactional fees, commissions or fees based on assets.

Con: They could give you a false sense of confidence when you’re really not investing aggressively enough

If you’re mid-career and haven’t yet started investing for the long-term, simply rolling over your spare change into an investment account isn’t likely to help you quickly catch up in terms growing your retirement nest egg and protecting your buying power from inflation down the road.

However, many investment apps have a variety of options for tax-efficient retirement accounts, from  ROTH and SEP-IRAs to traditional IRAs. The point is that you would be well-advised to make larger recurring payments when it comes to planning for your retirement. Both Acorns and Stash offer retirement accounts for a couple of dollars more per month than their starter-level programs. In addition, you may want to look into services like Betterment or Wealthfront, which were both named among “The Best Investment Apps for Beginner Investors” in an August 10, 2020 article published by the editors of New York Magazine.

But when it comes to something as critical as your retirement fund, it’s advisable to seek guidance from a qualified professional before you start moving your money. There are many factors that should be considered when opening a tax-advantaged retirement account, such whether your employer matches contributions to a 401 (k) or 403 (b), your contribution limits, the fund diversity, etc. Find an overview from NerdWallet in “IRA vs 401 (k): How to Choose.”

Con: You may not get the full picture of your financial outlook

While investment apps continue to evolve, keep in mind that not all provide the same level of advice and guidance, especially when it comes to factoring in important considerations like your debt levels, tax situation and other assets. For most people, it is still no substitute for sitting down with a financial planner who can help you define and set your financial goals, and help you determine those steps you can take to build your wealth, minimize tax liability and plan for your future security.

In the final analysis, the assortment of investment apps on the market in 2020 can provide a helpful means to give beginners practical experience in investing, and can be beneficial for those who want an easy approach to putting their money to work in the securities market. However, it’s important to maintain perspective about how their individual fees will impact your earnings, and not to get complacent about moving your money to an investment vehicle that will provide higher returns if it is warranted as your investments grow. Moreover, it pays to keep in mind that when it comes to investing in the stock market, it will generally serve you well to play the long game. Not only can you benefit from tax advantages when it comes to capital gains, but the longer your money is invested, the more you can benefit from compounding and growth.

This information is intended as an educational tool for your autonomous use and should not be construed as investment, legal or tax advice. For advice about your individual financial circumstances, it’s advisable to seek out a qualified professional.

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