Among younger investors, a perceived lack of knowledge and a scarcity of cash often stand in the way of saving for the future. In a 2016 survey by investment app Stash, 69 percent of millennials surveyed said they found investing confusing while 41 percent felt they lacked enough money to invest.
The notion that investing requires large amounts of capital is being challenged, however, by the micro-investing trend, which was designed mainly to appeal to tech-driven young adults.
“Micro investing may seem like a new concept, but the strategy is good, old-fashioned investment advice. The only thing that’s new is how it’s executed,” says Lou Cannataro, a partner at Cannataro Park Avenue Financial in New York.
Apps like Stash and Acorns let users build a portfolio with their spare change using their mobile device. Considering that a recent Acorns study found 35 percent of adults ages 24 to 35 spend more on coffee than they save for retirement, finding the money to invest may not be as difficult as young adults believe.
[See: 10 Long-Term Investing Strategies That Work.]
Traditional investments often feature higher barriers to entry, and micro investing is a way around those hurdles, says Rhett Wood, an investment advisor representative at Retirement Solutions in Oklahoma City, Oklahoma.
“Many traditional investments have a minimum investment amount that can range from a few hundred dollars to thousands of dollars,” Wood says. “Younger investors don’t usually have a large lump sum to meet that minimum.”
Stash, for example, requires a $5 minimum deposit to open an account, while Acorns has no minimum deposit. Both apps allow you to make an initial investment with as little as $5. That, says Wood, can make a real difference in retirement outcomes for younger savers.
“To build up funds for the long term, people need to get in the habit of saving on a regular basis,” Wood says. “Investing even in small amounts is better than nothing.”
For example, assume that you invest $5 a day through a micro-investing app, which may be less than what you’re spending daily on coffee or lunch. If you invest that same amount for 30 years and earn a 6 percent annual return, you’d have just shy of $149,000 saved.
Michael Banks, founder of The Fortunate Investor, an investment and personal finance blog, says the incremental nature of micro investing is the primary allure for newer investors who want to venture into the market but have less money to get started.
“Micro investing is popular among young investors for the same reason as Twitter and Snapchat,” Banks says. “It allows them to invest in smaller, easy-to-process pieces.”
Banks says besides allowing millennials to invest in amounts they can afford, micro investing also offers an opportunity for their portfolios to grow without having to conform to the typical investment mold.
“Many of today’s young investors came of age in the wake of the 2008 financial crisis, leaving them distrustful of traditional investment strategies,” Banks says.
That’s supported by Fidelity Investments’ first-ever Millennial Money Study, which found that one-third of Gen Y-ers turn to their parents first for financial advice. Twenty-three percent of millennials said they trust no one when it comes to their money. The do-it-yourself nature of micro investing puts younger investors in control of their investment decisions.
Jennifer Streaks, a financial and lifestyle expert and author of “Thrive!…Affordably: Your Month-to-Month Guide to Living Your Best Life Without Breaking the Bank,” says the convenience micro investing offers particularly suits busy millennials.
[Read: Why Roth 401(k)s Are a Great Deal for Millennials.]
“The biggest advantage to micro investing is consistency and the ability to set it and forget it,” Streaks says, noting that with an app like Acorns, “you can attach a debit card to your account and your change is funneled into an investment automatically.”
Streaks says younger investors should be prepared to let the money sit and grow to avoid triggering the capital gains tax from selling an investment. The higher short-term capital gains tax rate applies to investments held less than one year, while the more favorable long-term capital gains rate kicks in for investments held a year or more.
Micro investing can be a good way to ease into investing, but Wood advises that millennials shouldn’t discount other investment options.
“While micro investing might appeal to younger investors, that age group should not overlook 401(k) or individual retirement accounts,” Wood says. “Many employer-sponsored plans offer matching contributions. If your company offers this, make sure you’re putting in enough money to get that match.”
According to the Society for Human Resource Management, 42 percent of companies now match employee contributions to qualified retirement plans dollar for dollar up to a certain amount. Fifty-six percent of plans require employees to contribute 6 percent or more to their plan to receive the employer’s full matching contribution.
Even if you’re only contributing the bare minimum to get the match, that can affect the size of your portfolio significantly over the course of your career. A Financial Engines study found that employees who don’t save enough to get the match miss out on $42,855 in what’s essentially free money, when the value of the match is compounded over 20 years.
Besides the matching contributions, saving in an employer’s plan also yields the benefit of tax-deferred growth. If an employer’s plan isn’t available, a traditional or Roth IRA is another tax-advantaged way to save. These accounts may help offset any taxes on micro investments in a taxable account.
Cannataro says investors who go the micro-investing route should know how these investments align with their financial objectives.
“Just as important as investing is understanding how the funds are going to be invested in terms of asset allocation, diversification and taxation,” Cannataro says.
Micro-investment apps typically feature portfolios of exchange-traded funds, which include a mix of stocks and bonds representing various asset classes. Investors can choose which portfolio they’d like to invest in, based on their risk tolerance. Before adding micro investments to your portfolio, do your homework and make sure they’re a good fit for your investment strategy.
[See: 7 of the Best ETFs to Own in 2017.]
“If a person is considering micro investing, it is important to do the research to find out what the investment options are, what type of advice you will receive and what fees you will pay,” Wood says.
Banks says younger investors who are considering micro investing also need to keep the pros and cons in perspective.
“Micro investing is a good option for those who don’t have the funds for more traditional investments,” Banks says. “It’s not a replacement for a 401(k) or IRA, but it’s a good introduction to investing and creating healthy financial habits.”
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Micro Investing’s $5 Minimums Let Millennials Start Saving Early originally appeared on usnews.com
