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Money School: Microinvesting

A fun topic in personal finance of late has been the rise of microinvesting sites. 

These are services that connect to a bank or credit card account and round up your purchases to the nearest dollar, then invest that difference in one of a range of ETF portfolios. You can make a one-time investment of an amount of your choosing anytime you like, as well as set up recurring investments on a regular monthly or weekly schedule. 

There are lots of interesting benefits to this and some things to be aware of. 


  • It's automatic. There's an undeniable behavioral aspect at work. It all happens in the background. And you don't have to constantly make the decision to transact - that friction "costs" in the sense of you maybe being distracted and not pulling the trigger one day, or you being spooked by a headline and not pulling the trigger one day.

  • You don't really "feel" the pennies leaving your account and it adds up quickly. That's good because it drives home the impact that small changes can have on your long-term view, especially for younger savers. It can be daunting to think about how much money you will have to save for retirement when it's 40 years away. But starting early, being consistent, and staying out of the way has an enormous impact. Seeing the small amounts add up can lead to positive reinforcement where you will want to do more.

  • It's cheap! An obstacle to getting started with investing is that 1) you usually need to have a few hundred dollars, at least, to open an account, and 2) you can incur a per-transaction cost. Microinvesting sites charge you a nominal per-month fee instead of per-transaction charges (and some are completely free).  

  • Some apps let you connect to retail shopping sites and earn a bonus when you make a purchase

  • You can even have retirement accounts! This can be a con though. 


  • It's not meant to be your total investment solution, unless you regularly add more. While the power of compounding of even small amounts over a long period is undeniable, it won't be enough to retire on

  • Some of the investment options can be complicated. If the idea is to just get started, then the portfolio should be as simple as possible: an assessment of the investor's risk tolerance - which shouldn't just be a question of how the investor themselves would describe it, since it's subjective - and the resulting asset allocation to broadly diversified ETFs. But some of the sites allow the investor to choose their theme, like green investing or robot manufacturers or anything they think might be interesting. That can be fun but it also encourages practices (like market timing and stock picking) that have historically been shown to work against the investor in the long term. It also encourages the idea that you "should" be knowledgeable about what makes a particular sector or theme better or worse than others. This isn't true and not where you should be spending your finance-dedicated mental energy. Stick with the simpler, more broadly-diversified ones

  • While you can have an IRA on these platforms, I'm not so sure you should. The question of how much you can and should contribute to a tax-advantaged account can be complicated by whether you have access to a retirement plan at work, how much you make, how much your spouse makes, etc. Unless you are very sure about your ability to contribute, I would stick with a regular taxable brokerage account since those are not constrained by anything. 

Overall, I think these are a pretty useful addition to the personal finance landscape, if they are used correctly: as part of your overall investment strategy, where they are not taking the place of appropriate-for-you retirement contributions. You will almost undoubtedly save more money from automating the process than you would otherwise, the costs are very reasonable and the options can be very good. Just like with any other investment, don't do it if you're not ready to leave the money there for a long time, because ultimately, even the best-laid investment strategy can't outrun an emotional decision. 


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