Acorns and Robo-Investors
My friends told me about this ‘great’ app they found called Acorns back in early 2017. They mentioned how great it was that the program rounds up all of their credit card purchases to the nearest dollar and invests the change.
My first question was something along the lines of why not just put the money into an investment account themselves? As more and more people I knew started using the app to invest and build their portfolio, I started to look into it myself.
Specifically, I am going to focus on Acorns here, but there are other apps targeting the same groups although not all offer the round-up feature so prominent in Acorns.
As a background, the app offers a few fund choices to the user that range across the risk spectrum. All of these funds are managed, but ultimately split their money between various other commercial funds including Vanguard. This means that the app acts as a middle man taking away money in fees that you could just as easily put into those same Vanguard funds yourself.
I would love to say that the pros of this app and ones like it are that it is good for young investors who don’t really know what they’re doing with their money, but that doesn’t seem to be the case. At a management fee of $1 per month plus the (albeit very low) fees associated with the Vanguard funds, unless you have a decent amount of money in your account, it’s going to be hard to come out on top. Young investors who are just using the roundup feature aren’t going to come out on top.
For example, if you have $500 in your account (an amount that would take you a long time to reach at less than a dollar per transaction) and paid $1 each month, you would have paid roughly 2.4% of your account balance in their membership fee by the end of the year. Let’s put that another way. If you have $500 and get the average 8% per year gain (since 2010 for most of these portfolios mind you) then you could be looking at $540 at the end of the year. $12 is going right back to Acorns meaning you’re giving them back 30% of your gains.
Obviously that percentage decreases as you pile more money into the account and the fee changes to .25% of your account balance once you hit $5,000. Also worth noting is that they offer it to college students for free; unfortunately, none of my friends with the app are college students.
The absolute killer with this app strikes a little less obviously. Remember that this app is rounding up credit card purchases for you. As reported by Time, 65% of credit card users carry a balance on their cards meaning they don’t pay them off in full like Dan and I advocate. If you are using the Acorns app and not paying your credit cards off in full, that means you are FINANCING your investment. You’re earning an average of 8% on the investment before fees, but paying upwards of 15% on your credit card charges!
This is absolutely ridiculous, but not easily spotted or noticed by the financially uneducated.
My advice to you is this: if you are really having trouble investing, set up automatic payments from your bank to your broker and send it directly to a target retirement account or a market index fund. You don’t need fancy apps and programs to take extra money away from you. Acorns’ portfolios follow the market and make roughly the same movements (around 95-96% consistency). Continue educating yourself and saving money!
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