Building an investment portfolio with pocket change

The concept of investing in shares or other investment products can put a lot of people off. It can be difficult to understand, the share market is intimidating, and investment brokers generally only deal with people who have a lot of money to invest.

Micro-investing came about as a way to help more people get into investing without all the complexities that usually come with it. There are quite a few providers in Australia now, and they’re all app-based with very low minimum investments (or no minimum at all). Micro-investing is often referred to as ‘pocket investing’, because all you need is a phone and some spare change to get started. It’s become popular with younger people in particular as an alternative to high-interest savings accounts.

Here’s how it works.

A new approach to investing

Micro-investing is simply an investment platform that allows people to invest small amounts of money into specific investments (usually exchange-traded funds or managed funds) while taking care of all the admin involved with investing.

While each provider does things differently, this is what they have in common:

  • Low minimum investment. Some providers let you open an account with no money at all. Others have a tiny minimum investment amount (as low as $5).
  • No need for an investment broker. The investing is done for you automatically, and you can make changes yourself in the app.
  • Choose investments that fit your risk profile. Similar to managed funds, you can choose a portfolio that matches the level of risk you’re comfortable to accept.
  • Easy to understand. Because these products are generally aimed at beginners, they avoid investment jargon and use language that everyone can understand.
  • Low cost. The fees the providers charge (either as a monthly account fee or a brokerage cost per transaction) are a fraction of what you’d pay using an investment broker.
  • Keep track of your balance. The benefit of being app-based is that you can check your balance at any time.
  • Simple tax information. Most people need to declare dividends and other investment interest in their tax returns. Micro-investing apps compile all the information for you so you can pass it straight to your accountant.
  • Accessible to everyone. All you need to do is download the app, set up your account, and make some decisions about how to want to invest.
  • Invest as often as you want. You’re not locked into investing in any particular way. You can choose to add money to your investment whenever and however it suits you.

One of the golden rules of investing is to take advantage of the compounding effect to grow your money faster. In other words, you’ll earn market returns not just on the money you invest but also on the growth that money generates.

If you invest regularly and also reinvest the regular dividends you’ll earn from your investments, then compound interest will be even more powerful.

Investing regularly also allows you to use a strategy called dollar-cost averaging. This is a way of reducing market timing risk by investing regularly over a long period of time rather than investing a one-off lump sum. The price of investments listed on the share market will constantly go up and down, so investing regularly helps you take advantage of these price fluctuations.

Investing is never risk free

Just because you’re investing with smaller amounts doesn’t mean you won’t be exposed to the same risks as other investors. Your money is still invested in the share market, and that means you will see your balance move up and down as a result of market volatility from time to time. That’s why it’s important to choose a portfolio with a level of risk you’re comfortable to accept. Generally speaking, the higher the potential return, the higher the risk of losses.

As with any type of financial product, it’s important to do thorough research and understand any fees and costs that apply. Read the Product Disclosure Statement before making any financial decisions so you know what you’re getting into.

If you have any questions about investing, your financial adviser is the best person to speak to. They can help you work out what makes sense for your particular financial situation and what type of investments will help you meet your financial goals.

Source:  Colonial First State

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