There’s a bunch available at the moment, and while we’re all for smart investing, many of these types of investment platforms aren’t necessarily smart.
You’ll have seen the ads: “Invest your spare change!” or “Sacrifice your morning coffee!”, which isn’t altogether bad advice, but let’s be clear – you’re paying for a service even if it’s veiled to feel like it doesn’t cost you, and in some cases may cost you more than it makes you.
As a test we created an account with one of these apps (we won’t say which one).
We started by adding $50 to the account initially and set it to “top-up” on a “moderately aggressive” investment strategy. The top-up implies that if you spend, for example, $4.90 on something with your linked account, it’ll invest the 10c difference (to $5) for you. Seemed ok.
Quickly however, we saw various top-up amounts come from our linked account, up to $9.90 in one instance… On the surface and even after some digging, it wasn’t clear how to set a maximum top-up amount leaving us with the feeling we weren’t in control of the investment options, or indeed how much was being invested. We removed the “top-up” option, but left the money in the investment account.
Over the course of a fortnight we monitored the returns and through some ups and downs we managed a gain of about $1.00. Pretty good if you compare with bank account interest rates, especially over that short period.
With small quantities in the investment account you quickly go backwards thanks to monthly fees … that’s right, you’re paying for the service. $1.99 per month means our earnings were gone and some of our capital.
Now, if there was $500 or more in the account the monthly fee wouldn’t overshadow the gains, BUT it does reduce the comparable earnings if you were to consider investing the same amount elsewhere (high interest bank accounts or even property for example).
It should be mentioned that this IS a trading account, so you’re at the mercy of markets and the investment strategy you choose just like most other investments. That is until you compare it with property investments, where the market isn’t quite so volatile. You’re also trusting the investment algorithm/app owners to choose where you’re money goes …
Shutting down the account with around $75 in it took a few days, but was ok to do.
All in all, the experience cost us about 0.50cents as the market took a dip before we removed the money.
We thought it worth offering you some tips to takeaway:
1: Tax payable.
If you plan on using an app like this – especially if you invest large amounts of money beware that there is Capital Gains Tax and potentially other taxes you’ll be liable to pay if your investment makes money.
Make sure you check with your accountant or indeed a financial advisor before diving in.
2: The investment app isn’t a savings account.
If you pile all your money into it and intend to use the investment amount as a deposit, think again…
In addition, if you need to access your money like you would a savings account you’ll have some hoops to jump through, a bit of a wait to receive it and on top of that, may have to pay tax on the amount you’ve earned.
3: Read the fine print.
Most of these apps have monthly fees, some have transfer fees and others make it difficult to delete your account.
Make sure you know everything you can about the cost and workings of it before sending a dollar – You worked hard for that money, don’t throw it away.
Do the people behind the app have a good investment history? You want the best mechanic you can afford, or the best doctor even, so why just put your money in the hands of someone who may not be all that experienced with investing?
4: Think. Then think long term.
You’ve probably gathered we’re not huge fans of these investment apps, and with our background and experience that’s worth considering.
Firstly, if you’ve got debt of any kind it’s worth looking at improving your position on that front first – it may even free up extra money for you to invest. This includes home loans, personal loans and credit cards. Doing this will truly benefit you long-term.
For example, if you’ve had the same mortgage for more than two years you could stand to save hundreds of dollars per month or more if you assess your options. That money could be used to purchase an investment property or simply put into a safe, high interest earning bank account with no fees.
Manage your debt, increase your cash flow and invest right. Investing in shares and other kinds of trading is great, but don’t rush into it or expect a large, quick return … Thinking long term is how you’ll build real wealth.