How to Invest Money - Micro investing with acorns app

“Set It and Forget It” with Micro Investing

Update: Acorns Australia is now called Raiz.

Investing your money can seem daunting at first, but it really doesn’t have to be too difficult or complicated, nor do you have to worry about deciphering copious amounts of boring financial jargon.

In fact, with today’s technology, you can pretty much adopt a “set it and forget it” strategy, where your investments are completely automated, and you don’t have to worry about the intricacies of stock-picking.

Introducing Acorns – An Easy-to-Use Micro Investment App

If you’d like to get your feet wet with investing, I recommend Acorns (which I personally use), a micro investment app that has blown up in popularity since it was first released in 2012. There are a variety of apps on the market that allow you to do this, but Acorns is currently the largest and most popular company in this space.

The company markets itself by saying that it invests the change from your daily purchases, but since you have moi to explain it for you, I’ll give you a quick run-down on the process.

How Acorns Works:

  • The app connects to your bank account and tracks your expenses.
  • Every time you spend on something with a debit/credit card, it automatically rounds the amount up to the nearest dollar and invests the difference.
    • If you were to spend $12.70 on a meal, Acorns will deduct $0.30 from your account and invest it on your behalf.
  • You can also set recurring investments of $5 for example, to be invested into the market at your selected intervals, whether it’s weekly, bi-weekly or monthly, etc.
  • You could choose to make a one-off lump-sum investment of any amount.

Note that the minimum amount that you can invest is $5. So every time you spend on something, the rounded amounts are held until they add up to $5, upon which Acorns will then invest that amount into the market.

Long-Term Strategy, and Instant Diversification

It’s important to remember that it’s unlikely you’re going to make quick and large gains with micro investing. This is a long-term investment strategy, and works best if you can hold on to it for at least a couple of years.

The great thing about Acorns is that you are automatically diversifying your portfolio as Acorns splits up the money you invest into ETFs that comprise of various indices.

For example, in Australia, Acorns invests your money into Asian, Australian, European and American-based ETFs. In this way, your money is being diversified across a number of markets, which considerably lowers your risk.

The Benefit of Using Acorns:

  • It has a user-friendly interface
  • You can start investing with just $5; perfect for students and those who do not have a large disposable income or do not want to risk too much money at the initial stages.
  • Allows you to completely automate your investments
  • You can still apply theories like Dollar-Cost-Averaging (I explain this term below)
  • Allows you to withdraw your money at any time
  • It’s completely free if you sign up with a student email!

Here’s What I Recommend Doing

  • Once you have your account approved (usually takes a couple of days), you should set up recurring investments of a small amount that you can afford.
  • This allows you to take advantage of Dollar-Cost-Averaging, and also builds up your investment portfolio over time, leaving you with a chunk of money at the end of the year.
  • Setting up the recurring investments is easy, and once you’ve done that, your investments are completely automatic!

To learn more about Acorns, you can check out their website, or if you sign up with my referral link, Acorns rewards both you and I with $2.50 debited into our accounts. For the month of September, that bonus has been doubled to $5.

I also found an article on Investopedia that you might be interested in. It explains How Acorns Works and Makes Money.

Quick Dive:

Dollar-Cost-Averaging (DCA)

The term I used earlier, Dollar-Cost-Averaging, is a technique that investors use to average out their buying price. DCA involves investing a fixed amount of money, e.g. $25 a month, every month.

This allows you to average your cost, as you buy more shares when the market dips, and buy less shares when the market rises. Over time, your buying price will lie somewhere in the middle. The reason for doing this is because it is hard to time your investment.

For example, if you invest $100 in January, you have no idea what the market will do over the next few months. If could end up moving down and back up again (meaning you’ve lost precious buying opportunities as the market took a dip).

On the other hand, the market could continue on a long-term uptrend, and sure, your initial investment of $100 did grow, but you could have caught the upward trend by investing more money over time.

The idea of investing used to be this perplexing concept that seemed very far out of reach for the average person. The concentration of power was evident in Wall Street, monolithic banks, brokerage firms, and upscale investment houses. To make matters worse, placing trades used to be inconvenient and slow, and you needed to already be relatively well-off, as the capital requirements to get into the game were high.

Lucky for us however, the investment landscape is drastically changing. Investing is now more accessible than ever before with the advent of micro investing, discount brokers and regulatory changes to the system, which have significantly reduced costs for individual investors.

For the sake of transparency, this is not a paid endorsement, Acorns is an app that I genuinely like and think would be useful to you. I do however, benefit from sign-ups using my referral link, and it also gives you the same sign-up bonus of $2.50, or the promotional $5 for the month of September 2017 [Win-win for us both! ;)].

As always, drop me a line by sending me an email using the Contact page or leave a comment!


A Guide to Exchange Traded Funds

A Guide to ETFs: The Quickest Way to Start Investing

Quick note: This post is about ETFs, but before we get to that, I go on for a while to introduce some important concepts in investing. If you’re new to this, you might hopefully find it interesting and useful.

