The pros and cons of micro-investing


Published on

Micro-investing can be a beneficial way to invest if you only have a small amount to invest or if you want to start small to get used to the volatility that comes with investing. However, like all investments, it's not without its drawbacks.

Micro-investing is as it sounds: investing small or 'micro' amounts. It involves buying units of a managed fund. The fund pools everyone's money together and invests it on behalf of the group.

Instead of owning shares directly, you own units - which represent a percentage - of a pool of money. That pool of money is invested by a fund manager in a diversified portfolio of assets.

the pros and cons of micro investing by tashinvests

Examples of micro-investing platforms that can be used to manage investments include Pearler Micro, Raiz and Spaceship.

Let's break down the pros and cons of micro-investing to help you determine whether it may be the right investment strategy for you.

Pros of micro-investing

Good for learning

Micro-investing apps usually have low minimum investments, such as 1 cent or $5.

Unfortunately, though, it's hard to find out how you will react to things like market crashes without having some skin in the game and experiencing it.

Micro-investing allows you to start investing with small amounts so you can learn as you go and get more comfortable with investing and market fluctuations.

Lower minimums

When micro-investing, you can usually start with just $5.

Traditional brokers or investing platforms often have a minimum investment amount ranging from $100 to $500.)

Plus, you need to consider the impact of brokerage fees on your returns and ensure you are investing enough in each share parcel to make the brokerage fee worth it. (The general rule is to keep brokerage fees under 1% of the transaction cost.

Less paperwork and consolidated tax reporting

The goal of micro-investing apps is to make investing easy and accessible. As you don't own the shares directly, you are spared the paperwork involved in CHESS (Clearing House Electronic Subregister System)-sponsored ownership.

Micro-investing apps often offer a tax report or summary. Some may even tell you which columns on the ATO website to put each number into when reporting your investment earnings at tax time.

Good for building habits and automating

Micro-investing apps are a good way to start automating your investing and build the habit.

Just as with exercise, you need to make a consistent and ongoing change when investing, and micro-investing apps make this easy to do. Remember that investing even $5 a day can quickly add up.

Cons of micro-investing

Ongoing management fees

Instead of paying a one-off brokerage fee, you'll often pay an ongoing management fee.

While this may work out better for small investment amounts or short-term time frames, you'll need to work out what will be more cost effective in the longer term if you plan on holding your investments for 10, 20 or 30+ years.

No direct ownership

Similarly to the custodian model, with micro-investing, you don't have direct ownership of your shares. Therefore if the company collapses, getting your money back can be a bit murky.

Limited options

Micro-investing apps usually have three to eight investment options. (This can also be seen as a pro, because it helps to reduce analysis paralysis and keeps investing simple. It is also easier to avoid the distractions of the latest 'hot' penny stock.)

Can't be transferred without triggering a sale and potential capital gains

At the time of writing, only Raiz offers the option of transferring out, with some terms and conditions.

The other micro-investing apps don't currently allow transfers. This makes it harder to change brokers as your investment strategy and plan develops, with the only option being to stay and continue paying ongoing management fees or sell and be subject to capital gains tax.

Can't transfer to your own HIN (holder identification number)

If your strategy changes and you do want to invest in products that will allow you to hold on a HIN but don't have a minimum of $500 to invest, you may want to focus on saving in a high-interest savings account until you have enough money, and then start investing in ETFs (exchange-traded funds).

Ultimately, knowing your timeline, risk tolerance and what your goals actually are will help you decide what to invest in. It's important to know the amount you want to invest before deciding which investment option and platform are best for you.

This is an edited extract from How to Not Work Forever by Natasha Etschmann and Ana Kresina (Wiley $32.95). Enter now for your chance to win!

Get stories like this in our newsletters.

Related Stories

Natasha Etschmann is a personal finance educator and author of How to Not Work Forever. Natasha creates personal finance content for hundreds of thousands of followers across her @tashinvests handle on Instagram and TikTok, as well as through the Get Rich Slow Club podcast which she co-hosts. Having trained as an occupational therapist, Natasha holds a Bachelor of Occupational Therapy (Honours) from Curtin University and a Cert IV in Finance and Mortgage Broking. She is an Authorised Representative of Guideway Financial Services Pty Ltd (AFSL 420367).