Micro-Investing: what it is and how it works

Key Takeaways

  • Micro-investing platforms lower the barriers to entry for investors, automating and simplifying the process of allocating small amounts of cash to public market opportunities.

  • Focus on savings can have a positive, educational effect on consumer behavior, pushing otherwise reluctant investors to increase their savings and potentially collect some returns.

  • However, micro-investing funnels money towards public equity markets, which can be volatile and overcrowded, with limited opportunity for diversification.

What is Micro Investing?

Micro-investing allows one to put aside small amounts of cash to purchase public equity, exchange traded funds (ETFs) or other widely accessible public market assets.  Investors tend to use dedicated mobile apps or investment platforms, which employ behavioral finance techniques to push them to invest their “change.”

Rounding up everyday purchases to the nearest dollar and depositing the difference in an investment account is indeed the foundation of the concept of micro-investing. As an example, when a consumer goes to the grocery store and makes a debit card purchase of $62.17, a micro-investing app will round that total up to $63 and deposit the remaining 83 cents into an investment account. 

Done consistently, this can potentially build up savings and guide people toward investing, which can be educational and positive for the broader society. 

Pros of micro-investing

Lowers the barrier to entry – People of average means are almost always locked out from exposure to successful Wall Street firms when the price of a share is too high. To counter this, micro-investing allows fractional shares ownership, which can be gradually built up to a full position over time. 

Snowball effect – Micro-investing can potentially “pocket change” into an investment asset. 

Automated savings and investments – Maintaining consistency is easy because the process can happen automatically. It also overcomes the inertia people might experience as they do not have to give an input in order to transfer money to their savings account. 

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Cons of Micro-Investing

It is micro-investing – While micro-investing can force more people to save more money, it should only be seen as a gateway, and can’t be a long-term solution. 

Limited investment options – Investors are largely restricted to publicly traded instruments, which limits their ability to diversify. 

Platform fees – While they remove barriers to entry, micro-investing platforms charge substantial service fees. The exact amounts vary from platform to platform, but the $3 monthly average can take a serious bite from the account of someone who can only afford small allocations. 

Relies on spending – While  rounding expenditures up to the next dollar and investing the difference is an attractive proposition, investors must spend money to trigger the mechanism. 

Conclusions

The primary purpose of micro-investing platforms is to facilitate the investment of small amounts of money on a consistent basis. Their strongest feature is the ability to get people accustomed to the process, as well as encouraging saving. In some cases, they help investors choose appropriate investment instruments by educating them on risk tolerance. 

Micro-investing actually worsens the issue of “overallocation” to public markets, potentially funneling an increasing amount of money to overcrowded investment instruments such as – for instance – tech stocks. That, in turn, can exacerbate market swings and lead to a potentially substantial loss of portfolio value if, for instance, interest rates increase. 

While not suitable for micro-investing, Yieldstreet’s alternative investment opportunities – which include real estate, digital assets, private equity and art can help achieve increased diversification, offering exposure to risk factors and return drivers that can be less correlated with the ones that move public markets.

Learn more about the ways Yieldstreet can help diversify and grow your portfolio.

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