Alternatively, you can skip down to the section titled “A Primer on Exchange Traded Funds (ETFs)“. Let me know whether you enjoy this post and if you’d like to see more of these!

Let’s Talk About Risk, Bay-bee!

Many people shy away from investing their money because they’ve heard of how it can be very risky. First thing to note, investing is not gambling. Don’t get me wrong, there is a certain element of risk involved, but it’s calculated risk, and can be avoided to a certain extent.

High levels of risk-taking usually comes from not knowing what you’re doing, and taking advice from people who don’t have a solid grasp of how the stock market works. Don’t be like the proverbial Mr. Jones who lost all his money by placing uneducated bets on stocks based on neighbour Sam’s hot tip.

More people spend time painstakingly researching the kind of smartphone they buy than they would on performing the due diligence required when considering the purchase of shares. This exposes them to unnecessary risk, which can be greatly minimised by conducting the research and gaining a sound understanding of the company before making a decision.

Over the course of this series, you’ll find that in the finance world, risk has a slight but important distinction from our usual, everyday concept of risk. In financial parlance, risk is closer in meaning to “fluctuation” than exposure to danger.

The Market is More Predictable Over the Long-Term

One strategy which you can use to minimise risk is long-term investment. In the short-term (a period of five years or less as a rough guide), investments can be very risky as markets are volatile and unpredictable.

I’d like to draw your attention to the graph below (cheeky screenshot from Google), which depicts the movement of the S&P 500 index over the short-term period of a year.

As you can see, the market is quite temperamental and has a number of sharp dips throughout the time-frame. It is quite hard to predict where the market is headed. Compare this to the graph below, which depicts the S&P 500 since its inception.



From the graph above, you can see that although the market is volatile in the short term, over the long term the market always recovers and surpasses it’s previous peak. This makes long-term investment significantly less risky.

The market will generally continue the long-term upward trend as a result of inflation, rising income (especially in developing markets) and the growing population, in addition to other factors.

Think of investment as a long game, and not one in which quick profits are made.

Think of Investing in Terms of Purchasing the Entire Business

This next part ties in nicely with the concept of long-term investment. People who view investing as extremely risky usually think of the stock market as a very complicated lottery ticket. The idea is that you throw a stack of money at a company’s shares and hope that it rises in value. This is speculation, which is very high risk and not the same as investing.

Investing is quite literally the act of purchasing a portion of ownership in a company. Even though you may be starting out very small, it’s important to think of your investments as if you were purchasing the entire company or business.

This makes you ask important questions, such as, “Would I be willing to hold on to this business for at least 10 years?” or “Does this business make enough money to justify the asking price?”.

This will help you make far better decisions, and help you leave your emotions at the door.

I will get into more detail on this concept in a future post, but for now, let’s get back to ETFs.

A Primer on Exchange Traded Funds (ETFs)

Exchange Traded Funds or ETFs are simple to understand and extremely useful, especially to a new investor. Picking individual stocks can be very risky, as companies which seem very strong on paper can all of a sudden be wiped clean off the map (Looking at you, Lehman Brothers).

Applying the 80/20 rule to investing, the easiest and most effective way to start investing is to utilise ETFs, which although limited, can still provide you significantly higher returns compared to parking your money in a bank.

If you are new to investing, but would like to start with something relatively low-risk, ETFs are perfect. But first, what on earth is an ETF?

Think of it this way: If you combine a stock index (like the Dow Jones Industrial Average, the FTSE in London or the ASX 200 in Australia) and a regular stock which you can buy and sell, you would get an ETF.

Quick Dive

A stock market index is basically a weighted average of a set number of stocks. For example, the S&P 500 index in the U.S. is the weighted average of the 500 largest companies in the country.

An ETF basically tracks the movement of an underlying security. This just means that whenever the market moves up or down, the ETF follows in the same direction.

An ETF can be thought of as a basket containing a number of securities or shares. Imagine you had $10 with you, and the basket containing the securities you want costs $100. If you shared the total cost with others, you would be able to purchase the basket, and you would have a 10% ownership of all its contents. This is essentially how an ETF works.

I’ve included this YouTube video which does a pretty good job of explaining ETFs. I’m not in any way affiliated with Zions Direct, I just thought it was a helpful video.

Since individual stock picking can be risky, you can avoid the problem by buying the entire market. You could do this either by purchasing shares in every single company, or you could buy an ETF which tracks the market index, which is already an average of all the companies.

The Standard and Poor’s Depository Receipts (SPDR) is one such ETF that tracks the S&P 500 index. Since the ETF tracks the movement of the actual S&P 500, you’ve essentially diversified most of your risk by purchasing shares in all 500 companies. It’s important to note that when you buy an ETF, you don’t actually own shares in any of the companies. The shares that you own are simply the shares of the ETF itself.

The table below shows the average market return per year from 1900s to the present. If you had invested in and ETF which tracks the market, the following would be the returns that you would have received.

Decade Average Return Per Year
1900s 9.96%
1910s 4.20%
1920s 14.95%
1930s -0.63%
1940s 8.72%
1950s 19.28%
1960s 7.78%
1970s 5.82%
1980s 17.57%
1990s 18.17%
2000s 1.07%
2010-2013 16.74%
The table above can be found on this site.

