Last week I wrote about WiseBanyan, which lets you invest in a basket of ETFs with no minimum opening balance. I remarked that it allowed starter investors to open a complete portfolio with as little as $100. Well, what about investing just 57 cents at time?
Acorns is a new smartphone app that lets you invest your “spare change” into a diversified ETF portfolio of stocks and bonds. For example, if you bought something for $10.43, the Acorns app will “round up” your purchase to $11 and invest $0.57 into a brokerage account. The idea is that these small investments will make it simple and easy for folks to start saving and investing. Thanks to reader Steven for the tip.
How does it work? You’ll need to provide them:
- Your personal information (name, address, SSN) because this is still a real SIPC-insured brokerage account underneath.
- Your debit or credit card login information (so they can track your transactions and calculate round ups)
- Your bank account and routing number (so they can pull money into your investment account)
The app scans your transactions, calculates the round-ups, pulls that money from your checking account, and automatically invests it for you. You can also make one-time deposits or schedule recurring deposits on a daily, weekly, or monthly basis. The app also tries to identify “found money” like rebates and rewards which it encourages you to also invest. YouTube video demo:
Fees. There is an account fee of $1 per month and a management fee of 0.25% to 0.50% of your investment annually. (Specifically 0.5% annually for your first $5,000 and then 0.25% annually for anything over that.) No fee on $0 balances. See fee estimator for detailed calculations.
Withdrawals are free, but you may incur capital gains on which you’ll owe income tax. I don’t know if they will support asset transfers via ACAT.
Portfolio details. You can choose one of five target portfolios, ranging in risk level from conservative to aggressive. Mostly standard Modern Portfolio Theory fare, not surprising as their “Nobel Prize-winning economist advisor” is Harry Markowitz, who is a paid consultant.
All portfolios are constructed using the following six index ETFs:
- Vanguard S&P 500 ETF (VOO)
- Vanguard Small-Cap ETF (VB)
- Vanguard FTSE Emerging Markets ETF (VWO)
- Vanguard REIT ETF (VNQ)
- PIMCO Investment Grade Corporate Bond ETF (CORP)
- iShares 1-3 Year Treasury Bond ETF (SHY)
Fractional shares are used. Dividends are reinvested. Rebalancing happens automatically. Their asset allocation has much in common with most other automated portfolios, although it is probably one of the more different ones that I’ve seen in that you have no exposure to any stocks from Developed European and Asian countries like the UK, Japan, or Australia.
Availability. Currently available on iOS 7 or higher. iTunes download link. Android and web application “available soon”.
My thoughts. My first reaction was… that it was a great idea. I used to participate in Bank of America’s Keep The Change program, which is similar in that it also rounds up your BofA debit card transactions to the nearest dollar but instead moves the money into a BofA savings account paying essentially zero interest. Acorns takes it further by letting you use any bank and any debit or credit card, and also lets you invest it for potentially higher returns.
In addition, I agree that Acorns will lower the psychological barrier to investing because you don’t even have to commit to $25 a week or $500 a month. You know if you can afford a gizmo or meal at $15.66, you can afford it at $16, so why not invest that spare change? The hurdle can’t get much lower than that.
At the same time, we have to be realistic. With this model how much you save depends entirely on how many purchases you make, with a theoretical average of 50 cents saved per transaction. Even buying five things a day times 50 cents is $2.50 a day or $75 a month. It’s good as a kickstart, but not nearly enough to fund a retirement.
If you want to look at it purely mathematically, a monthly fee of $1 taken out of a $75 investment ends up being like a front-end load of 1.3%, in addition to the ongoing 0.25% to 0.50% management fee. Or you could just look at a buck a month as something you’d otherwise blow on some Candy Crush Saga app.
It bugs me when people call it a “piggy bank” when it isn’t. A piggy bank means you put in a quarter, and you can take out a quarter later on. A piggy bank is a bank savings account. Acorns on the other hand is a long-term investment account that you have to be ready not to touch for at least a decade. Sure the “expected” return is 4-9% but you have a good chance of a permanent loss of money if you withdraw within the next few years.
Finally, will people will keep large amounts of money in this little smartphone app for years and years? Maybe. My bet is that they are eventually bought out by a larger firm in the future (or someone just straight-up copies the idea).
Bottom line: Neat idea, very nicely-designed app. Worth a try for those that need a nudge to invest.