Notice how for the most part, 10-year periods have provided positive returns.  This goes back to the concept of long-term investment. Keep in mind that the actual return would be lower once adjusted for inflation.

If you hop over to YCharts, you can see how the market has been doing annually over the past few years.

Doubling Your Money With ETFs

Considering that the average return (adjust for inflation) is 7% per year, you can expect to double your money roughly every 10 years. Not too shabby, I’d say!

In the upcoming posts, I’ll explain how you can actually start purchasing shares of ETFs and begin your investing journey. Beyond that, I’ll go into detail on individual stock picking, which can beat market returns and also happens to be the reason Warren Buffett became one of the richest people in the world.

If you have any questions about this, just drop them in the comments below or email me using the Contact page and I’ll try my best to help out!


Save More Money by Spending Wisely

A Simple Hack to Transform the Way You Spend

It’s quite a struggle to resist the temptation of purchasing on impulse when you’re at a shopping centre. In fact, my bank account was taking quite a beating because of my unhealthy spending habits and I constantly found myself struggling with buyers remorse.

Eventually, I pulled up my bank statement – eyeballs popping out when I saw how bad it was – and decided that it was time to put an end to it. It was a lot easier said than done. I later began to wonder if my usual optimisation approach could be applied to fix my overspending.

Enter the utility approach

(You can think of utility as an arbitrary measure of happiness – it’s a concept I borrowed from microeconomics)

I devised a method which was deceptively simple, and yet managed to significantly reduce my spending. Here’s how it works:

  • I rank my potential purchases in terms of the amount of utility that I will derive from it.
  • Since the measurement of utility is arbitrary, I assign odd-numbered values to my purchases. For example, on a scale of 1 to 9, clothing would give me a utility of 3, while a good pair of earphones would be a 7.
  • I choose odd-numbered values because it’s easier for the brain to differentiate between a 3 and a 5, as opposed to a 5 and 6 because 5 and 6 are too close together to have any meaningful difference.

The rankings are based on a number of factors:

  1. How long the product will last
  2. How often I will utilise the item, or the frequency of use
  3. The opportunity cost (and this is a big one). Essentially, this means “What are you giving up, in order to buy this item?” I go into more detail later on in the post.
    • For example, if I’m buying a set of speakers, I am giving up my ability to purchase the new Kindle that I’d been waiting for.
  4. How things/life will improve as a consequence of the purchase

So if, for instance, I’m looking to buy a new guitar, this would be my checklist.

  1. It will last many years
  2. I use my current guitar almost every day so it’s very likely I will continue to do so
  3. I’m giving up my ability to purchase the new jacket I wanted, the hiking boots, and will probably need to cut back on spending as it’s a large purchase
  4. Quality of life will significantly improve because it’s a very big part of my life and I derive a lot of joy from playing the instrument

If the product/experience is very valuable, lasts a long time, can be used often and improves my quality of life significantly, I award it 9 “units of happiness” or a utility of 9, and I can prioritise it over, say, a new jacket with a utility of 5.

Noel, a good friend of mine, taught me to look at purchases as long-term investments. If the price was high but provided good value and long-term use, that would be considered a good buy. Credits to him for showing me this way of looking at items.

Going through this checklist, even in your head, can dramatically reduce the occurrence of impulse buying. It forces you to think about how happy the item is actually going to make you. In most cases, it’s probably not going to make you happy or even impact your life meaningfully, in which case you can happily pocket your money and know that you’ve made the right decision.

Delay your purchase

A tip that’s helped me very often is to hold off on buying big-ticket items. Half the time, you end up realising you don’t really want the item that much or you find a better deal and end up saving a ton of cash. Wait a couple of days or even a couple of weeks and see if you still want to buy it. After all, if you’ve lived without it for so long, do you really need it now?

Opportunity cost and how it helped me cut my spending in half

Whenever I am about to buy something, I go through the checklist very quickly, and I always consider the opportunity cost. I am currently saving up to travel in Europe. This means that if I’m buying overpriced popcorn and a drink at the cinema, I am aware that my opportunity cost is a night’s accommodation in South-East Asia (The price of popcorn here is unbelievable).

That sobers me up a little and makes me wonder about how much I value the popcorn (or whatever it is I’m thinking of buying) in relation to my travel budget. The more I spend on things which don’t give me very high utility, the less I have to spend on travel, which gives me considerably higher utility. I ended up cutting my expenditure by more than half once I started considering my opportunity costs.

As cliché as the saying is, moderation is key

All that being said, don’t start starving yourself of simple pleasures. I still go to the movies, have a cup of coffee etc, but I keep it to a minimum. I’ve replaced many of these expensive hobbies with free activities that make me equally as happy, such as playing the guitar, hiking with friends or enjoying a great book while at the beach.

The point is, you don’t have to buy stuff to be happy. Only make your purchase if it enhances your overall experience or quality of life in a meaningful way, and if you go through the checklist and the item passes your criteria, go ahead and make your purchase with confidence.